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Trade Deficit Definition

A trade deficit implies the value of imports is greater than exports. (M>X) A trade deficit is often split into trade in goods and trade in services. The opposite of a trade deficit is a trade surplus (X>M) During the 1980s and 1990s, the UK often had a trade deficit. This was because we imported more goods and services than exported. The balance of trade comprises the majority of a currect account balance. If a country has a trade deficit it will invariably have a current…

Trade Diversion

Trade Diversion

Definition Trade diversion occurs when tariff agreements cause imports to shift from low-cost countries to higher cost countries. Trade diversion is considered undesirable because it concentrates production in countries with a higher opportunity cost and lower comparative advantage. Trade diversion may occur when a country joins a free trade area with a common external tariff. Example of trade diversion Suppose the UK place a tariff on the import of cauliflowers to all countries equally. There is an equal tariff to European countries…

Trade Liberalisation

Trade Liberalisation

Definition Trade liberalisation involves removing barriers to trade between different countries and encouraging free trade. Trade liberalisation involves: Reducing tariffs Reducing/eliminating quotas Reducing non-tariff barriers. Non-tariff barriers are factors that make trade difficult and expensive. For example, having specific regulations on making goods can give an unfair advantage to domestic producers. Harmonising environmental and safety legislation makes it easier for international trade. Advantages of Trade Liberalisation Comparative advantage. Trade liberalisation allows countries to specialise in producing the goods and services where they have a comparative advantage (produce at lowest opportunity cost)….

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Trade not Aid

Definition of ‘Trade not aid’ This is the economic idea that the best way to promote economic development is through promoting free trade and not providing direct foreign aid. Logic of ‘Trade not Aid’ A culture of dependency. Foreign aid to developing economies is invariably wasteful and can create a culture of dependency. Also, recipients of aid may feel lower self-esteem, which is damaging in the long-run. Milton Friedman argues that, whilst aid can increase capital in a developing economy, it is also…

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Trade Sanctions

Trade Sanctions are laws passed to restrict or abolish trade with certain countries. Trade Sanctions can take various forms such as: Complete embargo on specific types of trade. Tariff Barriers. Higher taxes on imports of goods. If the tariffs are sufficiently high, it may stop imports completely. Quotas limiting the amount of trade Trade Sanctions could be implemented for political or economic reasons. For example, the US imposed a trade embargo with Cuba from 1963, in protest at the Communist government. From 2000, the embargo was lifted on medical and agricultural items, but remain on…

Trade weighted index

Trade weighted index

A trade weighted index is used to measure the effective value of an exchange rate against a basket of currencies. The importance of other currencies depends on the percentage of trade done with that country. For example in calculating the trade weighted index of the Pound Sterling, the most important exchange rate would be with the Euro. If the UK exports 60% of total exports to the EU, the value of £ to Euro would account for 60% of the trade weighted index. A trade weighted index is useful for measuring…

Free_Trade_Areas

Trading blocks – Pros and cons

Trading blocks are groups of countries who form trade agreements between themselves. Trading blocks can include Free trade areas – elimination of tariffs between economies in the trading block Customs union – free trade area + a common external tariff with non-members Economic union/Single market – Customs union + common rules and regulations. Different types of trading blocks Trade blocks are important for…

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Transaction costs

Definition – A transaction cost is any cost involved in making an economic transaction. For example, when buying a good or buying foreign exchange, there will be some transaction costs (in addition to the price of the good.) The transaction cost could be financial, extra time or inconvenience. Transaction costs could involve. Paying a margin to an intermediary. For example, when buying foreign exchange a broker may take a commission of 0.5% of total purchase. Search costs. When purchasing foreign exchange, you will look around for the dealer with best commission rate. …