ECONOMIC & COMMERCIAL CONCEPTS & TERMS
Economic Nationalism. A policy that places highest priority on
increasing the economic strength and competitiveness of national firms and reducing economic, vulnerability, if necessary at the expense of trading partners'
political and economic interests, or at the risk of damage to
international trading relationships. See also beggar- thy-neighbor
Economic Profit. The amount by which a producer's income
exceeds total operating costs, including the cost of capital
provided by the firm's owners. A zero economic
profit means a firm is earning the normal, economy-wide rate
of profit in the accounting sense, with investors receiving
a rate of return no greater than the return their capital could
earn elsewhere in the economy. Positive economic profits will
typically attract new entrants (domestic and/or foreign) to
the industry .Protectionism may
be the response of domestic firms seeking to prevent such entry
by foreign competitors, transforming a competitive industry
to an oligopoly. Persistent negative economic profits can
lead to a shakeout.
Economic Rent. The gain to a producer or resource owner
resulting from a trade barrier or other restriction of supply
that leads to a higher price than otherwise would occur. The
existence or prospect of economic rents may promote unproductive
rent-seeking activities by individuals or firms seeking
to take advantage of them. See also quota rent.
Economic Vulnerability. In the context of trade relations, the
proportion of a country's GNP accounted for by exports and imports
is sometimes interpreted as a measure of its vulnerability to
foreign events and economic conditions. (It is also used as
a measure of economic "interdependence" with other
states.) Since countries generally try to avoid being subject
to the leverage of their suppliers, many make efforts to diversify
their supply sources, even at the cost of higher prices. Political
relationships with trading partners are an important element
in determining vulnerability, since even a high level of trade
dependence on a friendly ally is likely to create less vulnerability
than trade with unfriendly states.
Economies of Agglomeration. Cost savings that occur when industrial
flm1s are located in close proximity to each other and are able
to share a common infrastructure network, such as transportation
facilities, communications, and energy supplies.
Economies of Scale. (Also known as increasing returns to scale.)
Cost savings that occur in production processes where higher
output levels allow a firm to employ more productive technology
--so that doubling inputs, for example, will result in more
than a doubling of output. Economies of scale can be a source
of international trade flows apart from comparative advantage
and individual countries are unable to produce a full range
of differentiated manufactures themselves (see intra- industry
Economies of Scope. Cost savings that occur when reductions
in average total costs can be achieved by increasing the number
of distinct products manufactured by an enterprise. Economies
of scope are possible when specialized inputs (e.g., expensive
machinery or highly skilled labor) can be shared among different
production processes --as, for example, when fighter aircraft
and cruise missiles are produced in the same facility.
ECU. See European Currency Unit.
Effective Rate of Protection. The overall effect of a nation's tariff
system on a specific domestic product, after taking into account
the impact of trade restrictions on the industry's inputs. The
effective rate of protection is the proportionate increase in
value- added in an industry that is possible as a result of
the whole structure of protection, on both the output and the
inputs of the industry.
Entente. In commercial usage in Continental Europe,
a synonym for a price-fixing agreement or cartel.
European Currency Unit (ECU). A unit of
value based on a "currency basket" comprising specific
amounts of the currencies of the EC member states. Each currency's
share in the basket is weighted in line with the respective
country's GNP and foreign trade. The ECU is issued by the European
Monetary Cooperation Fund against the gold and US dollar deposits
made by the member states' monetary authorities.
Excess Capacity. Occurs when a firm or industry is operating
below cost-minimizing levels of output. "Permanent excess
capacity" is said to exist in industries requiring very
large physical plants for which the size of the domestic market
may be inadequate to fully absorb the output --limiting firms
in the industry to production levels where economies of scale
not be fully exploited. Such conditions may set the stage for
international trade conflict, since firms experiencing excess
capacity may resort to unfair trade practices (Sec.l) to
expand markets for their output in other countries. At the same
time, excess-capacity firms generally have higher unit costs
than necessary , making them vulnerable to predation by
Exclusive Dealing. See vertical restraints.
Export-Led Growth. A macroeconomic strategy focusing on expansion
of the export sector --such as through export subsidies or competitive
a way of boosting economic growth while avoiding the inflationary
consequences of higher domestic spending. Especially if coupled
with higher import barriers, such an approach can be a form
of beggar-thy-neighbor policy. Moreover, by targeting export industries
for expansion, resources are diverted from industries producing
for the home market, with the result that industrial self-sufficiency
may be delayed.
Export Management Company. See export trading company.
Export Platforms. Refers to countries such as Mexico, Taiwan,
Singapore, Malaysia, and South Korea that established incentive
programs beginning in the late 1960s to attract foreign direct
investment oriented toward offshore production operations by corporations based in the United States and other
industrialized countries. Incentives included import reductions
on components, tax-free treatment of exports, and tax holidays.
Export Trading Company. (Also known as an export management company.)
A private firm that provides related-related services to other
firms, usually smaller and mid- sized manufacturers that could
not afford to maintain a separate export department on their
own. Services provided by an export trading company can include
locating foreign customers, arranging shipping and financing
for exported goods, and performing foreign marketing functions.
Compensation may be made on a commission basis, or through direct
purchase and resale of the exported merchandise.
Externalities. Spillover benefits or costs arising from
an economic activity that are not taken into account by producers,
resulting in levels of production that are inappropriate from
the standpoint of the economy as a whole. The presence of "positive
externalities" or external benefits means that insufficient
resources will be devoted to producing the product in question
unless incentives (e.g., subsidies) are given to producers.
For example, one of the important positive externalities affecting
trade in high-technology products involves private research
and development (R&D) activities, since firms may be unable
to completely appropriate for themselves the payoffs from their
R&D investments. In contrast, negative externalities (sometimes
called "diseconomies") imply overproduction unless
the activity is appropriately taxed or otherwise constrained
by governmental authorities. Unchecked pollution by manufacturers
is a commonly cited example of negative externalities.
Fair Trade. International trade involving shipments
that do not benefit from government assistance. Fair trade --and
the related concept of unfair trade practices (
Sec .I) --is
almost always used in the context of policies or practices affecting
exports, while free trade usually
refers to the absence of barriers to imports. See also level
f.a.s. An abbreviation (for "free alongside")
used in international trade statistics and t sales contracts;
a method of valuing traded goods that does not include the cost
of shipment from the exporting to the importing country.
f.o.b. An abbreviation (for "free on board")
used in international trade statistics and sales contracts;
a method of valuing traded goods that includes the cost of transportation
to the port of embarkation and the cost of loading the goods
on a vessel, but does not include further shipment or insurance
costs. Export data are usually reported in f.o.b. terms.
Forfeiting. A means of financing foreign trade based
upon the transfer of debt obligations arising from the sale
of goods and services, usually exports.
Free Trade. International trade that is unhampered
by restrictive measures such as tariffs or non-tariff barriers.
An ideal concept that plays a role in economic theory similar
to that of the "perfect vacuum" in physics, since,
except within economic unions, virtually no international
trade is genuinely free of governmental interference. In practical
terms, trade policy deliberations in all countries do not normally
of whether free trade should be pursued, but rather of how much
and what kind of government intervention is needed to serve
the national interest. See also fair trade.
Futures Contract. A contract for goods, foreign exchange,
or financial assets to be delivered at a certain future date
on terms and at prices set in the contract. A large number of
raw materials as well as some processed goods are commonly traded
internationally in futures contracts.
Globalization. The process of dispersing elements of a
firm is production and marketing across several countries. Historically,
trade in globalized industries followed a hub-and- spokes pattern,
with components and end-products moving between the home country
and "offshore" manufacturing subsidiaries or affiliates.
More recently, components and end-products have begun to be
shipped among specialized production facilities in several countries,
in order to take advantage of economies of scale, to circumvent trade barriers, or to match
distinct activities with local competitive advantages. Globalization
poses substantial scheduling, technical, and process coordination
problems, as well as risks of supply being disrupted by national
trade policies. It can result in a trade pattern in which many
countries can have both imports and exports in the same product
category (see intra-industry trade), depending on how they fit into the overall
production network. In such an environment, attributing national
origin to a product can be difficult, complicating international
trade negotiations conducted on a traditional, country-to- country
Heckscher-Ohlin Model. A theory for explaining international trade
patterns in tern1S of differences in countries' supplies of
productive factors (e.g., human and physical capital, raw material
resources). The model was named for Swedish economists Eli Heckscher
and Benil Ohlin. See also Ricardian Model.
High Technology. Products that embody relatively intensive
research and development , (R&D) inputs, either directly
at the final manufacturing stage or through the intern1ediate
..components used in their production. Numerous classification
schemes have been proposed in academic studies and international
discussions to designate high-technology industries, but all
have shortcomings. (For example, technologically "mature"
products such as industrial chemicals and consumer electronics
make up a significant proportion of high technology as delineated
by some R&D-based definitions; see discussion under product
cycle.) As a rule of thumb, high-technology industries
can be designated as those producing microelectronics, computers,
telecommunications equipment, machine tools and robotics, aerospace
equipment, scientific and precision instruments, medicine and
biological compounds, and specialty chemicals including certain
Hollowing-out. See de-industrialization.
Horizontal Integration. The merger of two or more firn1s producing
essentially the same product or service. See also vertical