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58 Cards in this Set
- Front
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common market
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An international union that goes beyond a customs union by also allowing for the free movement of labor and capital (factor flows) among member nations.
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customs market
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A union in which members remove all barriers to trade among themselves and adopt a common set of external barriers, thereby eliminating the need for customs inspection at internal borders (e.g., MERCOSUR today, and the EEC from 1957 1992).
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economic sanctions
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Discriminatory restrictions or complete bans on economic exchange, designed to punish the target country or countries.
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economic union
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A union that extends a common market by harmonizing the monetary and fiscal policies of the member nations as well.
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embargoes (boycotts)
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Complete bans on economic exchange. These may fail for either economic or political reasons.
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free trade area
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An area in which members remove trade barriers among themselves but keep their separate national barriers against trade with non-members
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rules of origin
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A version of domestic-content regulations in which products are certified to have been produced within a free-trade area (and so are permitted to trade without barriers in that area). Without such rules, a non-member Country X may circumvent Country Y’s high external tariff by exporting its good to Y’s free-trade partner, Country Z.
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trade blocs
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Forms of economic integration whereby members remove explicit trade barriers among themselves, but keep national barriers to the flow of labor and capital and their fiscal and monetary autonomy. Trade blocs are exemplified mainly by free trade areas and custom unions. Nearly half of all world trade occurs within trade blocs.
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trade creation
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The increase in trade volume caused by union with a lower cost (more efficient) supplier within the trade bloc.
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trade diversion
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The volume of trade shifted from a lower cost (more efficient) supplier outside the trade union to a higher cost (less efficient) supplier within the union.
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Council for Mutual Economic Assistance
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an organization of Soviet Bloc countries intended to promote and coordinate multilateral trade within the centrally-planned economies of the bloc.
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Engel's law
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Because the income elasticity of demand for food is less than one, as per capita incomes rise in the long run, demand will shift away from food and the relative price of food will fall.
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import-substituting industrialization
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A strategy for development that calls for governments of developing countries to identify large domestic markets as indicated by substantial imports over the years to ensure technologies of production can be mastered by local manufacturers or supplied by foreign investors, or to use subsidies to make it profitable for potential investors or state enterprises to set up high cost local production facilities.
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newly-industrialized countries
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Most prominent of these are South Korea, Taiwan, Hong Kong, and Singapore (“the Four Tigers”), whose per capita incomes rose to the level of the industrialized countries, thanks to high income growth rates through the late 1990s. “Newly-globalizing developing countries” are those that had closed economies in 1980, but whose growth rates skyrocketed in the late 1990s as trade was liberalized. This group includes China, Brazil, and India.
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OPEC
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Established in 1960, this cartel has a membership of 12 producers (from the Middle East, Africa, and South America) as of 2008. OPEC was successful in engineering enormous increases in the price of crude oil during 1973 74 and 1979 80. Because of supply conditions, it is unlikely that cartels in other primary products could achieve anything like OPEC’s success.
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transition countries
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Countries of the former Soviet Union (FSU) and its satellites that are moving from central planning to market orientation. Beginning in 1989, these countries started to “liberalize” by moving toward market-determined prices, private ownership of resources and businesses, and openness to international competition and trade. These countries may suffer from a “transition recession” early in the liberalization period as old business practices and relationships are re-organized.
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brain drain
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The emigration, mainly from developing countries, of highly skilled and educated people to higher-wage industrialized countries.
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foreign direct investment
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A flow of lending to, or purchase of ownership in, a new or existing foreign enterprise. To qualify as FDI, the investment must represent at least 10% of the value of the firm, and the investor is presumed to have the ability to exert some control over the firm
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firm-specific investment
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Managerial, technical, and marketing skills and patents that accrue to a particular firm and that help it overcome the inherent native advantages of local rival firms.
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multinational enterprise
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A firm that owns and controls enterprises in more than one foreign country. The parent company is based in the home-country source for the FDI and has one or more foreign branches or subsidiaries. Unlike a foreign direct investor, an MNE also tends to provide brand names, marketing strategies, or management practices.
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transfer pricing
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The price set on a component moving between units of an MNE. Creative transfer pricing can reduce the parent company’s corporate profits taxes by overstating the cost paid for components by the MNE’s unit in a high-tax country.
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balance of payments
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The systematic set of accounts that records all economic transactions between residents of a country and the rest of the world during a given period of time.
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financial account
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Records the values of financial assets purchased and sold abroad by private residents (not monetary authorities) of the home country. A financial account surplus indicates that, on net, financial capital has flowed into the country.
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capital inflow
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Either an increase in foreign assets in the nation, such as when a foreigner purchases a U.S. stock; or a reduction in the nation’s assets abroad, such as when an American sells a foreign stock.
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capital outflow
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Either an increase in the nation’s assets abroad, such as when an American purchases a foreign asset; or a reduction in foreign assets in the nation, such as when a foreigner sells his American assets.
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current account
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Records the values of goods and services sold and purchased abroad, plus net interest and other factor payments and net unilateral transfers and gifts. A current account surplus shows that a country has positive net foreign investment.
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international investment position
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Measures a nation’s stock of foreign assets and liabilities at a point in time.
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net foreign investment
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The part of national saving invested abroad instead of being channeled into domestic capital formation: (S = Id + If). It is also the difference between purchases of financial assets (lending) abroad and asset sales to foreigners (borrowing), that is, a country’s accumulation of net claims on other countries.
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official settlements balance
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Also called the “official balance,” this is the sum of the current account balance plus the private financial account balance. An imbalance in the official balance must be paid for through official reserves transactions.
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official international reserves transactions
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The changes in domestic official reserve assets and in
domestic official liquid liabilities to foreign officials. It is derived by dividing private transactions from official “accommodative” transactions in the balance of payments accounts. |
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reserve assets
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Assets held by a nation’s monetary authorities as a kind of “war chest” to enable them to intervene in the foreign exchange market if and when they decide to do so. Reserve assets include key foreign currencies, gold, official reserves at the IMF, and holdings of Special Drawing Rights (SDRs). Recently, China has accumulated a very large stock of dollar-denominated reserve assets.
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merchandise trade balance
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The value of goods exported (credits) minus the value of goods imported (debits). The value of exported goods and services minus imported goods and services is often referred to as “the trade balance.”
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appreciation (depreciation)
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An increase (decrease) in the market price of a currency under a floating exchange rate system.
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fixed exchange rate
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A rate whose officially declared value is maintained by central bank intervention. (Also referred to as a pegged exchange rate.)
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floating exchange rate
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A rate whose value is determined purely by the market forces of supply and demand, with no direct intervention by central banks. (Also referred to as a flexible exchange rate.)
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foreign exchange market
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A computerized communications network embracing all the major financial centers in the globe, where sellers and buyers of any national money can quickly and efficiently carry out any desired currency exchange.
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foreign exchange market intervention
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When a central bank buys or sells foreign exchange in order to manipulate or peg the exchange rate
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foreign exchange rate
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The price of one country’s currency expressed in terms of another country’s currency. (Note that, in this text, the exchange rate is expressed in terms of domestic currency units required to purchase one unit of a foreign currency.)
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foreign exchange swap
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A “package trade” in which a spot purchase of a currency is accompanied by a forward sale of that currency, or a spot sale of a currency is accompanied by a forward purchase of that currency and payment. This transaction allows for temporary foreign exchange needs and is free of exchange risk.
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forward exchange rate
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The exchange rate applicable to foreign exchange transactions agreed upon today for later delivery (usually in 30, 90, or 180 days).
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revaluation
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an official increase in the par value of a currency under a fixed exchange rate system
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devaluation
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an official decrease in the par value of a currency under a fixed exchange rate system
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spot exchange rate
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The rate applicable to foreign exchange transactions requiring contemporaneous delivery and payment.
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triangular arbitrage
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The process that ensures consistency among the sets of bilateral “cross rates” of the world’s traded currencies. For example, if the British pound trades for US$2, and 100 Japanese yen trade for US$1, the exchange rate between the yen and the pound must be 200 yen per pound. Otherwise, there is an opportunity for an arbitrageur to buy a currency cheaply in one market and sell it for a higher price in another market.
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vehicle currency
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A currency used to facilitate an indirect trade between two other currencies. The U.S. dollar is often used as a vehicle currency.
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covered interest arbitrage
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Buying a country’s currency spot and selling it forward to make a net profit off the combination of higher interest rates in the country and/or any forward premium on its currency.
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covered interest parity
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When the forward rate on a nation's currency exceeds the spot rate by the same percentage that its interest rate is lower than the other country’s interest rate.
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covered international investment
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When the exchange rate at which anticipated foreign investment returns will be redeemed is locked in today through a forward contract. The agent is protected from exchange rate risk when “covered.”
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currency futures
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Contracts to buy or sell a foreign currency on a specific date in the future at a price set today. In this sense, futures are exactly like forward exchange contracts. The difference lies in their form. While forward contracts are tailored to the needs of the customer in terms of amount of funds, due-date of contract, and so on, futures contracts have standardized denominations and due dates. As a consequence, they can be traded in organized markets such as the Chicago Mercantile Exchange. Almost anyone with some up front funds can enter into a futures contract; only very large firms get forward contracts from their banks.
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currency options
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contract that gives parties the right (but not the requirement) to buy/sell foreign exchange in the future at a price set today. If someone purchases a “call option,” she buys the right to obtain the currency at the “strike price” at a given date in the future. A person purchasing a “put option” buys the right to sell the currency at the “strike price.” A person expecting a foreign currency to become pricier in the future might buy a call option; a person expecting the currency to fall in value might buy a put option.
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exchange rate risk
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When the value of an economic agent’s income, wealth, or net worth changes as exchange rates change unpredictably in the future.
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future spot risk
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The spot exchange rate that will end up prevailing at some date in the future.
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hedging
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The act of exactly matching assets and liabilities, such as foreign currencies, so as to avoid exchange rate risk.
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long position
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A net asset position (e.g., owning a foreign currency).
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short position
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A net liability position (e.g., owing a foreign currency).
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speculation
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Deliberately assuming a net asset (long) position or net liability (short) position in an asset, such as a foreign currency, in the hope of profiting from price changes.
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uncovered interest parity
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When the expected rate of appreciation of a currency equals the amount by which its interest rate is lower than the other country’s interest rate.
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uncovered international investment
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When the exchange rate at which anticipated foreign investment returns will be redeemed is not determined until the trade occurs at the future spot rate. The agent is exposed to exchange rate risk when “uncovered.”
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