Introductıon to Economıcs II (ENG) — Ünite 7 Soru-Cevap

International economic transactions are made in order to gain in simple terms:

• Consumers gain by meeting their demands with a lower price and higher quality variety of commodities.
• Producers gain by producing for a larger market with increased competition.
• Investors gain by choosing the most profitable investment from all around the globe.

Import is a commodity or a service purchased from foreign sources.

Export is a commodity or a service sold to foreign buyers.

General Equilibrium refers to the situation of concurrent equilibrium of the internal and external balance of an economy.

Internal Equilibrium refers to the full employment of economy with price stability.

External Equilibrium refers to the balance of payments equilibrium.

General equilibrium is determined by the implementation of two economic policies: (1) expenditure-changing policies, (2) expenditure-switching policies. In other words, internal equilibrium and external equilibrium is achieved by an effective implementation of the expenditure-changing and expenditure-switching policies.

Expenditure-changing policies are the fiscal and monetary policies which change the volume of the total expenditure.

Expenditure-switching policies are the policies which switch the total expenditure from imported commodities to domestic commodities or vice versa.

The common assumption of the theories is that international trade increases the welfare via specialization in the most effective production and exchange referring to exports and imports.

Autarky is the absence of international trade.

Production possibilities frontier (PPF) is the boundary between those combinations of commodities and services that can be produced and those that cannot.

Consumption possibilities frontier (CPF) is also referred to budget line. Consumption possibilities frontier or the budget line describes the limits to the consumption choices of a household. In international economics, it defines the consumption choices of a country under the given relative prices.

Terms of trade is the ratio of the export price index of a county to its import price index.

Theory of absolute advantage postulates that if a country produces only the commodity that it can produce most efficiently and exchanges part of its output for the other commodities it demands, it would maximize its total output and welfare of its individuals.

Theory of absolute advantage is proposed by Adam Smith.

Heckscher-Ohlin theory is the international trade theory developed by two Swedish economists, Eli Heckscher and Bertil Ohlin. The Heckscher-Ohlin theory explains the reason of the differences in the relative commodity prices in autarky by using the factor intensity and factor abundance.

Factor intensity refers to intensity of the factors of production used in the production of a certain commodity.

Factor abundance is the factor of production which exists in a greater proportion and with a relatively lower price in one country than the other country.

Economies of scale exist when the cost of producing a unit of a commodity falls as its output rate increases. In other words, it features of a firm’s technology that leads to a falling long run average cost as output increases.

Imperfect competition is a type of market structure showing some but not all the features of perfect competition.

Perfect competition is a market in which there are many firms each selling an identical commodity; there are many buyers; there are no restrictions on entry into and exit from the industry; firms in the industry have no advantage over potential new entrants; firms and buyers are well informed about the price of the commodity that each firm is produced.

Constant returns to scale gives a constant long run average cost of a firm as output increases. Constant returns to scale occur if the percentage increase in output equals the percentage increase in inputs.

Increasing returns to scale occur when the percentage increase in output exceeds the percentage increase in all inputs, with given input prices.

Traditional trade restriction aims refer to protecting domestic producers and collecting revenue to the treasury.

Tariff is a tax or a duty levied on the traded commodity as it crosses a national boundary.

Non-tariff restriction is any action other than a tariff that restricts international trade. It is a barrier resulting from a prohibition, condition or a specific market requirement that makes importation or exportation of a commodity costly or difficult.

GATT is the General Agreement on Tariffs and Trade which was signed in 1947. It covers the rules and regulations of international commodity trade.

Uruguay Round is the most well-known trade round of GATT that started in 1986 and ended in 1994. At the Uruguay Round, the signatory countries decided to establish WTO (World Trade Organization).

Foreign exchange rate is the price of one country’s currency expressed in terms of another country’s currency. It is simply referred to exchange rate.

The characteristics of the foreign exchange market:

1. There is a single foreign exchange market: Due to the effective and fast communication networks, the foreign exchange market for any currency, for example the pound, is comprised of all the places such as İstanbul, Tokyo, New York, London, etc., where pound is bought and sold for other currencies. The increased electronic communication and contact of the different countries leads to a single foreign exchange market.
2. The participants of the foreign exchange market can act without meeting each other: The market functions electronically. In other words, the demand for and the supply of foreign currency meet electronically. Thus, there is no need for the participants to meet for a foreign exchange.
3. The foreign exchange market resembles to a perfectly competitive market: The foreign exchange market has some features of a perfectly competitive market of a real economy. There are many buyers and sellers in the foreign exchange market. Each participant has a small market share. There are no restrictions on the entry in and exit from the market. The participants are quite well-informed about the market. 

Equilibrium exchange rate is the exchange rate determined by the intersection of the demand and supply curves for the foreign currency.

Nominal exchange rate gives the quantity of the foreign currency that can be bought by the national currency. In other words, nominal exchange rate is the price of one country’s currency expressed in terms of another country’s currency.

Real exchange rate is the nominal exchange rate weighted by the consumer price index of the two countries.

Currency appreciation is the rise in the value of one currency in terms of another currency in the flexible exchange rate system.

Currency depreciation is the fall in the value of one currency in terms of another currency in the flexible exchange rate system.

Currency devaluation is the fall in the value of one currency in terms of another currency by the decision of the central bank.

Currency revaluation is the rise in the value of one currency in terms of another currency by the decision of the central ban

Balance of payments (BOP) is the summary statement of all the economic transactions made by the foreign currency.

Credit international transactions are the international transactions that embrace the receipt of payments from foreigners.

Debit international transactions are the international transactions that embrace the making of payments to foreigners.

Current account deficit refers to a situation where the net result of the Current Account is negative.

Current account surplus refers to a situation where the net result of the Current Account is positive.

Foreign direct investments (FDI) are the real investments made directly to the firms, capital commodities and land. In foreign direct investments, the control on the investment is in the hands of the investor.

Capital account constitutes the properties that are not financial, like the patent rights, intellectual property rights and licenses, etc.

Financial account is the main sub-account of the Capital Account and Financial Account under which the foreign direct investments and portfolio investments are recorded.

Portfolio investments are financial properties and assets such as bonds, Treasury bills and stocks.

Balance of payments deficit refers to the situation where the net result of the “Current Account + Capital and Financial Account + Official Reserves Account + Statistical Discrepancy Account” equation is negative.

Balance of payments surplus refers to the situation where the net result of the “Current Account + Capital and Financial Account + Official Reserves Account + Statistical Discrepancy Account” equation is positive.