section 4 definitions

Question 1

What is international trade?

Answer 1

Exchange of goods and services between countries

This process facilitates economic interaction and growth among nations.

Question 2

Define exchange rates.

Answer 2

The purchasing power of a currency in terms of what it can buy of other currencies

Exchange rates are crucial for international trade and investment.

Question 3

What are nominal exchange rates?

Answer 3

The weight of one currency relative to another, without being adjusted for inflation

Nominal rates do not reflect the real purchasing power of currencies.

Question 4

Define real exchange rates.

Answer 4

When the exchange rate is adjusted for inflation to give a more accurate reflection of purchasing power

Real exchange rates provide a better measure for economic analysis.

Question 5

What is a fixed exchange rate?

Answer 5

The value of the currency is set against the value of another and the exchange rate does not change

This system can stabilize a currency but may require government intervention.

Question 6

Define floating exchange rate.

Answer 6

Value of the currency is determined purely by market demand and supply of the currency

Floating rates can lead to more volatility in currency values.

Question 7

What are bilateral exchange rates?

Answer 7

The value of one currency expressed in another currency

These rates are essential for direct currency conversions.

Question 8

Define effective exchange rates.

Answer 8

Describe the strength of one currency to a basket of other currencies using an index

Effective rates provide a broader view of a currency’s value.

Question 9

What is a hybrid exchange rate system?

Answer 9

A combination of the characteristics of fixed and floating exchange rates; the currency fluctuates but it doesn’t float on a fully free market e.g. managed float

This system aims to balance stability and flexibility.

Question 10

Define globalisation.

Answer 10

The growing interdependence of countries and the rapid rate of change it brings about; movement towards free trade of goods and services, free movement of labour and capital and free interchange of technology and intellectual capital

Globalisation impacts economies, cultures, and political systems worldwide.

Question 11

What is international competitiveness?

Answer 11

The ability of a country to compete effectively and become attractive in international markets

Competitiveness is influenced by various factors including productivity and innovation.

Question 12

Define absolute advantage.

Answer 12

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

This concept emphasizes efficiency in production.

Question 13

What is comparative advantage?

Answer 13

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

Comparative advantage encourages specialization and trade.

Question 14

Define terms of trade.

Answer 14

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

Terms of trade can indicate the economic health of a country.

Question 15

What is the Marshall-Lerner condition?

Answer 15

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

This condition is crucial for understanding the effects of currency fluctuations.

Question 16

Define the J-Curve.

Answer 16

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

The J-Curve illustrates the short-term effects of currency changes on trade balances.

Question 17

What is protectionism?

Answer 17

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

Protectionist measures aim to protect domestic industries.

Question 18

Define free trade.

Answer 18

Trade with no barriers or restrictions

Free trade promotes economic efficiency and consumer choice.

Question 19

What are free trade areas?

Answer 19

Where countries agree to trade goods with other members without protectionist barriers

These areas facilitate easier trade among member countries.

Question 20

Define customs union.

Answer 20

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

Customs unions enhance trade among member countries while protecting against external competition.

Question 21

What is a monetary union?

Answer 21

Two or more countries with a single currency

Monetary unions simplify trade and reduce exchange rate risks.

Question 22

Define economic union.

Answer 22

A common market with a customs union and free movement of goods, services, capital and labour

Economic unions deepen economic integration among member states.

Question 23

What are tariffs?

Answer 23

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

Tariffs are a common tool of protectionism.

Question 24

Define quotas.

Answer 24

Limits placed on the level of imports allowed into a country

Quotas restrict supply and can protect domestic industries.

Question 25

What is **trade creation**?

Answer 25

When a country moves from buying goods from a high cost to a lower cost producer ## Footnote Trade creation enhances overall economic efficiency.

Question 26

Define **trade diversion**.

Answer 26

When a country moves from buying goods from a low cost producer to a higher cost one ## Footnote Trade diversion can lead to inefficiencies in the market.

Question 27

What are **embargoes**?

Answer 27

Complete ban on trade with a particular country ## Footnote Embargoes are often used for political reasons.