Absolute Advantage

According to Adam Smith, who is regarded as the father of modern economics, countries should only produce goods that they have an absolute advantage in.

Trading Bloc

A trading bloc is a formal agreement between two or more regional countries that remove trade barriers between the countries in the agreement while keeping trade barriers for other countries.

Letter of Credit

A Letter of credit is an obligation of a bank, usually irrevocable, issued on behalf of their customer and promising to pay a sum of money to a beneficiary upon the happening of a certain event or events.

Comparative Advantage

Comparative advantage is a situation in which a country may produce goods at a lower opportunity cost than another country, but not necessarily have an absolute advantage in producing that good.

Purchasing Power Parity

Purchasing power parity (PPP) is a theory that says that in the long run (typically over several decades), the exchange rates between countries should even out so that goods essentially cost the same amount in both countries.

Trade Barriers

There are four types of trade barriers that can be implemented by countries. They are Voluntary Export Restraints, Regulatory Barriers, Anti-Dumping Duties, and Subsidies.


A tariff is a type of trade barrier imposed by a government that acts as a tax on imports. The tariff may be in the form of a specific or ad valorem tax.


A quota, which is a type of trade barrier, is a restriction on the quantity that can be imported into a country. Quotas and Tariffs are effectively the same except that governments collect revenue from tariffs while exporting firms can collect extra revenue from quotas.

Washington Consensus

The Washington Consensus refers to a set of free-market economic policies supported by prominent financial institutions such as the International Monetary Fund, the World Bank, and the U.S. Treasury. A British economist named John Williamson coined the term Washington Consensus in 1989.

Exchange Rate

The exchange rate of a currency is the price a currency expressed in terms of another currency. For example, $1 is worth €0.82 (07/15/12). The foreign exchange market is a market where people exchange currencies for other currencies.

Labor Arbitrage

Global labor arbitrage is where, as a result of the removal or reduction of barriers to international trade, jobs move to nations where labor and the cost of doing business (such as environmental regulations) are inexpensive.

Trade Finance

Banks involved in commercial lending provide a wide range of financing packages for international trade, commonly called trade finance. Trade finance not only assists the buyer in financing its purchase but also provides immediate cash to the seller for the sale.

Advantages of Free Trade

Trade around the world is becoming increasingly barrier-free, but there are still many people who think that free trade is bad for the economy.

Bill of Exchange

A bill of exchange is a specialized type of international draft used to expedite foreign money payments in many types of international transactions. In addition, a draft is commonly used in the U.S. while a bill of exchange is primarily used outside the U.S.