Glossary: M06 — International Trade

Term	Definition
Absolute advantage	Ability to produce a good with fewer resources than another country
Comparative advantage	Ability to produce a good at a lower opportunity cost than another country
Tariff	Tax on imported goods
Quota	Limit on the quantity of a good that can be imported
Voluntary export restraint (VER)	Agreement by exporting country to limit exports
Export subsidy	Government payment to domestic exporters
Free trade area	Agreement eliminating tariffs between members; each sets own external tariffs
Customs union	Free trade area with common external tariffs
Common market	Customs union with free movement of labor and capital
Economic union	Common market with harmonized economic policies
Monetary union	Economic union with a common currency
Trade creation	When a trading bloc leads members to replace domestic production with lower-cost imports from partners
Trade diversion	When a trading bloc diverts trade from more efficient non-members to less efficient members