Chapter 3 Review

embargo

A complete ban against importing or exporting a product.

comparative advantage

A country has a comparative advantage when it has the ability to produce a specific product more efficiently than any other product that it produces. For example, a country that is able to produce rice more efficiently than beans would plant more of their land in rice and then trade with another country for beans.

absolute advantage

A country has an absolute advantage when it can produce and sell products at a lower cost than any other country or when it is the only country that can provide a product. For example, South Africa has a large natural diamond resource. Since it is the main country in the world with this resource, this gives them an absolute advantage in the production and selling of the product.

balance of payments

A country's balance of payments is a summary of all of a country's international financial transactions showing the difference between the country's total payments to and its total receipts from other countries. Balance of payments includes imports, exports, interest on money borrowed from other countries, aid to foreign governments, etc. Since 1970, both the balance of payments and the balance of trade have been unfavorable.

outsourcing

A decision by a corporation to turn over much of the responsibility for production to independent suppliers often offshore or from other countries.

franchising

A form of licensing that has grown rapidly in recent years. More than half of the international franchises are for fast-food restaurants and business services.

export

A good or service produced in the home country and sold in another country.

natural barriers to trade

A natural barrier to trade between two countries might be distance. Shipping costs might make trade unprofitable between the two countries.

North American Free Trade Agreement (NAFTA)

Agreement that created a free-trade area among the United States, Canada, and Mexico.

World Trade Organization (WTO)

An organization established by the Uruguay Round to oversee international trade, reduce trade barriers, and resolve disputes among member nations.

multinational corporation

Corporation that moves resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters is located.

tariffs

Perhaps the most commonly applied trade restriction is the tariff. A tariff (or import duty) is a tax imposed by a nation on imported goods; any tariff makes imported goods cost more so that they are less able to compete with domestic products.

free trade

The policy of permitting the people of a country to buy and sell where they please without restrictions—obviously this type of policy can create many safety and economic problems for a country.

protectionism

The policy of protecting home industries from outside competition by establishing artificial barriers such as tariffs and quotas so that trade does not take place.

dumping

The practice of charging a lower price for a product in foreign markets than in the firm's home market. In effect, dumping ends up driving down the price of the domestic item it is competing against which hurts domestic businesses.

exporting

The practice of selling domestically produced goods to buyers in another country.

nationalism

The sense of national consciousness that may boost the culture and interests of one country over those of all other countries. For example, you may have heard the phrases Buy American or Made in the U.S.A.

European Union (EU)

The world's largest common market with free trade between 28 European nations.

why would a country's government establish trade restrictions?

To protect domestic jobs/industries, to retaliate against another country's trade restrictions or public policy, to protect the health of its citizens, and to protect national security.

direct foreign investment

When a company builds a new manufacturing or marketing facility in a foreign country.

import

Goods and services that are bought from other countries.

what is usually the result of trade restrictions for consumers?

If the U.S. establishes import restrictions on other countries, it usually results in higher prices for consumers for those goods and services and it limits consumer choices since not as many goods will be imported.

import quotas

Import quotas limit the quantity of a certain good that can be imported. The United States protects its shrinking textile industry with quotas.

joint venture

In a joint venture, the domestic firm buys part of a foreign company or joins with a foreign company to create a new entity and produce a product.

countertrade

In countertrade, part or all the payment for goods or services is in the form of other goods or services; countertrade is a form of barter.

General Agreement on Tariffs and Trade (GATT) Uruguay Round

The Uruguay Round of trade negotiations among member nations is an agreement to dramatically lower trade barriers worldwide; the Uruguay Round has reduced tariffs by one-third worldwide, a move that is expected to increase global income by $235 billion annually.

balance of trade

The difference between the value of a country's exports and the value of its imports during a certain time is the country's balance of trade. Since the United States imported more than it exported in 2018, it had an unfavorable balance of trade or a trade deficit of $621 billion.

licensing

The legal process whereby a foreign firm agrees to let another firm use a manufacturing process, trademark, patent, trade secret, or other proprietary knowledge. It provides a relatively risk-free way to enter the global market.