(8.) Economics Hl. International Economics, Definitions.

Comparative advantage refers to a country's ability to produce a good at a lower opportunity cost compared to another country. This means that a country can produce a good more efficiently or with fewer resources, allowing them to specialize in the production of that good. By focusing on their comparative advantage, countries can trade with each other and benefit from the differences in their production capabilities, leading to increased efficiency and overall economic growth.

Trade creation refers to a situation in which a trade agreement leads to the creation of new trade between countries. It occurs when a trade agreement allows for the production to be shifted from a high-cost producer to a low-cost producer, resulting in increased efficiency and lower prices for consumers. This leads to the creation of new trade opportunities and benefits for both countries involved.

A subsidy is a payment given by the government to producers, with the aim of reducing prices for consumers and encouraging the production of more domestic goods. The government provides this financial assistance to help offset the costs of production and make it more affordable for producers to offer goods at lower prices. By doing so, it stimulates demand and consumption, ultimately benefiting consumers by making goods more affordable and increasing the quantity of domestically produced goods available in the market.

The three letters "MNC" stand for multinational corporation. A multinational corporation is a company that operates and has production facilities in at least two countries. These corporations have a global presence and conduct business activities in multiple countries, often with headquarters in one country and subsidiaries or branches in others. By having production in multiple countries, multinational corporations can take advantage of different markets, resources, and labor pools, allowing them to expand their operations and reach a wider customer base.

Speculation refers to the act of making guesses or predictions about future events, particularly in the context of financial markets. In the case of exchange rates, speculation involves attempting to forecast or anticipate the direction and movement of currency exchange rates. Speculators analyze various factors such as economic indicators, political events, and market trends to make informed guesses about the future exchange rates. They may engage in buying or selling currencies based on their predictions, aiming to profit from the fluctuations in exchange rates.

(AD = Aggregate demand)

A country has an absolute advantage in producing a good over another if it is able to produce the good using fewer resources and factors of production. This means that the country can produce more of the good with the same amount of resources or produce the same amount of the good with fewer resources compared to another country. Having an absolute advantage allows a country to be more efficient and productive in producing a particular good, giving it a competitive edge in the global market.

A quota refers to a physical limit imposed on the amount of a good or service that may be imported. This means that there is a restriction on the quantity of the product that can be brought into a country from abroad. Quotas are often used as a trade barrier to protect domestic industries and control the flow of imports.

A free trade area refers to an area where there are no barriers or restrictions on the movement of goods and services between borders. In such an area, countries involved promote free trade by eliminating tariffs, quotas, and other trade barriers. This allows for the smooth flow of goods and services across borders, promoting economic growth and cooperation between nations. Therefore, the given statement is true as it accurately defines a free trade area.

When the exchange rate is determined solely by market forces of supply and demand, it is called a floating exchange rate. In this system, the value of a currency fluctuates freely based on the market conditions and investor sentiment. The exchange rate is not fixed or controlled by any central bank or government intervention. This allows for flexibility and adjustment in response to economic factors such as inflation, interest rates, and trade imbalances.

An embargo refers to a complete prohibition on trade between countries. It is a government-imposed restriction that restricts the import or export of certain goods or services. Unlike other trade measures like subsidies, quotas, and tariffs that may impose limitations or costs on trade, an embargo completely halts the exchange of goods or services. Therefore, the correct answer is "embargo."

A customs union allows for the free movement of goods and services between member countries, but it does not necessarily allow for the free movement of factors of production such as labor, capital, and technology. However, a common market goes a step further by not only eliminating tariffs and trade barriers, but also allowing for the free movement of factors of production. Therefore, a customs union where the four factors of production can move freely over borders is known as a common market.

Dirty float is the behavior described in the question. It refers to a situation where a government intervenes in the foreign exchange market by buying or selling its own currency to stabilize its value. This can be done using gold reserves or foreign currency reserves. The term "dirty" indicates that the government is not allowing the currency to freely float and is actively managing its value.

An asset refers to any item that holds economic value and is owned by either a corporation or an individual. This can include tangible assets such as buildings, equipment, or inventory, as well as intangible assets like patents, trademarks, or intellectual property. Assets are essential for individuals and businesses as they contribute to their overall wealth and can generate income or provide future benefits.

The given correct answer, "Protectionism," refers to the act of a country imposing trade barriers to safeguard the incomes of its domestic producers. This can be done through measures such as tariffs, quotas, or subsidies. By implementing these trade barriers, the country aims to protect its domestic industries from foreign competition and maintain the economic well-being of its producers.

A tariff is a tax imposed on imported goods.

The correct answer is "balance of payments." A country's external balance refers to its account with the rest of the world, which includes all transactions of goods, services, and capital between the country and other nations. This is known as the balance of payments, which provides a comprehensive record of a country's economic transactions with the rest of the world. It includes the current account, capital account, and financial account, and helps to measure the overall economic health and competitiveness of a country.

Expenditure switching refers to a type of protectionism that aims to persuade people to switch their spending from foreign to domestic products by changing relative prices. This can be achieved through various measures such as tariffs, import quotas, or currency devaluation. By making foreign products more expensive compared to domestic ones, the government encourages consumers to prioritize domestic goods, thus protecting domestic industries and reducing reliance on imports. This strategy is commonly used to boost domestic production, promote economic growth, and maintain a favorable balance of trade.

A country's exchange rate refers to the value at which its currency is traded for another currency on the foreign exchange market. The foreign exchange market is a global decentralized marketplace where currencies are bought and sold. It is where individuals, businesses, and governments exchange one currency for another, facilitating international trade and investment. The exchange rate determines the purchasing power of a country's currency and plays a significant role in international trade and the economy.

An economic union is a common market where member countries have common economic policies and either a fixed exchange rate or a common currency. In an economic union, there is free movement of goods, services, capital, and labor among member countries. This allows for greater economic integration and cooperation among member countries, leading to increased trade and economic growth. The establishment of a common currency or fixed exchange rate further promotes economic stability and eliminates currency fluctuations, making it easier for businesses and individuals to engage in cross-border transactions.

The condition stated in the last question is Marshall-Lerner. This condition refers to the economic theory that states that a depreciation or devaluation of a country's currency will only lead to an improvement in the country's trade balance if the sum of the price elasticities of demand for exports and imports is greater than one. In other words, for a depreciation to be effective in improving the trade balance, the demand for exports and imports must be relatively elastic.

The correct answer is "Balance of payments". The balance of payments refers to an account of a country's transactions with the rest of the world, including its imports and exports of goods and services, financial transactions, and transfers. It provides a comprehensive record of all economic transactions between a country and the rest of the world during a specific time period.

A fixed exchange rate system is being defined in this question. In this system, a currency is set at a specific level and can only be adjusted by being devalued (lowered) or revalued (increased). This means that the value of the currency is fixed in relation to another currency or a basket of currencies.

It is known as "appreciation"

"Free trade" refers to a system of commerce where goods and services can be exchanged between countries without any restrictions or barriers such as tariffs, quotas, or regulations. It promotes open markets and allows for the free flow of goods and services across borders. The given correct answers all convey the same meaning by using different combinations of words, emphasizing the absence of limitations or protectionism in trade.

A customs union is a free trade area where countries agree to eliminate tariffs and trade barriers among themselves and adopt a common external trade policy. In a customs union, countries retain their sovereignty, meaning they have their own governments and decision-making powers. However, they coordinate their trade policies and regulations through a central government body. This allows for the free movement of goods and services within the customs union while maintaining a unified approach to trade with non-member countries.

The given formula calculates the terms of trade. Terms of trade is a measure of the ratio between a country's export prices and import prices. It indicates the relative value of a country's exports compared to its imports. A higher terms of trade indicates that a country is able to purchase more imports for a given amount of exports, which is favorable for its economy. Conversely, a lower terms of trade means that a country's exports are relatively less valuable compared to its imports.

Depreciation is being defined in this question. Depreciation refers to a fall in the value of a domestic currency relative to other currencies. It means that the domestic currency can buy fewer units of foreign currency. This can occur due to various factors such as economic instability, inflation, or market forces. Depreciation can have both positive and negative effects on a country's economy, impacting exports, imports, inflation, and foreign investment.

Exchange controls refer to the government's intervention in the foreign exchange market to regulate and control the exchange rate of its currency. By adjusting exchange rates to obtain unfairly low prices, the domestic government aims to protect domestic producers by making imported goods more expensive and less competitive compared to domestic products. This helps to promote domestic industries and safeguard their market share against foreign competition.

The correct answer is trade diversion. Trade diversion occurs when a trade agreement causes production to shift from a low-cost producer to a high-cost producer. This can happen when a country that was initially importing goods from a low-cost producer is forced to switch to a higher-cost producer due to the terms of a trade agreement. This shift in production can lead to inefficiencies and higher costs for the importing country.

A currency depreciation can have a positive impact on a country's balance of payments if the sum of their price elasticities of exports and imports is greater than 1. This means that the percentage change in the quantity of exports and imports will be greater than the percentage change in their prices. As a result, the value of exports will increase and the value of imports will decrease, leading to an improvement in the balance of payments.

PPP (Purchasing power parity) theory suggests that the exchange rate between two currencies will adjust to equalize the purchasing power of each currency. Inflation is a key factor in this theory because it affects the relative prices of goods and services in different countries. If one country experiences higher inflation than another, its currency will depreciate to maintain parity in purchasing power. Therefore, the answer "inflation" is a valid explanation for the theory of PPP, as it directly influences the exchange rate adjustments.

They are known as "net transfers of money"

The term for the "fix" of the fixed exchange rate that is changeable is an adjustable peg. An adjustable peg refers to a system where a country's currency is fixed to another currency or a basket of currencies, but the exchange rate can be adjusted or changed over time. This allows for some flexibility in the exchange rate to accommodate economic changes or external factors.

Expenditure changing refers to a method of shifting the aggregate demand curve by altering incomes, which in turn affects the total amount spent on imports. By changing the level of income, individuals and households may adjust their spending patterns, including their expenditures on imports. This can have an impact on the overall demand for imports in the economy. Therefore, expenditure changing is a way of influencing the total amount spent on imports by manipulating incomes.

"A measure of the net movement of profit, interest, and dividends moving in out of the country as a result of financial investment abroad" is the complicated definition of net income flows

Trade volumes refers to the actual number of goods and services that are imported and exported by a country. It represents the total amount of trade activity and reflects the level of economic exchange between countries. By measuring trade volumes, policymakers and economists can assess the level of international trade and its impact on the economy.