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level: Level 1

Questions and Answers List

level questions: Level 1

Question	Answer
Two goods are compliments if the consumption of one item increases the demand for the other. For example, as the price of a printer will go up, so will ink cartridges as the ink cartridge complement printers.	complement
A substitute good is a good that can be used in place of another. Two goods are substitutes if the consumption of one item decreases the demand for another. Substitutes play an important part in the marketplace and are considered a benefit for consumers. An example of a substitute could be Pepsi for Coca Cola	Substitute
The complete absence of trade. Autarkic states do not engage in any international trade, and therefore cannot exploit comparative advantage or reap the gains from trade. North Korea, in addition to being communist, also does not permit trade of most products, making their economy almost entirely autarkic.	Autarky
The law of comparative advantage describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage. The significance of this is gains from trade can be made between two countries even if one is explicitly better at producing everything.	Comparative Advantage
The loss of potential gain from other alternatives when one alternative is chosen. In comparative advantage, opportunity cost is used to gauge what one is comparatively better at producing and gives insights into what one should specialize in.	Opportunity Cost
In economics, factors of productions are what is used in the production process to produce an output—finished goods and services. The utilized amounts of various inputs determines the quantity of output according to the relationship. An example would be that flour, egg, sugar and a fryer are all factors of production for doughnuts. Land, Labor and Capital.	Factors of Production
States that factors of production are not tied to industries, so owners of factors employed in the losing industry can seek employment in the winning industry. Skilled labor vs unskilled labor, one is going to win and one is going to lose. Ex: Highly-educated people in the US are fine while uneducated people aren’t	Stolper-Samuelson
A commodity is an economic good or service that has full or substantial fungibility: the market treats instances of the good as equivalent or nearly so with no regard for who produced them. Often raw materials or primary agricultural products that can be bought and sold, such as copper and coffee.	Commodities
The formula for Terms of Trade are Index of Exports divided by Index of Imports times 100. Relative price of exports in terms of imports, when TOT is greater than 100% the country is accumulating more capital from exports than it is spending on imports relative to before. Terms of trade only tells us change over time, can’t tell us whether terms of trade are actually “high” or “low”.	Terms of Trade
The number of units or amount of a good that must be forgone in order to create or attain one unit of another good. Considered the absolute value of the slope of the production possibilities frontier. The formula is money needed to produce another unit divided by the rate of increase by cutting production.	Marginal Rate of Transformation
The race to the bottom refers to a competitive state where a company, state or nation attempts to undercut the competition’s prices by sacrificing the quality standards or worker safety, defying regulations or paying low wages.	Race to the Bottom
You don't move prices against yourself.	Importance of Being Unimportant
The price of an identical asset or commodity will have the same price globally, regardless of location, when certain factors are considered. The law of one price is achieved by eliminating price differences through arbitrage opportunities between markets.	Law of One Price
Arbitrage is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices at which the unit is traded.	Arbitrage
In economic relations, MFN status is an economic position in which a country enjoys the best trade terms given by its trading partners. That means it receives the lowest tariffs, fewest trade barriers and the highest import quotas.	Most Favored Nation
When a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporters domestic market. Selling at an unfairly competitive lower price. Countries can subsidize exporting business or business can use the practice to drive competitors into bankruptcy.	Dumping
Protectionist tariffs imposed on foreign imports believed to be subsidized by a foreign government and causing material harm to the domestic market.	Countervailing Duties
Was implemented in 1930 in response to the stock market crash and one of the antecedents to the great depression. Implemented protectionist trade policies in the United States.	Smoot-Hawley Tariff
The GATT is a legal agreement between many countries, whose overall purpose was to promote international trade by reducing or eliminating trade barriers such as tariffs and quotas. Was signed in 1947, two years after the end of WWII in hopes of creating a more globalized world. Remained in effect until the establishment of the WTO.	General Agreement on Tariffs and Trade
An intergovernmental organization that is concerned with the regulation of international trade between nations. The WTO deals with regulation of trade in goods, services and intellectual property between participating countries by providing a framework for negotiating trade agreements and a dispute resolution process.	World Trade Organization
Concentrated is a small group of people who care a lot whereas Diffuse are a large group of people who care a little. Concentrated often win out.	Concentrated vs. Diffuse Interests
A term coined to describe a situation where it can be argued that a good is being produced below its cost of production when externalities are taken into account. Ex: a toaster might be social dumping if its sold below the cost determined by pollution given off at a toaster factory being taken into account	Social Dumping
The notion that resources flow from a “periphery” of poor and undeveloped states to a “core” of wealthy states, enriching the latter at the expense of the former. Poor states stay poor by the way they are integrated into the world system.	Dependency Theory
Replacing foreign imports with domestic production. Countries should reduce foreign dependency through local production of industrialized products. Protect, strengthen and grow local industries using a variety of tactics, including tariffs, import quotas and subsidized government loans. -- Trying to be Autarkic, you don’t want to reap the gains from trade	Import-Substituting Industrialization
Speed up the industrialization process of a country by exporting goods for which the nation has a comparative advantage. Airbus.	Export-Oriented Industrialization
Help developing countries that faced economic crises. Recommended structural reforms that increased the role of market forces in exchange for immediate financial help. Set out by John Williamson in 1989.	Washington Consensus
Government help for those who have been adversely affected by free trade. Used to preserve the gains made from trade while helping out those adversely affected. A federal program for workers, firms, farmers and communities. Examples include unemployment, subsidies for affected industries (sugar-beet farmers), and retraining.	Trade adjustment assistance
The practice of using capitalism, globalization, and cultural imperialism to influence a developing country instead of the previous colonial methods of direct material or indirect political control. Can lead to formerly-colonized countries to have stagnant economic growth and still be at the mercy of their former colonizers.	Neocolonialism
When a nation or individual concentrates its productive efforts on producing a limited variety of goods. It often has to forgo producing other goods and relies on obtaining those other goods through trade. Plays into Comparative Advantage and Gains from trade.	Specialization
Standardized global system of freight transport using shipping containers—allows for universal methods of loading, offloading goods and reduces the cost of transporting goods. Completely mechanized so that all handling is done with cranes, and special forklift trucks. Stackable and organized.	Containerization