International_Economics_Tenth_Edition (1)

Glossary

A

absorption approach an approach to currency depreciation that deals with the income effects of depreciation; a decrease in domestic expenditures relative to income must occur for depreciation to promote payments equilibrium, according to the absorption approach

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

adjustment mechanism a mechanism that works to return a balance of payments to equilibrium after the initial equilibrium has been disrupted; the process takes two different forms: automatic (economic processes) and discretionary (government policies)

ad valorem tariff a tariff expressed as a fixed percentage of the value of the imported product

advanced nations include those of North America and Western Europe, plus Australia, New Zealand, and Japan

agglomeration economies a rich country specializes in manufacturing niches and gains productivity through groups of firms clustered together, some producing the same product and others connected by vertical linkages

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

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

asset-market approach a method of determining short-run exchange rates where investors consider two key factors when deciding between domestic and foreign investments; relative levels of interest rates and expected changes in the exchange rate itself over the term of the investment

autarky a case of national self-sufficiency or absence of trade

automatic adjustment (of the balance-of-payments process) a mechanism that works to return a balance of payments to equilibrium automatically through the adjustments in economic variables

B

balance of international indebtedness a statement that summarizes a country's stock of assets and liabilities against the rest of the world at a fixed point in time

balance of payments a record of the flow of economic transactions between the residents of one country and the rest of the world

bank claims and liabilities bank claims consist of loans, overseas deposits, acceptances, foreign commercial paper, claims on affiliated banks abroad, and foreign government obligations; bank liabilities include demand deposits and NOW accounts, passbook savings deposits, certificates of deposit, and liabilities to affiliated banks abroad

basis for trade why nations export and import certain products

basket valuation the valuation of the special drawing right based on the values of several countries' cur- rencies

beggar-thy-neighbor policy the practice of imposing protectionist policies to achieve gains from trade at the expense of other nations

bid rate the price that the bank is willing to pay for a unit of foreign currency

bonded warehouse a storage facility operated under the lock and key of (in the case of the United States) the U.S. Customs Service

brain drain emigration of highly educated and skilled people from developing nations to industrial nations

buffer stock supplies of a commodity financed and held by a producers' association; used to limit commodity price swings

business services in many cases, nonstorable or intangible products, such as tourism, consulting, banking, construction, and freight transportation

buy-national policies when a home nation's government, through explicit laws, openly discriminates against foreign suppliers in its purchasing decisions

(

call option gives the holder the right to buy foreign currency at a specified price

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

capital and financial account the net result of both private-sector and official capital and financial transactions

capital/labor ratio a country's ratio of capital inputs to labor inputs

cartel a group of firms or nations that attempts to support prices higher than would exist under more competitive conditions

clean float when free-market forces of supply and demand are allowed to determine the exchange value of a currency

commodity terms of trade measures the relationship between the prices a nation gets for its exports and the prices it pays for its imports

common agricultural policy members of the European Union agree to maintain identical governmental agricultural policies to support farmers

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

community indifference curve the indifference curve that represents the tastes and preferences of all of the households of a nation

comparative advantage ability to produce a good or service at a lower opportunity cost than others can produce it

Glossary 511

complete specialization a situation in which a country produces only one good

compound tariff a tariff that is a combination of a specific tariff and an ad valorem tariff

conditionality the standards imposed by the lMF on borrowing countries to qualify for a loan, which can include requirements that the borrowers initiate programs to correct economic difficulties, adopt austerity programs to shore up their economies, and put their muddled finances in order

conglomerate integration in the case of an MNE, diversification into nonrelated markets

constant opportunity costs a constant rate of sacrifice of one good for another as a nation slides along its production possibilities schedule

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

consumption effect a trade restriction's loss of welfare that occurs because of increased prices and lower consumption

consumption gains posttrade consumption points outside a nation's production possibilities schedule

convergence criteria economic standards required of all nations in a monetary union; in the instance of the Maastricht Treaty, these standards included price stability, low long-term interest rates, stable exchange rates, and sound public finances

corporate average fuel economy standards (CAFE) fuel economy standards imposed by the U.S. government on automobile manufacturers

cost-based definition a method of calculating the fair market value of a product in dumping cases; the U.S. Commerce Department "constructs" fair market value equal to the sum of (1) the cost of manufacturing the merchandise, (2) general expenses, (3) profit on home-market sales, and

(4) the cost of packaging the merchandise for shipment to the United States

cost-insurance-freight (ClF) valuation when ad valorem tariffs are levied as a percentage of the imported commodity's total value as it arrives at its final destination

countertrade international trade in which goods are exchanged for goods

countervailing duty a levy imposed by importing countries to counteract foreign export subsidies;

the size of the duty is limited to the amount of the export subsidy

country risk risk associated with political developments in a country, especially the government's views concerning international investments and loans

covered interest arbitrage the process of moving funds into foreign currencies to take advantage of higher investment yields abroad, while avoiding exchange rate risk

crawling peg a system in which a nation makes small, frequent changes in the par value of its currency to correct balance-of-payments disequilibriums

credit risk the probability that part or all of the interest or principal of a loan will not be repaid

credit transaction a balance of payments transaction that results in a receipt of a payment from foreigners

cross exchange rate the resulting rate derived when the exchange rate between any two currencies can be derived from the rates of these two currencies in terms of a third currency

currency board a monetary authority that issues notes and coins convertible into a foreign anchor currency at a fixed exchange rate

currency crashes financial crises that often end in currency devaluations or accelerated depreciations

currency crisis a situation in which a weak currency experiences heavy selling pressure, also called a speculative attack

currency risk investment risk associated with currency depreciations and appreciations as well as exchange controls

currency swap the conversion of one currency to another currency at one point in time, with an agreement to reconvert it to the original currency at a specified time in the future

current account the net value of monetary flows associated with transactions in goods and services, investment income, employee compensation, and unila teral transfers

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

customs valuation the process of determining the value of an imported product

D

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

debit transaction a balance of payments transaction that leads to a payment to foreigners

debt/equity swaps when a commercial bank sells its loans at a discount to the debtor-nation's government for local currency, which it then uses to finance an equity investment in the debtor nation

debt forgiveness any arrangement that reduces the value of contractual obligations of the debtor nation

debt reduction any voluntary scheme that lessens the burden on the debtor nation to service its external debt

debt service/export ratio the scheduled interest and principal payments as a percentage of export earnmgs

demand for international reserves the requirement for international reserves; depends on two related factors: (1) the monetary value of international transactions and (2) the disequilibrium that can arise in balance-of-payments positions; the requirement for international reserves include assets such as key foreign currencies, special drawing rights, and drawing rights at the International Monetary Fund

demand-pull inflation when a nation's capacity to produce has been achieved, and further increases in aggregate demand pull prices upward

demonetization of gold occurred in the 1970s when the official price of gold was abolished as the unit of account for the international monetary system

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

destabilizing speculation speculation that occurs when speculators expect a current trend in exchange rates to continue and their transactions accelerate the rise or fall of the target currency's value

devaluation an official change in a currency's par value, which causes the currency's exchange value to depreciate

developing nations most nations in Africa, Asia, Latin America, and the Middle East

direct controls consist of government restrictions on the market economy

direct foreign investment when residents of one country acquire a controlling interest in a business enterprise in another country

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

discount the valuation of a currency when it is worth less in the forward market than in the spot market

distribution of income the distribution of wages earned across a country

domestic content requirements requirements that stipulate the minimum percentage of a product's total value that must be produced domestically if the product is to qualify for zero tariff rates

domestic revenue effect the amount of tariff revenue shifted from domestic consumers to the tarifflevying government

domestic subsidy a subsidy that is sometimes granted to producers of import-competing goods

double-entry accounting a system of accounting in which each credit entry is balanced by a debit entry, and vice versa, so that the recording of any transaction leads to two offsetting entries

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

dynamic comparative advantage a changing pattern in comparative advantage; governments can establish policies to promote opportunities for changes in comparative advantage over time

dynamic effects of economic integration effects that relate to member nations' long-run rates of growth, which include economies of scale, greater competition, and investment stimulus

dynamic gains from international trade the effect of trade on the country's growth rate and thus on the volume of additional resources made available to, or utilized by, the trading country

E

economic mtegration a process of eliminating restrictions on international trade, payments, and factor mobility

economic interdependence all aspects of a nation's economy are linked to the economies of its trading partners

economic sanctions government-mandated limitations placed on customary trade or financial relations among nations

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

economies of scale when increasing all inputs by the same proportion results in a greater proportion of total output

effective exchange rate a weighted average of the exchange rates between a domestic currency and that nation's most important trading partners, with weights given by relative importance of the nation's trade with each trade partner

effective tariff rate measures the total increase in domestic production that a tariff makes possible, compared to free trade

elasticity approach an approach to currency depreciation that emphasizes the relative price effects of depreciation and suggests that depreciation works best when demand elasticities for a nation's imports and exports are high

environmental regulation regulations imposed on the production process to limit environmental impact

escape clause allows the president to temporarily terminate or make modifications in trade concessions granted foreign nations and to temporarily levy restrictions on surging imports

euro the official currency of the EMU

exchange arbitrage the simultaneous purchase and sale of a currency in different foreign-exchange markets in order to profit from exchange-rate differentials in the two locations

exchange rate the price of one currency in terms of another

exchange-rate index a weighted average of the exchange rates between a domestic currency and that nation's most important trading partners, with weights given by relative importance of the nation's trade with each trade partner

exchange-rate pass-through (relationship) the extent to which changing currency values lead to changes in import and export prices

exchange-stabilization fund a government entity that attempts to ensure that the market exchange

514 Glossary

rate does not move above or below the official exchange rate through purchases and sales of foreign currencies

exit barriers cost conditions that make lengthy industry exit a rational response by companies

expenditure-changing policies policies that alter the level of aggregate demand for goods and services, including those produced domestically and those imported

expenditure-switching policies policies that modify the direction of demand, shifting it between domestic output and imports

export controls enacted to stabilize export revenues, these measures offset a decrease in the market demand for the primary commodity by assigning cutbacks in the market supply

export quotas limitations on export sales administered by one or more exporting nations or industries

export subsidies a subsidy paid to exporters so they can sell goods abroad at the lower world price but still receive the higher support price

export-led growth (export-oriented policy) involves promoting economic growth through the export of manufactured goods-trade controls are either nonexistent or very low, in the sense that any disincentives to export resulting from import barriers are counterbalanced by export subsidies

export-revenue effect an increase in home country export revenue due to an export subsidy and the corresponding drop in foreign price of homenation exports

external balance when a nation realizes neither BOP deficits nor BOP surpluses

F

factor-endowment theory asserts that a country exports those goods that use its abundant factor more intensively

factor-price equalization free trade's tendency to cause cheap factors of production to become more expensive, and the expensive factors of production to become cheaper

fast-track authority devised in 1974, this provision commits the U.S. Congress to consider trade agreements without amendment; in return, the president must adhere to a specified timetable and several other procedures

fiscal policy refers to changes in government spending and taxes

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 exchange rates when a nation allows its currency to fluctuate according to the free-market forces of supply and demand

flying-geese pattern of economic growth where countries gradually move up in technological development by following in the pattern of countries ahead of them in the development process

forecasting exchange rates attempts to predict future rates of exchange

foreign direct investment foreign acquisition of a controlling interest in an overseas company or facility

foreign repercussion effect the impact that changes in domestic expenditures and income levels have on foreign economies; a rise in domestic income stimulates imports, causing a foreign expansion that in turn raises demand for domestic exports

foreign-currency options provide an options holder the right to buy or sell a fixed amount of foreign currency at a prearranged price, within a few days or several years

foreign-exchange market the organizational setting within which individuals, businesses, governments, and banks buy and sell foreign currencies and other debt instruments

foreign-trade multiplier when an increase in exports sets off a chain reaction that results in greater levels of spending so that domestic income increases by some multiple of the export increase

foreign-trade zone (FTZ) special zones that enlarge the benefits of a bonded warehouse by eliminating the restrictive aspects of customs surveillance and by offering more suitable manufacturing facilities; FTZs are intended to stimulate international trade, attract industry, and create jobs by providing an area that gives users tariff and tax breaks

forward market where foreign exchange can be traded for future delivery

forward rate the rate of exchange used in the settlement of forward transactions

forward transaction an outright purchase and sale of foreign currency at a fixed exchange rate but with payment or delivery of the foreign currency at a future date

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-on-board (FOB) valuation when a tariff is applied to a product's value as it leaves the exporting country

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

free-trade argument if each nation produces what it does best and permits trade, over the long run each party will enjoy lower prices and higher levels of output, income, and consumption than could be achieved in isolation

free-trade-biased sector generally comprises exporting companies, their workers, and their suppliers; it also consists of consumers, including wholesalers and retail merchants of imported goods

fundamental analysis the opposite of technical analysis; involves consideration of economic variables that are likely to affect a currency's value

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

futures market a market in which contracting parties agree to future exchanges of currencies and set applicable exchange rates in advance; distinguished from the forward market in that only a limited number of leading currencies are traded; trading takes place in standardized contract amounts and in a specific geographic location

G

gains from international trade gains trading partners simultaneously enjoy due to specialization and the division of labor

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

globalization the process of greater interdependence among countries and their citizens

global quota a technique permitting a specified number of goods to be imported each year, but

Glossary 515

does not specify where the product is shipped from or who is permitted to import

gold exchange standard a system of fixed exchange rates, with gold serving as the primary reserve asset; member nations officially agreed to state the par values of their currencies in terms of gold or, alternatively, the gold content of the U.S. dollar

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

goods and services balance the result of combining the balance of trade in services and the merchandise trade balance

guest workers foreign workers, when needed, allowed to immigrate on a temporary basis

H

Heckscher-Ohlin theory differences in relative factor endowments among nations underlie the basis for trade

hedging the process of avoiding or covering a foreignexchange risk

home market effect countries will specialize in products for which there is large domestic demand

horizontal integration in the case of an MNE, occurs when a parent company producing a commodity in the source country sets up a subsidiary to produce the identical product in the host country

importance of being unimportant when one trading nation is significantly larger than the other, the larger nation attains fewer gains from trade while the smaller nation attains most of the gains from trade

import license used to administer an import quota; a license specifying the volume of imports allowed

import quota a physical restriction on the quantity of goods that may be imported during a specific time period

import substitution a policy that involves extensive use of trade barriers to protect domestic industries from import competition

516Glossary

income determination a theory developed by John

Maynard Keynes in the 1930s; asserted that under a system of fixed exchange rates, the influence of income changes in surplus and deficit nations will help restore payments equilibrium automatically

increasing opportunity costs when each additional unit of one good produced requires the sacrifice of increasing amounts of the other good

increasing returns to scale when increasing all inputs by the same proportion results in a total output to increase by a greater proportion

indifference curve a curve depicting the various combinations of two commodities that are equally preferred in the eyes of the consumer

industrial policy government policy that is actively involved in creating comparative advantage

infant-industry argument a tariff that temporarily shields newly developing industries from foreign competition

institutional constraints policy considerations that involve issues of fairness and equity

intellectual property rights (lPRs) the exclusive rights to use an invention, idea, product, or process for a given time awarded to the inventor (or author) through registration with the government of that invention, idea, product, or process

interbank market bank transactions with other banks

interest arbitrage the process of moving funds into foreign currencies to take advantage of higher investment yields abroad

interindustry specialization when each nation specializes in a particular industry in which it enjoys a comparative advantage

interindustry trade the exchange between nations of products of different industries

internal balance the goal of economic stability at full employment

international commodity agreements (leAs) agreements between leading producing and consuming nations of commodities about matters such as stabilizing prices, assuring adequate supplies to consumers, and promoting the economic development of producers

international economic policy activities of national governments that affect the movement of trade and factor inputs among nations

international economic-policy coordination the attempt to coordinate national policies-monetary, fiscal, or exchange-rate policy-in recognition of international economic interdependence

international joint ventures an example of multinational enterprise in which a business organization established by two or more companies combines their skills and assets

international reserves assets held to enable nations to finance disequilibrium in their balance-of-payments positions

intraindustry specialization the focusing on the production of particular products or groups of products within a given industry

intraindustry trade two-way trade in a similar commodity

J

judgmental forecasts subjective or common-sense exchange-rate forecasts based on economic, political, and other data for a country

K

key currency a currency that is widely traded on world money markets, has demonstrated relatively stable values over time, and has been widely accepted as a means of international settlement

L

labor mobility a measure of how labor migration responds to wage differentials

labor theory of value the cost or price of a good depends exclusively upon the amount of labor required to produce it

large nation an importing nation that is large enough so that changes in the quantity of its imports, by means of tariff policy, influence the world price of the product

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 increases; thus, all countries can

rea lize welfare gains

law of one price part of the purchasing-power-parity approach to determining exchange rates; asserts

that identical goods should cost the same in all nations, assuming that it is costless to ship goods between nations and there are no barriers to trade

leaning against the wind intervening to reduce short-term fluctuations in exchange rates without attempting to adhere to any particular rate over the long run

level playing field a condition in which domestic and foreign producers can compete on equal terms

license on demand allocation a system in which licenses are required to import at the withinquota tariff

liquidity problem when a government or central bank runs short of needed international reserves

long position the position speculators take when they purchase foreign currency on the spot or forward market with the anticipation of selling it at a higher future spot price

M

managed floating system an exchange-rate system in which the rate is usually allowed to be determined by the free-market forces of supply and demand, while sometimes entailing some degree of government (central bank) intervention

maquiladoras manufacturing facilities or industrial parks in northern Mexico, typically the result of direct foreign investment; typically host an assemblage of U.S.-owned companies that combine U.S. parts and supplies and Mexican assembly to manufacture goods that are exported to the United States

margin of dumping the amount by which the domestic price of a firm's product exceeds its foreign price, or the amount by which the foreign price of a firm's product is less than the cost of producing it

marginal rate of transformation (MRT) the slope of the production possibilities schedule that shows the amount of one product a nation must sacrifice to get one additional unit of the other product

market economy where the commercial decisions of independent buyers and sellers acting in their own interest govern both domestic and international trade

market expectations examples include news about future market fundamentals and traders' opinions about future exchange rates

Glossary 517

market fundamentals economic variables such as productivity, inflation rates, real interest rates, consumer preferences, and government trade policy

mercantilist an advocate or practitioner of mercantilism; a national economic system in which a nation could regulate its domestic and international affairs so as to promote its own interests through a strong foreign-trade sector

merchandise trade balance the result of combining the dollar value of merchandise exports recorded as a plus (credit) and the dollar value of merchandise imports recorded as a minus (debit)

migration moving from one country to settle in another

monetary approach an approach to currency depreciation that stresses the effects depreciation has on the purchasing power of money and the resulting impact on domestic expenditure levels

monetary policy refers to changes in the money supply by a nation's central bank

monetary union the unification of national monetary policies and the acceptance of a common currency administered by a supranational monetary authority

most-favored nation (MFN) an agreement between two nations to apply tariffs to each other at rates as low as those applied to any other nation

multilateral contracts contracts that stipulate a minimum price at which importers will purchase guaranteed quantities from the producing nations and a maximum price at which producing nations will sell guaranteed amounts to importers

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

multiplier process when an initial increase in investment spending sets off a chain reaction that results in greater levels of spending, so that income increases by some multiple of the initial investment increase

N

net creditor the status of a nation when that country's claims on foreigners exceed foreign claims on that country at a particular time

net debtor the status of a nation when foreign claims on a country exceed that country's claims on foreigners at a particular time

518Glossary

net foreign investment in national income accounting, is synonymous with the current account balance

nominal exchange rate exchange-rate quotes published in newspapers that are not adjusted inflation rates in trading partners

nominal exchange-rate index the average value of a currency, not adjusted for changes in price levels of that country and its trading partners

nominal interest rate the rate of return on assets that can be earned in a particular country, not adjusted for the rate of inflation

nominal tariff rate the tariff rate published in a country's tariff schedule

nonmarket economy where state planning and control govern foreign and sometimes domestic trade

nonrestrained suppliers a trading partner that is not restrained by a voluntary export agreement

nontariff trade barriers (NTBs) policies other than tariffs that restrict international trade

normal trade relations the U.S. government's replacement for the term most-favored nation

no-trade boundary the terms-of-trade limit at which a country will cease to export a good

o

offer rate the price at which the bank is willing to sell a unit of foreign currency

official exchange rate the exchange rate determined by comparing the par values of two currencies

official reserve assets holding key foreign currencies, special drawing rights, and reserve positions in the IMF by official monetary institutions

official settlements transactions the movement of financial assets among official holders; these financial assets fall into two categories: official reserve assets and liabilities to foreign official agencies

offshore-assembly provision when import duties apply only to the value added in the foreign assembly process, provided that domestically made components are used by overseas companies in their assembly operations

openness the ratio of a nation's exports and imports as a percentage of its gross domestic product (GDP)

optimum currency area a region in which it is economically preferable to have a single official currency rather than multiple official currencies

optimum tariff a tariff rate at which the positive difference between the gain of improving terms of trade and the loss of declining import volume is maximized

option an agreement between a holder (buyer) and a writer (seller) that gives the holder the right, but not the obligation, to buy or sell financial instruments at any time through a specified date

orderly marketing agreement a market-sharing pact negotiated by trading partners

outer limits for the equilibrium terms of trade defined by the domestic cost ratios of trading nations

overall balance when an economy attains internal balance and external balance

overshooting an instance of an exchange rate's short-run response to a change in market fundamentals is greater than its long-run response

p

par value a central value in terms of a key currency that governments participating in a fixedexchange rate system set their currencies

partial specialization when a country specializes only partially in the production of the good in which it has a comparative advantage

persistent dumping when a producer consistently sells products abroad at lower prices than at home

predatory dumping when a producer temporarily reduces the prices charged abroad to drive foreign competitors out of business

premium the valuation of a currency when it is worth more in the forward market than in the spot market

price-specie-flow doctrine David Hume's theory that a favorable trade balance was possible only in the short run, and that over time, it would automatically be eliminated via changes in product prices

priced-based definition a method of calculating fair market value in dumping cases; dumping occurs when a company sells a product in its home market at a price above that for which the same product sells in the foreign market

primary products agricultural goods, raw materials, and fuels

principle of absolute advantage in a two-nation, two-product world, international specialization