Terminologies for Final Flashcards
Law of comparative advantage
when each nation specializes in the production of that good in which it has a relative advantage, the total output of each good increase; thus, all countries can realize welfare gains
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
Terms of trade
the relative prices at which two products are traded in the marketplace
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 non-participants
Economic integration
a process of eliminating restrictions on international trade, payments, and factor mobility
Brain drain
emigration of highly educated and skilled people from developing nations to industrial nations
Foreign direct investment
foreign acquisition of a controlling interest in an overseas company or facility
Guest workers
foreign workers, when needed, allowed to immigrate on a temporary basis
Labor mobility
a measure of how labor migration responds to wage differentials
Migration
moving from one country to settle in another
Multinational enterprise (MNE)
an enterprise that cuts across national borders and is often directed from a company planning center that is distant from the host country
Balance of payments
a record of the flow of economic transactions between the residents of one country and the rest of the world
Current Account
the net value of monetary flows associated with transactions in goods and services, investment income, employee compensation, and unilateral transfers
Trade balance
derived by computing the net exports (imports) in the merchandise accounts; also called merchandise trade balance
Appreciation
(as applied to currency markets) when, over time, it takes fewer units of a nation’s currency to purchase a unit of some foreign currency
Depreciation
(as applies to currency markets) when, over time, it takes more units of a nation’s currency to purchase a unit of some foreign currency
Foreign-exchange market
the organizational setting within which individuals, businesses, governments, and banks buy and sell foreign currencies and other debt instruments
Exchange rate
the price of one currency in terms of another
Real interest rate
the nominal interest rate minus the inflation rate
Gold standard
a monetary system in which each member nation’s money supply consisted of gold or paper money backed by gold, where each member nation defined the official price of gold in terms of its national currency and was prepared to buy and sell gold at that price; free import and export of gold was permitted by member nations
Adjustable pegged
exchange rates a system of semifixed exchange rates where it is understood that the par value of the currency will be changed occasionally in response to changing economic conditions
Capital controls
government-imposed barriers to foreign savers investing in domestic assets or to domestic savers investing in foreign assets; also known as exchange controls
Clean float
when free-market forces of supply and demand are allowed to determine the exchange value of a currency
Crawling peg
a system in which a nation makes small, frequent changes in the par value of its currency to correct balance-of-payments disequilibrium
Currency board
a monetary authority that issues notes and coins convertible into a foreign anchor currency at a fixed exchange rate
Devaluation
an official change in a currency’s par value, which causes the currency’s exchange value to depreciate
Dirty float
a condition under a managed floating system when free-market forces of supply and demand are not allowed to achieve their equilibrating role; countries may manage their exchange rates to improve the competitiveness of their producers
Exchange controls
government-imposed barriers to foreign savers investing in domestic assets (for example, government securities, stock, or bank deposits) or to domestic savers investing in foreign assets
Exchange-stabilization fund
a government entity that attempts to ensure that the market exchange rate does not move above or below the official exchange rate through purchases and sales of foreign currencies
Fixed exchange rates
a system used primarily by small developing nations whose currencies are anchored to a key currency, such as the U.S. dollar
Floating (or flexible) exchange rates
when a nation allows its currency to fluctuate according to the free-market forces of supply and demand
Fundamental disequilibrium
when the official exchange rate and the market exchange rate may move apart, reflecting changes in fundamental economic conditions—income levels, tastes and preferences, and technological factors
Impossible trinity
a restriction whereby a country can maintain only two of the following three policies—free capital flows, a fixed exchange rate, and an independent monetary policy
Fiscal policy
refers to changes in government spending and taxes
Monetary policy
refers to changes in the money supply by a nation’s central bank
Wage and price controls
intervention by the government to set price and wage levels
Special Drawing Rights (SDR)
an artificial currency unit based on a basket of four currencies established by the IMF
International Monetary Fund (IMF)
headquartered in Washington, and consisting of 184 nations, the IMF can be thought of as a bank for the central banks of member nations
World Bank
an international organization that provides loans to developing countries aimed toward poverty reduction and economic development
Organization of Petroleum Exporting Countries (OPEC)
a group of nations that sells petroleum on the world market and attempts to support prices higher than would exist under more competitive conditions to maximize member-nation profits
World Trade Organization (WTO)
organization that embodies the main provisions of GATT, but its role was expanded to include a mechanism intended to improve GATT’s process for resolving trade disputes among member nations
Generalized System of Preferences (GSP)
a system in which industrialized nations attempt to promote economic development in developing countries through lower tariffs and increased trade, rather than foreign aid
Nontariff trade barriers (NTBs)
policies other than tariffs that restrict international trade
Rules of Origin (RoO)
describe the local processing requirements necessary for a good to be considered as being of local origin and hence qualify for preferential market access under a given preferential trade agreement.
