Commonly Used Terminologies in International Trade

In trade policy discussions terms such as protectionism, free trade, and trade liberalization are used
repeatedly. It is worthwhile to define these terms at the beginning. One other term is commonly used
in the analysis of trade models, namely national autarky, or just autarky.

Two extreme states or conditions could potentially be created by national government policies. At one
extreme, a government could pursue a "laissez faire" policy with respect to trade and thus impose no
regulation whatsoever that would impede (or encourage) the free voluntary exchange of goods between
nations. We define this condition as free trade. At the other extreme, a government could impose such
restrictive regulations on trade as to eliminate all incentive for international trade. We define this
condition in which no international trade occurs as national autarky. Autarky represents a state of
isolationism. (See Figure).

Probably, a pure state of free trade or autarky has never existed in the real world. All nations impose
some form of trade policies. And probably no government has ever had such complete control over
economic activity as to eliminate cross-border trade entirely. The real world, instead, consists of
countries that fall somewhere between these two extremes. Some countries, such as Singapore and
(formerly) Hong Kong, are considered to be highly free trade oriented. Others, like North Korea and
Cuba, have long been relatively closed economies and thus are closer to the state of autarky, the rest of
the world lies somewhere in between.

Below are some other terms and concepts commonly used in international trade:

Imports: the purchase of goods or services from another country.

Exports: the sale of goods or services to other countries.

Merchandise goods: includes manufacturing, mining, and agricultural products.

Service exports: includes business services like travel, insurance, and transportation.

Migration: is the flow of people across borders as they move from one country to another.

Foreign Direct Investment: is the flow of capital across borders when a firm owns a company in
another country

Balance of trade: is the difference in value of a country’s exports and its imports.

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Terms of trade: the relative prices at which two products are traded in the marketplace.

A Trade Surplus: exists when a country exports more than it imports.

A Trade Deficit: exists when a country imports more than it exports.

Bilateral Trade Balance: is the difference between exports and imports between two countries.

Free trade: a system of open markets between countries in which nations concentrate their production
on goods they can make most cheaply, with all the consequent benefits of the division of labor.

Free-trade area: an association of trading nations whose members agree to remove all tariff and
nontariff barriers among themselves.

Trade barriers: refer to all factors that influence the amount of goods and services shipped across
international borders.

Tariff: is a tax imposed by a country’s government on imported products.

Common External Tariff (CET): is a uniform tariff implemented by member countries of a customs
union, on all imported products from territories outside the union, to any member country.

Quota (non-tariff barrier): is the maximum amount of foreign products that are permitted to enter a
domestic economy over a specific period of time.

Current account: is the sum of the balance of trade (value of exports minus imports), cross border
interest and dividends payments, and gifts from both individuals and governments from other countries
such as foreign aid. It measures trade in goods and services as well as income and current transfers.

Capital account: reflects the change in ownership of fixed assets and the acquisitions or disposal of
non-financial assets.

Financial account: records inward and outward flows of investment. This account includes direct
investment, portfolio investment, changes in reserves and other investments.

Balance of payments (BOP): is a summary statement of all the international transactions of the
residents of a nation with the rest of the world during a particular period of time, usually a year. The
balance of payments has three major components, a current account, capital account and the financial
account. The BOP can either have a surplus (which occurs when a country sells more to foreign
countries than it buys from them or a deficit (when a country buys more from a foreign country than it
sells to them.

Exchange rate: is the price at which one currency can be exchanged for another.

Exchange rate regime: is the means by which exchange rates between different currencies are
determined.

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World Trade Organization (WTO): is the international trade body which regulates and enforces, set
standards of the trading of goods between countries on an international level.

Comparative advantage: is ability to produce a good or service at a lower opportunity cost than others
can produce it.

Antidumping duty: a duty levied against commodities a home nation believes are being dumped into
its markets from abroad.

Consumer surplus: the difference between the amount that buyers would be willing and able to pay
for a good and the actual amount they do pay.

Common market: a group of trading nations that permits the free movement of goods and services
among member nations, the initiation of common external trade restrictions against nonmembers, and
the free movement of factors of production across national borders within the economic bloc.

Deadweight loss: the net loss of economic benefits to a domestic economy due the protective effect
and the consumption effect of a trade barrier.

Customs union: an agreement among two or more trading partners to remove all tariff and non tariff
trade barriers among themselves; each member nation imposes identical trade restrictions against
nonparticipants.

Economic union: where national, social, taxation, and fiscal policies are harmonized and administered
by a supranational institution.

Dumping: when foreign buyers are charged lower prices than domestic buyers for an identical product,
after allowing for transportation costs and tariff duties.

Economic integration: a process of eliminating restrictions on international trade, payments, and

Globalization: the process of greater interdependence among countries and their citizens.