Macro IV: Globalisation

Question 1

Absolute advantage:

Answer 1

When a country can produce a good more cheaply in absolute terms than another country

Question 2

Comparative advantage:

Answer 2

When a country is able to produce a good more cheaply relative to other goods produced; it has a lower opportunity cost

Question 3

Theory of comparative advantage:

Answer 3

Countries will find specialisation mutually advantageous if the opportunity costs of production are different

Question 4

Terms of trade:

Answer 4

The ratio of an index of a country’s export prices to an index of its import prices

Question 5

Protectionism:

Answer 5

When government enact policies to restrict the free entry of imports into their country, such as tariffs and quotas

Question 6

Tariffs:

Answer 6

Taxes placed on imported goods in an attempt to prevent people from buying them

Question 7

Quota:

Answer 7

Limits placed on the level of imports allowed into a country

Question 8

Trade liberalisation:

Answer 8

Reduction or removal of protectionist policies

Question 9

Trading bloc:

Answer 9

A group of countries that reduce or remove trade barriers between them

Question 10

Common market:

Answer 10

Members trade freely in all economic resources and impose a common external tariff

Question 11

Customs union:

Answer 11

The removal of all tariff barriers between members and the introduction of a common external tariff

Question 12

Trade creation:

Answer 12

When a country moves from buying goods from a high cost to a lower cost producer

Question 13

Trade diversion:

Answer 13

When a country moves from buying goods from a low cost producer to a higher cost one

Question 14

Revaluation:

Answer 14

When the currency is increased against the value of another under a fixed system

Question 15

Appreciation:

Answer 15

An increase in the value of the currency using floating exchange rates

Question 16

Managed floating exchange rate:

Answer 16

Value of the currency is determined by demand and supply but the Central Bank intervenes to prevent large changes

Question 17

J-curve:

Answer 17

A current account will worsen before it improves following a depreciation of the currency

Question 18

Marshall-Lerner condition:

Answer 18

The sum of the price elasticities of imports and exports must be more than one if a currency depreciation is to have a positive impact on the trade balance

Question 19

Speculation:

Answer 19

Trading financial assets in hope of significant returns

Question 20

Capital flight:

Answer 20

When large amounts of money are taken out of the country, rather than being left there for people to borrow and invest