Glossary of Key Terms1

International Economics

A

Absolute advantage The greater efficiency that onenation may have over another in the productionof a commodity. This was the basis for trade forAdam Smith.

Absolute purchasing-power parity theory Postulatesthat the equilibrium exchange rate is equal to theratio of the price levels in the two nations. Thisversion of the PPP theory is not acceptable.

Absorption approach Examines and integrates the effectof induced income changes in the process ofcorrecting a balance-of-payments disequilibriumby a change in the exchange rate.

Accommodating transactions Transactions in officialreserve assets required to balance internationaltransactions; also called below-the-line items.

ACP Africa, the Caribbean, and the Pacific (or thecountries s of the Lomé Convention).

ADB Asian Development Bank.

Ad valorem tariff A tariff expressed as a fixedpercentage of the value of a traded commodity.

Adjustable peg system The system under whichexchange rates or par values are periodicallychanged to correct balance-of-paymentsdisequilibria.

Adjustment The process by which balance-of-paymentsdisequilibria are corrected.

Adjustment assistance The provision of the 1962 TradeExpansion Act to assist displaced workers andfirms injured by tariff reductions.

Adjustment in the balance of payments The operationand effects of the mechanisms for correctingbalance-of-payments disequilibria.

Adjustment policies Specific measures adopted by anation’s monetary authorities for the primarypurpose of correcting a balance-of-paymentsdisequilibrium.

AFDB African Development Bank.

Aggregate demand (AD) curve The graphicalrelationship between the total quantity demandedof goods and services at various prices.

Aggregate supply (AS) curve The graphical relationshipbetween the nation’s output and the price levelover a given time period.

Anti-trade biased growth Growth that results in areduction of trade relative to the size of theeconomy.

Antitrade production and consumption Increases inproduction and consumption that lead to asmaller than proportionate increase (or even anabsolute decline) in the volume of trade.

APM Average propensity to import.

Appreciation A decrease in the domestic currency priceof the foreign currency.

Arbitrage The purchase of a currency in the monetarycenter where it is cheaper for immediate resale inthe monetary center where it is more expensive inorder to make a profit.

ASEAN Association of Southeast Asian nations.

Autarky The absence of trade, or isolation.

Automatic adjustment mechanism An adjustmentmechanism activated by the balance-of-paymentsdisequilibrium itself, without any governmentaction, and which operates (if unhampered) untilthe balance-of-payments disequilibrium iseliminated.

Automatic income adjustment mechanism Anadjustment mechanism that relies on inducedchanges in the national income of the deficit andsurplus nations to correct balance-of-paymentsdisequilibria.

Automatic price adjustment mechanism An adjustmentmechanism that relies on price changes in thedeficit and surplus nations to correct balance-of-payments disequilibria.

Autonomous transactions International transactions thattake place for business or profit motives (exceptfor unilateral transfers) and independently ofbalance-of-payments considerations.

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Average propensity to import (APM) The ratio ofimports to national income, or M/Y.

Average tariff A measure of the height of a country’stariff barriers.

B

Balance of payments A summary statement of all theinternational transactions of the residents of anation with the rest of the world during aparticular period of time, usually a year.

Balance of trade The value of merchandise exports minusimports.

Balanced growth Equal rates of factor growth andtechnological progress in the production of bothcommodities.

Basic balance The current account plus long-term capital.

Basis for trade The forces that give rise to trade betweentwo nations. This was absolute advantageaccording to Adam Smith and comparativeadvantage according to David Ricardo.

Benign neglect The policy of nonintervention in foreignexchange markets followed by the United Statesfrom March 1973 until the end of 1977 and from1981 to 1985.

Bilateral agreements Agreements between two nationsregarding quantities and terms of specific tradetransactions.

Bilateral trade Trade between any two nations.

BIS Bank for International Settlement.

BP curve Combinations of i (interest rate) and Y (realGDP) that provide equilibrium in the balance ofpayments.

Brain drain The migration of highly skilled and trainedpeople from developing to developed nations andfrom other industrial nations to the United States.

Bretton Woods system The gold-exchange standard thatoperated from the end of World War II until1971.

Buffer stocks The type of international commodityagreement that involves the purchase of thecommodity (to be added to the stock) when thecommodity price falls below an agreed minimumprice, and the sale of the commodity rises above

the established maximum price.

Bulk purchasing An agreement to purchase a specifiedamount of a commodity for a year or a number ofyears.

“Buy American” acts Laws that direct purchasing agentsof the U.S. federal, state, and local governmentsto purchase American products unlesscomparable foreign goods are substantiallycheaper.

C

CACM Central American Common Market.

Call option An option to buy currency.

CAP Common Agricultural Policy (of the EU).

Capital account The change in U.S. assets abroad andforeign assets in the United States, other thanofficial reserve assets.

Capital flight Large capital outflows resulting fromunfavorable investment conditions in a country.

Capital inflow An increase of foreign assets in the nationor a reduction in the nation’s assets abroad.

Capital-intensive commodity The commodity with thehigher capital-labor ratio at all relative factorprices.

Capital-labor ratio (K/L) The amount of capital per unitof labor used in the production of a commodity.

Capital outflow A decrease of foreign assets in thenation or an increase in the nation’s assetsabroad.

Capital-saving technical progress Technical progressthat increases the productivity of laborproportionately more that the productivity ofcapital and results in an increase in L/K atconstant relative factor prices.

CARICOM Caribbean Community.

Centralized cartel An organization of suppliers of acommodity that behaves as a monopolist.

Centrally planned economies Economies in whichfactors of production are owned by thegovernment and prices are determined bygovernment directives.

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CHP Czechoslovakia (now two countries), Hungary, andPoland.

CIP Covered interest parity.

CIS Commonwealth of Independent States (anorganization of the most of the republics of theformer USSR).

Closed economy An economy in autarky or not engagingin international transactions.

CMEA Council of Mutual Economic Assistance (nowdefunct).

Cobb-Douglas production function The productionfunction exhibiting a unitary elasticity ofsubstitution between labor and capital.

COMECON Another acronym for the CMEA.

Commercial policies The regulations governing anation’s commerce or international trade.

Commodity, or net barter, terms of trade The ratio ofthe price index of the nation’s exports to the priceindex of its imports times 100.

Commodity money standard The value of money isfixed relative to a commodity.

Common market Removes all barriers on trade amongmembers, harmonizes trade policies toward therest of the world, and also allows the freemovement of labor and capital among membernations. An example is the European Union(EU) since January 1, 1993.

Commonwealth of Independent States (CIS) Theorganization formed by most of the former SovietRepublics when the Soviet Union was dissolvedat the end of 1991.

Community indifference curve The curve that shows thevarious combinations of two commoditiesyielding equal satisfaction to the community ornation. Community indifference curves arenegatively sloped, convex from the origin, andshould not cross.

Comparative advantage A country has comparativeadvantage over another in a particular good if theopportunity cost of producing that good is lowerin the country in question.

Comparative statics Studies and compares two or moreequilibrium positions (resulting from changes inunderlying economic conditions) without regardto transitional period and process of adjustment.

Complete specialization The utilization of all of anation’s resources in the production of only onecommodity with trade. This usually occurs underconstant costs.

Compound tariff A combination of an ad valorem and aspecific tariff.

Confidence The knowledge that the balance-of-paymentsadjustment mechanism is working adequately andthat international reserves will retain theirabsolute and relative values.

Constant elasticity of substitution (CES) productionfunction The production function exhibiting aconstant (but not necessarily unitary) elasticity ofsubstitution between labor and capital.

Constant opportunity costs The constant amount of acommodity that must be given up to produceeach additional unit of another commodity.

Constant returns to scale The condition under whichoutput grows in the same proportion as factorinputs.

Consumer surplus The difference between whatconsumers are willing to pay for a specificamount of a commodity and what they actuallypay for it.

Consumption effect of a tariff The reduction indomestic consumption of a commodity resultingfrom the increase in its price due to a tariff.

Consumption function The relationship betweenconsumption expenditures and income. Ingeneral, consumption is positive when income iszero (i.e., the nation dissaves) and rises as incomerises, but by less than the rise in income.

Council of Mutual Economic Assistance (CMEA orCOMECON) The organization of Communistbloc nations formed by the Soviet Union in 1949to divert trade from Western nations and achievea greater degree of self-sufficiency amongCommunist nations.

Consumer surplus the difference between the amountconsumers are willing to pay to purchase a givenquantity of goods and the amount they have topay to purchase those goods.

Consumption possibilities frontier The various bundles ofgoods that a country can obtain by takingadvantage of international trade.

Countervailing duty A tariff imposed by an importing

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country designed to offset artificially low pricescharged by exporters.

Covered interest arbitrage The transfer of short-termliquid funds abroad to earn higher returns withthe foreign exchange risk covered by the spotpurchase of the foreign currency and asimultaneous offsetting forward sale.

Covariance A measure of how two variables fluctuateabout their means together.

Covered return The domestic currency value of a foreigninvestment when the foreign currency proceedsare sold in the forward market.

Crawling peg system The system under which par valuesor exchange rates are changed by very smallpreannounced amounts at frequent and clearlyspecified intervals until the equilibrium exchangerate is reached.

Credit tranche The amounts that a member nation couldborrow from the IMF, subject to conditions, overand above the gold tranche.

Credit transactions Transactions that involve the receiptof payments from foreigners. These include theexport of goods and services, unilateral transfersfrom foreigners and capital inflows.

Crowding out An increase in government spending isoffset by a reduction in private spending, such asnet exports.

CRS constant returns to scale.

Currency convertibility The ability to exchange onenational currency for another without anyrestriction or limitation.

Currency swaps A spot sale of a currency combinedwith a forward repurchase of the same currency.

Current account The amount that includes all sales andpurchases of currently produced goods andservices, income on foreign investments, andunilateral transfers.

CUSFTA Canada-U.S. Free Trade Agreement.

Customs union Removes all barriers on trade amongmembers and harmonizes trade policies towardthe rest of the world. The best example is theEuropean Union (EU).

D

DC Developed country (or, collectively, the North or theWest; unfortunately, DC also sometimes standsfor “developing country” and is used a anotheracronym for LDC).

Debit Transactions Transactions that involve paymentsto foreigners. These include the import of goodsand services, unilateral transfers to foreigners,and capital outflows.

Deficit in the balance of payments The excess of debitsover credits in the current and capital accounts,or autonomous transactions; equal to the netcredit balance in the official reserve account, oraccommodating transactions.

Demand for money According to the monetaryapproach, the nation’s demand for nominalmoney balances is stable in the long run and isdirectly related to nominal national income butinversely related to the rate of interest in thenation.

Depreciation An increase in the domestic currency priceof the foreign currency.

Deprived demand The demand for factors of productionthat arises from the demand for final commoditiesthat are produced using the particular factors.

Desired or planned investment The level of investmentexpenditures that business would like toundertake.

Destabilizing speculation The sale of a foreign currencywhen the exchange rate falls or is low, in theexpectation that it will fall even lower in thefuture, or the purchase of a foreign currencywhen the exchange rate is rising or is high, in theexpectation that it will rise even higher in thefuture.

Devaluation A deliberate increase in the exchange rateby a nation’s monetary authorities from one fixedor pegged level to another.

Differentiated products The somewhat differentproducts (such as automobiles, cigarettes, andsoaps) produced by different manufacturers in thesame industry or general product group.

Direct investments Real investments in factories, capitalgoods, land, and inventories where both capitaland management are involved and the investorretains control over the use of the investedcapital.

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Dirty floating Managing the nation’s exchange rate toachieve aims other than simply the smoothing outof short-term fluctuations, for example, keepingthe nation’s currency undervalued so as tostimulate exports.

DM Deutsche mark.

Dollar glut The excess supply of dollars in the hands offoreign monetary authorities that developedduring the late 1950s and early 1960s.

Dollar overhang The large amount of foreign-helddollars resulting form past U.S. balance-of-payments deficits, the movement of which frommonetary center to monetary center can lead tolarge exchange rate fluctuations and complicatesthe conduct of monetary policies.

Dollar shortage The inability of war-torn nations duringthe late 1940s and early 1950s to accumulatesubstantial dollar reserves.

Dollar standard The international monetary system thatemerged from the Smithsonian Agreement inDecember 1971 under which the U.S. dollarremained an international currency and reservewithout any gold backing.

Domestic value added Equals the price of a finalcommodity minus the cost of the imported inputsgoing into the production of the commodity.

Double-entry bookkeeping The accounting procedurewhereby each (international) transaction isentered twice, once as a credit and once as a debitof an equal amount.

Double factoral terms of trade The ratio of the priceindex of the nation’s exports to the price index ofits imports times the ratio of the productivityindex in the nation’s export sector to theproductivity index in the nation’s import-competing sector.

Dumping The export of a commodity at below cost or ata lower price than sold domestically.

Dutch disease The appreciation of a nation’s currencyresulting from the exploitation of a domesticresource that was previously imported, and theresulting loss of international competitiveness inthe nation’s traditional sector.

Duty-free zones or free economic zones Areas set up toattract foreign investments by allowing rawmaterials and intermediate products duty free.

Dynamic analysis Deals with the time path and processof adjustment from one equilibrium position toanother.

Dynamic external economies The decline in the averagecost of production as cumulative industry outputincreases and firms accumulate knowledge overtime.

E

EACM East Africa Common Market.

EBRD European Bank for Reconstruction andDevelopment.

EC European Community (successor name to the EEC).

Economic integration The commercial policy ofdiscriminatively reducing or eliminating tradebarriers only among the nations joining together.

Economic union Removes all barriers on trade amongmembers, harmonizes trade policies toward therest of the world, allows the free movement oflabor and capital among member nations, andalso harmonizes or unifies the monetary, fiscal,and tax policies of its members.

ECSC European Coal and Steel Community (precursor tothe EEC).

ECU European Currency Unit.

Edgeworth box diagram The diagram constructed fromthe isoquants of two commodities and the givenquantities available of two factor inputs.

EEA European Economic Area (between the EC and theEFTA).

EEC European Economic Community.

Effective exchange rate A weighted average of theexchange rates between the domestic currencyand the nation’s most important trade partners,with weights given by the relative importance ofthe nation’s trade with each of these tradepartners

Efficiency of foreign exchange markets The situation inwhich forward rates accurately predict future spotrates.

EFTA European Free Trade Area.

Elasticity approach The change in the trade balance

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resulting from a depreciation or devaluation anddepending on the price elasticity of demand forthe nation’s exports and imports.

Elasticity of substitution The degree or ease with whichone factor can be substituted for another inproduction when the price of the factor declines.

Elasticity pessimism The belief, arising from theempirical studies of the 1940s, that foreignexchange markets were either unstable or barelystable.

EMCF European Monetary Cooperation Fund (of theEMS).

EMI European mOnetary Institute.

EMS European Monetary System.

EMU European Monetary Union.

Engine of growth The view that exports were the leadingsector that propelled the economies of the regionsof recent settlement into rapid growth anddevelopment during the nineteenth century.

Environmental standards The level of pollutionaccepted in various countries.

Equilibrium level of national income The level ofincome at which desired or planned expendituresequal the value of output, and desired savingsequals desired investment.

Equilibrium-relative commodity price in isolation Therelative commodity price at which a nation ismaximizing its welfare in isolation. It is given bythe slope of the common tangent to the nation’sproduction frontier and indifference curve at theautarky point of production and consumption.

Equilibrium-relative commodity price with trade Thecommon relative commodity price in two nationsat which trade is balanced.

ERM Exchange-rate mechanism (of the EMS).

ERP Effective rate of protection.

Escape clause A protectionist device that allowed anyindustry that claimed injury from imports topetition the International Trade Commission,which could then recommend to the President torevoke any negotiated tariff reduction.

EU European Union.

Euler’s theorem The theorem that postulates that ifconstant returns to scale prevail in productionand each factor is rewarded (paid) according toits productivity, the output produced is exhaustedand just exhausted.

Eurobonds Long-term debt securities sold outside theborrower’s country to raise long-term capital in acurrency other than the currency of the nationwhere the securities are sold.

Eurocurrency Commercial bank deposits in a nationdenominated in a foreign currency.

Eurocurrency market The market where eurocurrenciesare borrowed and lent

European Central Bank (ECB) The institution similarto the Federal Reserve System in the UnitedStates that would control the money supply andissue the single currency of the European Unionto be set up by 1997 or 1999.

European Community The former name of theEuropean Union (EU).

European Currency Unit (ECU) The unit of accountdefined by the European Monetary System, basedon the weighted average of the currencies of theEU members.

European Economic Area (EEA) The free trade areaformed by the 12 members of the EU and the 7members of the EFTA on January 1, 1994.

European Free Trade Association (EFTA) The freetrade area that was formed in 1960 by the UnitedKingdom, Austria, Denmark, Norway, Portugal,Sweden and Switzerland, with Finland andassociate member in 1961. Iceland acceded in1970. In 1973, the United Kingdom andDenmark left the EFTA to join the EU. Finlandbecame a full member of the EFTA in 1986 andLiechtenstein in 1991.

European Monetary Cooperation Fund (EMCF) Theinstitution of the European Monetary System thatprovides short-term and medium-term balance-of-payments assistance to member nations.

European Monetary Institute (EMI) The forerunner ofthe European Central Bank called to be set up inJanuary 1994 by the Maastrich Treaty ofDecember 1991 to further centralize members’macroeconomic policies and reduce exchangerate fluctuation margins.

European Monetary System (EMS) The organization

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formed by the members of the European Union(EU) in 1979 based on the creation of theEuropean Currency Unit (ECU) of account,limited exchange rate flexibility amongmembers, and formation of the EuropeanMonetary Fund (EMF).

European Union (EU) The customs union formed byWest Germany, France, Italy, Belgium, theNetherlands and Luxembourg that came intoexistence in 1958, and expanded to 12 nationswith the joining of the United Kingdom,Denmark and Ireland in 1973, Greece in 1981,and Spain and Portugal in 1986. Also known asthe European Common Market.

Exchange controls Restrictions on international capitalflows, official intervention in forward markets,multiple exchange rates, and other financial andmonetary restrictions imposed by a nation.

Exchange rate The domestic currency price of theforeign currency.

Exchange rate mechanism (ERM) The arrangement ofthe European Monetary System under which thecurrencies of member countries were allowed tofluctuate by plus or minus 2.25 percent of theircentral rates.

Exchange rate overshooting The tendency of exchangerates to immediately depreciate of appreciate bymore than required for long run equilibrium andthen partially reversing their movement as theymove toward their long run equilibrium levels.

Expected prices The prices that are believed will prevail.

Expenditure-changing policies Fiscal and monetarypolicies directed at charging the level ofaggregate demand of the nation.

Expenditure switching policies Devaluation orrevaluation of a nation’s currency directed atswitching the nation’s expenditures from foreignto domestic or from domestic to foreign goods.

Export controls The type of international commodityagreement that seeks to regulate the quantity ofthe commodity exported by each nation.

Export function The relationship between exports andincome. With exports exogenous, the exportfunction is horizontal. That is, exports areindependent of (or do not change with ) the levelof national income.

Export -Import Bank A U.S. government agency that

extends subsidized loans to foreigners to financeU.S. exports.

Export instability Short run fluctuations in exportprices and earnings.

Export orientated industrialism The policy ofindustrialization pursues by some developingnations that involves increasing the output ofmanufactured goods for export.

Export pessimism The feeling that developing countries’exports to developed countries cannot growrapidly because of the latter'’ increasedprotectionism.

Export subsidies The granting of tax relief andsubsidized loans to potential exporters, and low interest loans to foreign buyers of the nation’sexports.

Export tariff A tax or duty on exports.

External balance The objective of equilibrium in anation’s balance of payments.

External economies The reduction in each firm’saverage costs of production as the entire industryoutput expands.

F

Factor abundance The factor of production available ina grater proportion and at a lower relative price inone nation than in another nation.

Factor endowments See factor abundance

Factor- intensity reversal The situation where acommodity is L- intensive when the relative priceof labor is low and K intensive when the relativeprice of capital is low. If prevalent, this wouldlead to rejection of the H-O trade model.

Factor- price equalization (H-O-S) theorem The part ofthe H-O theory that predicts, under highlyrestricted assumptions, that international tradewill bring about equalization in relative andabsolute returns to homogeneous factors acrossnations.

Factor-proportions or factor-endowment theory SeeHeckscher-Ohlin theory.

FDI Foreign direct investment.

FE curve The usually positively inclined curve showingthe various combinations of interest rates and

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national income levels at which the nation’sbalance of payments is in equilibrium.

First credit tranche The 25 percent of a nation’s quotain the IMF that the nation is required to pay inSDR’s or in the currencies of other membersselected by the Fund almost automatically.

Footloose industries Industries that face neithersubstantial weight gains nor losses during theproduction process and thus tend to locate wherethe availability of other inputs leads to overallmanufacturing costs.

Foreign exchange futures A forward contract forstandardized currency amounts and selectedcalendar dates traded on an organized market(exchange).

Foreign exchange markets The framework for theexchange of one national currency for another.

Foreign exchange options A contract specifying theright to buy or sell a standard amount of a tradedcurrency at or before a stated date.

Foreign exchange risk The risk resulting from changesin exchange rates over time and faced by anyonewho expects to make or to receive a payment in aforeign currency at a future date; also called anopen position.

Foreign repercussions The effect that a change in a largenation’s income and trade has on the rest of theworld and which the rest of the world in turn hason the nation under consideration. This is howbusiness cycles are transmitted internationally.

Foreign trade multiplier (k`) The ratio of the change inincome to the change in exports and/orinvestment. It equals k`=1/(MPS + MPM).

Forward discount The percentage per year by which theforward rate on the foreign currency is below itsspot rate.

Forward premium The percentage per year by which theforward rate on the foreign currency is above itsspot rate.

Forward rate The exchange rate in foreign exchangetransactions involving delivery of the foreignexchange one, three, or six months after thecontract is agreed upon.

Freely floating exchange rate system The flexibleexchange rate system under which the exchangerate is always determined by the forces of

demand and supply without any governmentintervention in foreign exchange markets.

Free trade area Removes all barriers on trade amongmembers, but each nation retains its own barrierson trade with nonmembers. The best example isthe European Free Trade Association (EFTA).

Fundamental disequilibrium Large and persistentbalance-of-payments deficits or surpluses.

FX Foreign exchange.

G

Gain from exchange The increase in consumptionresulting from exchange alone and with thenation continuing to produce at the autarky point.

Gain from specialization The increase in consumptionresulting from specialization in production.

Gain from trade The increase in consumption in eachnation resulting from specialization in productionand trading.

Game theory A method of choosing the optimal strategyin conflict situations.

GATS General Agreement on Trade in Services(proposed extension of GATT to trade inservices).

GATT General Agreement on Tariffs and Trade.

GDP Gross Domestic Product.

G-5 Group of Five (France, Germany, U.K., and theU.S.).

GNP Gross National Product.

G-7 Group of Seven (G-5 plus Canada and Italy).

General Arrangement on Tariff and Trade (GATT) An international organization devoted to thepromotion of freer trade through multilateraltrade negotiation.

General Arrangements to Barrow (GAB) Thearrangements under which the IMF negotiated tobarrow from the “Group of Ten” (most importantindustrial nations) and Switzerland to augment itsresources if needed to help nations with balance-of-payments difficulties.

General equilibrium analysis the study of theinterdependence that exists among all markets in

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the economy.

General equilibrium model an economic model thatstudies the behavior of all producers, consumers,and traders simultaneously.

Global monetarists Extreme monetarist who believe thatnational income will be at or will automaticallytend toward full employment (or the natural rateof unemployment) in the long run and that thelaw of one price prevails throughout the world.

Gold export point The mint parity plus the cost ofshipping an amount of gold equal to one unite ofthe foreign currency between the two nations.

Gold import point The mint parity minus the cost ofshipping an amount of gold equal to one unit ofthe foreign currency between the two nations.

Gold standard The international monetary systemoperating from about 1880 to 1914 under whichgold was the only international reserve, exchangerates fluctuated only within the gold points, andbalance-of-payments adjustment was describedby the price-specie-flow mechanism.

Gold tranche The 25 percent of a nation’s quota in theIMF that the nation was original required to payin gold and could then borrow from the Fundalmost automatically.

GSP Generalized System of Preferences (for LDCs).

G-10 Group of Ten (G-7 plus Belgium, the Netherlands,Sweden, and [unofficially] Switzerland).

H

Heckscher-Ohlin (H-O) theorem The part of theHeckscher-Ohlin theory that postulates that anation will export the commodity intensive in itsrelatively abundant and cheap factor and importthe commodity intensive in its relatively scarceand expensive factor.

Heckscher-Ohlin (H-)) theory The theory that postulatesthat (1) a nation exports commodities intensive inits relatively abundant and cheap factor and (2)international trade brings about equalization inreturns to homogeneous factors across countries.

Hedging the avoidance of a foreign exchange risk (or thecovering of an open position).

Homogeneous of degree 1 A production function-exhibiting constant return to scale.

Horizontal integration the product abroad of adifferentiated product that is also produced athome.

HOS model Heckscher-Ohlin-Samuelson model ofinternational trade (a subset of the HO theory).

HOV theorem Heckscher-Ohlin-Vanek theorem (anothersubset of the HO theory).

Human capital the education, job training, and healthembodied in workers, which increase theirproductivity.

I

IBF International Banking Facility.

IBRD International Bank for Reconstruction andDevelopment (usually called the World Bank).

IDA International Development Association.

IDB Inter-American Development Bank.

Identification problem The inability of the regressiontechnique to identify shifts in demand curvesfrom shifts in supply curves, leading to theunderestimation of price elasticities in empiricalstudies of international trade.

IFC International Finance Corporation.

IMF International monetary Fund.

IMF conditionally The conditions imposed by the IMFon members’ borrowing from the Fund.

IMM International Money Market.

Immiserizing growth the situation where a nation’ termof trade deteriorate so much as a result of growththat the nation is worse off after growth thanbefore, even if growth without trade tends toimprove the nation’s welfare.

Import function The positive relationship between thenation’s imports and national income.

Import substitutes Commodities (such as automobiles inthe United States) that a nation produces at homebut also imports from other countries (because ofincomplete specialization in production).

Import-substitution industrialization (ISI) theindustrialization policy that many developingnations followed during the 1950s, 1960s, and1970s involving the replacement of imports of

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industrial goods with domestically producedgoods.

Import tariff A tax or duty on imports.

Income elasticity of demand for import (NY) The ratioof the percentage change in imports to thepercentage chance in national income; it is equalto MPM/APM.

Income term of trade The ratio of the price index of thenation’s export to the price index of its importstimes the index of the nation’s volume of exports.

Incomplete specialization the continued production ofboth commodities in both nations with increasingcosts, even in a small nation with trade.

Increasing opportunity costs The increasing amounts ofone commodity that a nation must give up torelease just enough resources to produce eachadditional unit of another commodity. This isreflected in a production frontier that is concavefrom the origin. This is reflected in a productionfrontier that is concave from the origin.

Increasing returns to scale the production situationwhere output grows proportionately more thanthe increase in inputs or factors of production. For example, doubling all inputs more thandoubles outputs.

Industrial policy an activist policy by the government tostimulate the development and growth of someindustry (usually a high-tech industry) in anindustrial nation.

Infant-industry argument The argument that temporarytrade protection is needed to set up an industryand to protect it during its infancy againcompetition from more established and efficientforeign forms.

Inferior goods Those goods for which consumptiondeclines absolutely if income rises and increasesabsolutely if income falls (so that the incomeelasticity of demand is negative).

Input-output table A matrix or table showing the originand destination of each product in the economy.

Interdependence The (economic) relationships amongnations.

Interest arbitrage The transfer of short-term liquid fundsabroad to earn a higher return.

Interest parity The situation where the positive interests

differential in favor of the foreign monetarycenter is equal to the forward discount on theforeign currency.

Internal balance The objective of full employment withprice stability; usually a nation’s most importanteconomics objective.

Internal factor mobility The movement within a nationof factors of production from areas and industriesof lower earning to areas and industries of higherearnings.

International Bank for Reconstruction and Development(IBRD or World Bank) -- The internationalinstitution established after World War II toprovide long-run development assistance todeveloping nations.

International cartel An organization of suppliers of acommodity located in different nations (for agroup of governments) that agrees to restrictoutput and exports of the commodity with theaim of maximizing or increasing the total profitsof the organization. An international cartel thatbehaves as a monopolist is called a centralizedcartel.

International commodity agreements Organizations ofproducer and consumer nations attempting tostabilize an increase the prices and earnings ofthe primary exports of developing nations.

International debt The hundreds of billions of dollarsthat developing countries owe to commercialbanks in developed countries and that they finddifficult to repay or even service (i.e. pay intereston).

International Development Association (IDA) theaffiliate of the International Bank forReconstruction and Development set up in 1960to make loans at subsidized rates to poorerdeveloping nations.

International factor mobility The movement of factorsof production across national boundaries, usuallyform nations of lower earnings to nations ofhigher earnings.

International finance The study o foreign exchangemarkets, the balance of payments, and adjustmentto balance-of payments disequilibria.

International Finance Corporation (IFC) the affiliateof the International Bank for Reconstruction andDevelopment set up in 1956 to stimulate privateinvestments in developing nations from

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indigenous and foreign sources.

International investment position The total amount andthe distribution of a nation’s assets abroad andforeign assets in the nation at year-end; alsocalled the balance of internationalinterdependence.

International Monetary Fund (IMF) The internationalinstitution created under the Bretton Woodssystem for the purposes of (1) overseeing thatnations followed a set of agreed-upon rules ofconduct in international trade and finance and (2)providing borrowing facilities for nations intemporary balance-of-payments difficulties.

International monetary system The rules, customs,instruments, facilities, and organizations foreffecting international payments.

International Trade Organization (ITO) Aninternational organization that was to regulateinternational trade after World War II. It wasnever ratified by the U.S. Senate and never cameinto existence. Its place was taken by GATT,which was less ambitious.

International trade policy Examines the reasons for andeffects of trade restrictions.

International trade theory Analyzes the basis and thegains from trade.

Intervention currency A convertible national currency(primarily the U.S. dollar) used by nations’monetary authorities to intervene in foreignexchange markets in order to keep the exchangerate from moving outside the allowed or desiredrange of fluctuation.

Intra-industry trade International trade in thedifferentiated products of the same industry orbroad product group.

Intra-industry trade index (T) It is given by 1 minus theratio of the absolute value of exports minusimports over exports plus imports.

Investment function The relationship betweeninvestment expenditures and income. Withinvestment exogenous, the investment function ishorizontal when plotted against income. That is,investment expenditures are independent of (ordo not change with) the level of national income.

IP Interest parity.

IRS Increasing returns to scale.

IS curve the negatively inclined curve showing thevarious combinations of interest rates andnational income levels at which the goods marketis in equilibrium?

ISIC International Standard Industrial Classification (forcompiling statistics).

Isocost A line showing the various combinations of twoinputs that a firm can hire for a given expenditureand factor prices.

Isoquant A curve showing the various combinations oftwo factors or inputs that a firm can use toproduce a specific level of output.

ITC International Trade Commission (formerly the tariffcommission).

ITO International Trade Organization.

J

Jamaica Accords the agreements reached in January1976 and ratified in April 1978 that recognizedthe managed float and abolished the official priceof gold.

J-curve effect The deterioration before a netimprovement in a country’s trade balanceresulting from a depreciation or devaluation.

K

Kennedy Round The multilateral trade negotiations thatwere completed in 1967 (under the authority ofthe 1962 Trade Expansion Act) under whichagreement was reached to reduce average tariffduties on industrial products by 35 percent.

L

Labor-capital ratio (L/K) -- The amount of labor per unitof capital used in the production of a commodity.

Labor-intensive commodity The commodity with thehigh labor-capital ratio (L/K) at all relative factorprices.

Labor-saving technical progress Technical progress thatincreases the productivity of capitalproportionately more than the productivity oflobar and results in an increase in K/L at constantrelative factor prices.

Labor theory of value The theory that the cost or priceof a commodity is determined by or can beinferred exclusively from its labor content.

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LAFTA Latin American Free Trade Association.

LAIA Latin American Integration Association (succeededLAFTA in 1980).

Laissez-faire The policy of minimum governmentinterference in or regulation of economic activity,advocated by Adam Smith and other classical economists.

Law of comparative advantage Explains how mutuallybeneficial trade can take place even when onenation is less efficient than, or has an absolutedisadvantage with respect to, another nation inthe production of all commodities. The lessefficient nation should specialize in and exportthe commodity in which its absolute disadvantageis smaller (this is the commodity of itscomparative advantage), and should import theother commodity.

Law of one price The proposition that in the absence oftransportation costs, tariffs, and otherobstructions to the free flow of trade, the price ofeach homogeneous (identical) traded commoditywill be equalized in all markets by commodityarbitrage.

LDC Less developed country (or, collectively, the South).

Leaning against the wind The policy of monetaryauthorities supplying part of the excess demandor absorbing part of the excess supply of foreignexchange in the market to smooth out short-runfluctuations in exchange rates.

Learning curve The curve showing the degree by whichaverage costs of production decline as cumulativeindustry output increases over time.

Leontief paradox The empirical finding that U.S. importsubstitutes were more K-intensive than U.S.exports. This is contrary to the H-O trade model,which predicts that, as the most K-abundantnation, the United States should import L-intensive products and export K-intensiveproducts.

LIBOR London Interbank Offer Rate (a benchmark rateon Eurodollar loans).

LIFFE London International Financial Futures Exchange.

Liquidity The amount of international reserve assetsavailable to nations to settle temporary balance-of-payments disequilibria.

LM curve The usually positively inclined curve showing

the various combinations of interest rates andnational income levels at which the moneymarket is in equilibrium.

Long-run aggregate supply (LRAS) curve The fixedrelationship between the nation’s price level andits natural level of output, which depends on theavailability of labor, capital, natural resourcesand technology in the nation.

M

Maastricht Treaty The treaty that called for the creationof the European Monetary Institute as aforerunner of the European Central Bank andmonetary union by the European Union by 1997or 1999.

Macroeconomics The study of the whole or theaggregate, such as the total receipts and paymentsof a nation and the general price index.

Managed floating exchange rate system The policy ofintervention in foreign exchange markets bymonetary authorities to smooth out short-runfluctuations without attempting to affect the long-run trend in exchange rates.

Marginal propensity to consume (MPC) The ratio ofthe change in consumption expenditures to thechange in income.

Marginal propensity to import (MPM) The ratio of thechange in imports to the change in nationalincome.

Marginal propensity to save The ratio of the change insaving to the change in income.

Marginal rate of substitution (MRS) The amount ofone commodity that a nation could give up inexchange for one extra unit of a secondcommodity and still remain on the sameindifference curve. It is given by the slope of thecommunity indifference curve at the point ofconsumption and declines as the nation consumesmore of the second commodity.

Marginal rate of technical substitution of labor forcapital in production (MRTS) It shows howmuch capital a firm can give up by increasinglabor by one unit and still remain on the sameisoquant.

Marginal rate of transformation (MRT) The amount ofone commodity that a nation must give up toproduce each additional unit of another

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commodity. This is another name for theopportunity cost of a commodity and is given bythe slope of the production frontier at the point ofproduction.

Market-oriented industries Industries that producegoods that become heavier or more difficult totransport during production and thus locate nearthe markets for the product.

Marketing boards National schemes set up by severaldeveloping nations after World War II to stabilizeexport prices for individual producers of anagricultural commodity.

Marshall-Lerner condition Indicates that the foreignexchange market is stable when the sum of theprice elasticities of the demands for imports andexports is larger than on (when the supplyelasticities of imports and exports are infinite).

MCA Monetary Compensatory Amount (of the CAP).

Mercantilism The body of writings prevailing during theseventeenth and eighteenth centuries thatpostulated that the way for a nation to becomericher was to restrict imports and stimulateexports. Thus, one nation could gain only at theexpense of other nations.

MERM Multilateral exchange rate model.

Metzler paradox The exception to the Stolper-Samuelson theorem.

MFA Multifiber Agreement.

MFN Most favored nation (either the nation, the clause,or the principle).

Microeconomics The study of individual units, such as aparticular nation and the relative price of a singlecommodity.

MIGA Multilateral Investment Guarantee Agency.

Mint Parity The fixed exchange rates resulting under thegold standard from each nation defining the goldcontent of its currency and passively standingready to buy or sell any amount of gold at thatprice.

MITI Ministry of International Trade and Industry (in theJapanese government).

MNC Multinational corporation.

MNE Multinational enterprise (MNC).

MNF Multinational firm (=MNE=MNC).

Monetary approach The theory that postulates thatexchange rates are determined in the process ofequilibrating or balancing the demand and supplyof the national currency in each country.

Monetary approach to the balance of payments Theapproach that views the balance of payments as aan essentially monetary phenomenon with moneyplaying the key role in the long run as both thecause and the cure of balance-of-paymentsdisequilibria.

Monetary base The domestic credit created by thenation’s monetary authorities plus the nation’sinternational reserves.

Monopolistic competition The form of marketorganization where there are many firms selling adifferentiated product and entry into or exit fromthe industry is relatively easy.

Monopoly The form of market organization where thereis a single producer of a commodity for whichthere is no close substitute.

Most-favored-nation principle The extension to alltrade partners of any reciprocal tariff reductionnegotiated by the United States with any othernation.

MPM Marginal propensity to import.

MPS Marginal propensity to save.

MRS Marginal rate of substitution (in consumption).

MRT Marginal rate of transformation (in production).

MRTS Marginal rate of technical substitution (ofproductive inputs).

MTN Multilateral trade negotiations (that is, the GATTTrounds).

Multilateral trade negotiations Trade negotiationsamong many nations.

Multiple exchange rates The different exchange ratesoften enforced by developing nations for eachclass of imports depending on the usefulness ofthe various imports as determined by thegovernment.

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Multiplier (k) The ratio of the change in income to thechange in investment; in a closed economywithout government, k = 1/MPS

Multinational corporations (MNCs) Firms that own,control, or manage production and distributionfacilities in several countries.

N

NAFTA North American Free Trade Agreement.

National security clause A protectionist device thatprevented any tariff reduction (even if alreadynegotiated) that would hurt industries importantfor national defense.

National level of output (Yn) The fixed level of outputthat a nation can produce in the long run with itsgiven quantity of labor, capital, natural resources,and technology.

NEC Newly exporting country.

Net IMF position The size of a nation’s quota in the IMFminus the Fund’s holding of the nation’scurrency.

Neutral production and consumption Increases inproduction and consumption that lead toproportionate increases in the volume of trade.

Neutral technical progress Technical progress thatincreases the productivity of labor and capital inthe same proportion and leaves K/L constant atconstant relative factor prices.

New International Economic Order (NIEO) Thedemands made by developing nations as a groupat the United Nations for the removal of thealleged inequities in the operation of the presentinternational economic system and for specificsteps to be taken to facilitate their development.

New protectionism New forms of nontariff tradebarriers.

Newly Industrializing Countries (NICs) Countries suchas Hong Kong, Singapore, S. Korea, and Taiwanthat are growing very rapidly based mostly onexport growth.

NIC Newly industrializing country.

NIEO New International Economic Order (a set ofreforms of the international economy formerlyurged by LDCs).

Nominal tariff A tariff (such as an ad valorem one)calculated on the price of a final commodity.

Nontariff trade barriers (NTBs) Trade restrictions otherthan tariffs, such as voluntary export restraints;technical, administrative, and other regulations;as well as those arising from international cartels,dumping, and export subsidies.

Nontraded goods and services Those goods and servicesthat are not traded internationally because thecost of transporting them exceeds theinternational price difference.

Normal goods Those goods for which consumptionchanges in the same direction as a change inincome (so that the income elasticity of demandis positive).

North American Free Trade Agreement (NAFTA) Theagreement to establish a free trade area amongthe United States, Canada, and Mexico that cameinto existence on January 1, 1994.

NTB Nontariff barrier.

O

OECD Organization for Economic Cooperation andDevelopment (sometimes called the “Rich Men’sClub”).

OEEC Organization for European Economic Cooperation(succeeded by the OECD).

Offer curve A curve that shows how much of its importcommodity a nation demands to be willing tosupply various amounts of its export commodity,or the willingness of the nation to import andexport at various relative commodity prices.

Official reserve account The change in U. S. officialreserve assets and the change in foreign officialreserve assets in the United States.

Official settlements balance The net credit or debitbalance in the official reserve account.

Oligopoly The form of market organization where thereare only a few producers of a homogeneous ordifferentiated product.

Omnibus Trade and Competitiveness Act of 1988 Through its Super 301 provision, the Act requirescurbing imports from countries that do notremove major barriers to the U. S. exports.

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OPEC Organization of Petroleum Exporting Countries.

Open-economy macroeconomics The study of foreignexchange markets, the balance of payments, andadjustment to balance-of-payments disequilibria.

OPIC Overseas Private Investment Corporation.

Opportunity cost theory - The theory that the cost of acommodity is the amount of a second commoditythat must be given up to release just enoughresources to produce one more unit of the firstcommodity.

Optimum currency area or bloc Refers to a group ofnations whose national currencies are linkedthrough permanently fixed exchange rates and theconditions that would make such an areaoptimum.

Optimum tariff The rate of tariff that maximizes thebenefit resulting from improvement in thenation’s terms of trade against the negative effectresulting from reduction in the volume of trade.

P

Partial equilibrium analysis The study of individualdecision-making units (such as a firm or nation)in isolation (i.e., abstracting from all theinterconnections that exist between the firm ornation and the rest of the economy or world).

Pass- through effect The proportion of an exchange ratechange that is reflected in export and import pricechanges.

Pattern of trade The commodities exported andimported by each nation.

Perfect competition The market condition where (1)there are many buyers and sellers of a givencommodity or factor, each too small to affect theprice of the commodity or factor; (2) all units ofthe same commodity or factor are homogenous,or of the same quality; (3) there is perfectknowledge and information on all markets; and(4) there is perfect internal mobility of factors ofproduction.

Peril-point provisions A protectionist device thatprevented the President from negotiating anytariff reduction that would cause serious damageto a domestic industry.

Persistent dumping The continuous tendency of adomestic monopolist to maximize total profits by

selling the commodity at a lower price abroadthan domestically; also called international pricediscrimination.

Phillips Curve The controversial inverse relationship, ortrade-off, between unemployment and inflation.

Portfolio balance approach The theory that postulatesthat exchange rates are determined in the processof equilibrating or balancing the demand andsupply of financial assets in each country.

Portfolio investments Th purchase of purely financialassets, such as stocks and bonds, usually arrangedthrough banks and investment funds.

Portfolio theory Maintains that by investing in securitieswith yields that are inversely related over time, agiven yield can be obtained at the same level ofrisk for the portfolio as a whole.

PPP Purchasing Power Parity.

Predatory dumping The temporary sale of a commodityat a lower price abroad in order to drive foreignproducers out of business, after which prices areraised to take advantage of the newly acquiredmonopoly power abroad.

Preferential trade arrangement The loosest form ofeconomic integration; provides lower barriers totrade among participating nations than on tradewith nonparticipating nations. An example is theBritish Commonwealth Preference Scheme.

Price-specie-flow mechanism The automatic adjustmentmechanism under the gold standard. It operatesby the deficit nation losing gold and experiencinga reduction in its money supply. This in turnreduces domestic prices, which stimulates thenation’s exports and discourages its imports untilthe deficit is eliminated. A surplus is correctedby the opposite process.

Principle of effective market classification Maintainsthat policy instruments should be paired or usedfor the objective toward which they are mosteffective.

Producer equilibrium The tangency point where aproducer reaches the highest isoquant possiblewith a given isocost line.

Product cycle model The hypothesis, advanced byVernon, that new products introduced byindustrial nations and produced with skilled laboreventually become standardized and can beproduced in other nations with less skilled labor.

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Production contract curve The curve joining points atwhich the isoquants of two commodities aretangent and factor inputs are used mostefficiently.

Production effect of a tariff The increase in domesticproduction of a commodity resulting from theincrease in its price due to a tariff.

Production function A relationship showing themaximum quantities of a commodity that a firmcan produce with various amounts of factorinputs.

Production possibility frontier A curve showing thevarious alternative combinations of twocommodities that a nation can produce by fullyutilizing all of its resources with the besttechnology available to it.

Prohibitive tariff A tariff sufficiently high to stop allinternational trade so that the nation returns toautarky.

Protection cost or deadweight loss of a tariff The reallosses in a nations’ welfare because ofinefficiencies in production and distortions inconsumption resulting from a tariff.

Protrade production and consumption Increases inproduction and consumption that lead to greaterthan proportionate increase in the volume oftrade.

Purchase contracts Long-term multilateral agreementsthat stipulate the minimum price at whichimporting nations agree to purchase a specifiedquantity of the commodity and a maximum priceat which exporting nations agree to sell specifiedamounts of the commodity.

Purchasing-power parity (PPP) theory The theory thatpostulates that the change in the exchange ratebetween two currencies is proportional to thechange in the ratio in the two countries generalprice levels.

Q

QR Quantitative restriction (on trade).

Quantity theory of money Postulates that the nation’smoney supply times the velocity of circulation ofmoney is equal to the nation’s general price indextimes physical output at full employment. WithV and Q assumed constant, the change in P isdirectly proportional to the change in M.

Quota A direct quantitative restriction on trade.

R

Rate of effective protection The tariff calculated on thedomestic value added in the production of acommodity.

R and D Research and Development.

Real exchange rate The nominal exchange rate adjustedfor changes in relative aggregate price changes inthe two nations.

Reciprocal demand curve Another name for the offercurve.

Regions of recent settlement The mostly empty andresource-rich lands that Europeans settled duringthe nineteenth century, such as the United States,Canada, Argentina, Uruguay, Australia, NewZealand and South Africa.

Relative commodity prices The price of one commoditydivided by the price of another commodity. Thisequals the opportunity cost of the firstcommodity and is given by the absolute slope ofthe production possibility frontier.

Relative factor prices The ratio of the price of one factorof production to the price of the other factor. With labor and capital as the factors ofproduction, the relative price of labor is w/r andthe relative price of capital is the inverse, or r/w.

Relative purchasing-power parity theory Postulatesthat the changes in the exchange rate over aperiod of time should be proportional to therelative change in the price levels in the twonations. This version of the PPP theory has somevalue.

Rent or producer surplus A payment that need not bemade in the long run in order to induce producersto supply a specific amount of a commodity orfactor services.

Reserve-currency country (RCC) A country, such asthe United States, whose currency is held byother nations as international reserves.

Resource-oriented industries Industries which processbulky and heavy raw materials into lighterfinished products and thus locate near rawmaterial sources.

Revenue effect of a tariff The revenue collected by the

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government from the tariff.

Risk diversification Investments in securities with yieldsthat are inversely, or negatively, correlated orinvestments in different lines or products in orderto spread and thus reduce the overall risks of thetotal investments.

Roosa bonds Medium-term treasury bonds denominatedin dollars but with an exchange rate guarantee,created by the United States in the early 1960 toinduce foreign monetary authorities to continueto hold dollars rather than exchange them forgold at the Federal Reserve.

RTA Reciprocal Trade Agreement (as provided for in theTrade Agreements Act of the United States).

Rules of the game of the gold standard The requirementunder the gold standard that monetary authoritiesrestrict credit in the deficit nation and expandcredit in the surplus nation (thus reinforcing theeffect of changes in international gold flows onthe nation’s money supply).

Rybczynski theorem Postulates that at constantcommodity prices, an increase in the endowmentof one factor will increase by a greater proportionthe output of the commodity intensive in thatfactor and will reduce the output of the othercommodity.

S

Same technology Equal production techniques; it resultsin equal K/L in the production of eachcommodity in both nations if relative factorprices are the same in both nations.

Saving function the relationship between saving andincome. In general, saving is negative whenincome is zero and rises as income rises, in sucha way that the increase in consumption plus theincrease in saving equals the increase in income.

Scientific tariff Th tariff rate that would make the priceof imports equal to domestic prices so as to allowdomestic producers to meet foreign competition.

SDR Special Drawing Right.

SEA Single European Act (of the ED; the basis for“1992").

Seigniorage the benefit accruing to a nation form issuingthe currency or when its currency is used as aninternational currency and reserve.

Shared Foreign Sales Corporations U.S. tax legislationaimed at stimulating U.S. exports by reducing theeffective rate of taxation on export income.

SIMEX Singapore International Monetary Exchange.

Short-run aggregate supply (SRAS) curve thetemporary positive relationship between thenation’s output and the price level resulting fromimperfect information or market imperfections.

Single factoral terms of trade The ratio of the priceindex of the nation’s exports to the price index ofits imports times the productivity index in thenation’s export sector.

Small country case the situation where trade takes placeat the pretrade-relative commodity prices in thelarge nation receives all of the benefits fromtrade.

Smithsonian Agreement The agreement reached inDecember 1971 in Washington under which thedollar was devalued by about 9 percent (byincreasing the dollar price of gold from $35 to$38 an ounce), other strong currencies wererevalued by various amounts with respect to thedollar, the dollar convertibility into goldremained suspended, and exchange rates wereallowed to fluctuate by 2.25 percent on eitherside of the new par values.

Smoot-Hawley Tariff Act of 1930 Raised averageimport duties in the United States to the all-timehigh 59 percent in 1932.

Special Drawing Rights (SDRs) International reservescreated by the IMF to supplement otherinternational reserves and distributed to membernations according to their quotas in the Fund.

Specific-factors model The model to analyze the effectof a change in commodity price on the returns offactors in a nation when at least one factor is notmobile between industries.

Specific tariff A tariff expressed as a fixed sum per unitof a traded commodity.

Speculation the acceptance of a foreign exchange risk, oropen position, in the hope of making a profit.

Speculative demand for money The demand for inactivemoney balances in preference to interest-bearingsecurities (which can fall in price) so that onemay take advantage of future investmentopportunities. The speculative, or liquidity,demand for money varies inversely with the rate

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of interest.

Sporadic dumping The occasional sale of a comity at alower price abroad than domestically in order tosell an unforeseen and temporary surplus of thecommodity abroad without having to reducedomestic prices.

Spot rate the exchange rate in foreign exchangetransactions that calls for the payment and receiptof the foreign exchange within two business daysfrom the date when the transaction is agreedupon.

Stabilizing speculation The purchase of a foreigncurrency when the domestic currency price of thecurrency (i.e. the exchange rate) falls or is low, inthe expectation that the exchange rate will soonrise, thus leading to a profit. OR the sale of aforeign currency when the exchange rate rises oris high, in the expectation that it will soon fall.

Stable foreign exchange market The condition in aforeign exchange market where a disturbancefrom the equilibrium exchange rate gives rise toautomatic forces that push the exchange rate backtoward the equilibrium rate.

Stagnation The combination of recession or stagnationand increasing prices or inflation.

Standby arrangements The arrangements under whichmember nations negotiate with the IMF foradvance approval for future borrowings from theFund so they will be immediately available whenneeded.

State trading companies The state organizations incentrally planned economies handling trade inspecific product lines.

Statistical discrepancy The entry made in a nation’sbalance of payments to make total credits equalto total debits, as required by double-entrybookkeeping.

Stolper-Samuelson theorem Postulates that an increasein the relative price of a commodity (for example,as a result of a tariff) raises the return or earningsof the factor used intensively in the production ofthe commodity.

Strategic trade policy The argument that an activisttrade policy in oligopolistic markets subjects toextensive external economies can increase anation’s welfare.

Substitution account The account proposed to be used to

exchange all foreign-held dollars for SDRs at theIMF to solve the problem of the dollar overhang.

Super gold tranche the amount by which the IMF’sholdings of a nation’s currency are below 75percent of the nation’s quota, which the nationcould borrow from the Fund without the need torepay.

Supply of money The nation’s total money supply isequal to the nation’s monetary base times themoney multiplier.

Surplus in the balance of payments The excess ofcredits over debits in the current and capitalaccounts, or autonomous transactions; equal tothe net debit balance in the official reserveaccount, or accommodating transactions.

Swap arrangements The arrangements under whichnational central banks negotiate to exchange eachother’s currency to be used to intervene inforeign exchange markets to combat internationalhot money flows.

SWIFT Society for Worldwide Interbank FinancialTelecommunication.

Synthesis of automatic adjustments The attempt tointegrate that automatic price, income, andmonetary adjustments to correct balance-of-payment disequilibria.

T

TAA Trade Adjustment Assistance.

Tariff factories Direct investments made in a nation orother economic unit (such as a customs union) toavoid import tariff.

Technical, administrative, and other regulations Nontariff trade barriers such as safety, health, andlabeling requirements, and border taxes.

Technological gap model The hypothesis that a portionof international trade is based on the introductionof new products or processes.

Terms of trade The ratio of the index price of a nation’sexport to its import commodities.

Terms-of-trade effect The change in the relativecommodity prices at which a nation trades; itresults from the tendency of the volume of tradeto change as the nation grows.

Theory of the second best Postulates that when all of the

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conditions required to reach maximum socialwelfare or Pareto optimum can not be satisfied,trying to satisfy as many of these conditions aspossible does not necessarily or usually lead tothe second-best welfare position.

Tokyo Round The multilateral trade negotiations thatwere completed in 1979 (under the authority ofthe 1974 Trade Reform Act) in which agreementwas reached to cut average tariff rates by about30 percent and to adopt a uniform internationalcode of conduct for applying nontariff tradebarriers.

Trade Agreement Act of 1934 Authorized the Presidentto negotiate with other nations mutual tariffreductions of up to 50 percent under the most-favored-nation principle.

Trade and Tariff Act of 1984 Authorized the Presidentto negotiate the lowering of trade barriers inservices and a free trade agreement with Israel,and extended the Generalized system ofPreference (GSP) until 1993.

Trade controls Tariffs, quotas, advance deposits onimports, and other restrictions imposed by anation on international trade.

Trade-creating customs union a customs union thatleads to trade creation only and increases thewelfare of both member and nonmember nations.

Trade creation Occurs when some domestic productionin a member of the customs union is replaced bylower-cost imports from another member nation. The increases welfare.

Trade deflection The entry of imports from the rest ofthe world into the low-tariff member of a freetrade area to avoid the higher tariffs of othermembers.

Trade diversion Occurs when lower-cost imports fromoutside the union are replaced by higher-costimports from another union member. By itself,this reduces welfare.

Trade-diverting customs union A customs union thatleads to both trade creation and trade diversionand may increase or reduce the welfare ofmember nations, depending on the relativestrength of these two opposing forces.

Trade effect of a tariff The reduction in the volume oftrade in the commodity resulting from a tariff.

Trade Expansion Act of 1962 Granted the President

authority to negotiate across-the-board tariffreductions of up to 50 percent of their 1962 leveland replaced the no-injury principal withadjustment assistance.

Trade indifference curve The curve showing the varioustrade situations that provide a nation equalwelfare.

Trade or elasticities approach The theory or approachthat stresses trade or the flow of goods andservices in the determination of exchange rates. This model is more useful in explaining exchangerates in the long run than in the short run.

Trade policies The regulations governing a nation’scommerce or international trade.

Trade Reform Act of 1974 Granted the Presidentauthority to negotiate tariff reductions of up to 60percent of their post-Kennedy Round level and tonegotiate reductions in nontariff trade barriers.

Transaction demand for money The demand for activemoney balances to carry on business transactions;it varies directly with the level of national incomeand the volume of business transactions.

Transfer pricing The overpricing or under-pricing ofproducts in the intrafirm trade of multinationalcorporations in an attempt to shift income andprofits from high-to low-tax nations.

Transfer problem Deals with the conditions underwhich a large and unusual capital transfer isactually accomplished by an export surplus of thepaying nation and an equal import surplus of thereceiving nation.

Transportation costs Freight charges, costs of loadingand unloading, insurance premiums, and interestcharges while goods are in transit.

Trigger-price mechanism The antidumping mechanismintroduced by the United States in 1978 toprotect its steel industry by imposing a duty onunder-priced imported steel to make its priceequal to that of the lowest cost foreign producer.

TRIMS Trade-related investment measures.

TRIPS Trade-related intellectual property rights.

U

UIP Uncovered interest parity.

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UN United Nations.

Uncovered interest arbitrage The transfer of short-termliquid funds to the international monetary centerwith higher interest rates without covering theforeign exchange risk.

UNCTAD United Nations Conference on Trade andDevelopment.

Unilateral transfers Gifts of grants extended to orreceived from abroad.

United Nations Conferences on Trade and Development(UNCTAD) Special conferences held under theauspices of the United Nations in 1964, 1968,1972, 1976, 1979, 1983, 1987, and 1992, atwhich developing nations advanced theirdemands to improve the operation of the presentinternational economic system to facilitate theirdevelopment.

Unstable foreign exchange market The condition in aforeign exchange market where a disturbancefrom equilibrium pushes the exchange rate fartheraway from equilibrium.

Uruguay Round The multilateral trade negotiationsstarted in 1986 and completed at the end of 1993aimed at reversing the trend of rising nontarifftrade barriers. It replaced the GATT with theWorld Trade Organization (WTO), broughtservices and agriculture into the WTO, andimproved the dispute settlement mechanism.

USSR Union of Soviet Socialist Republics .

V

Variable import levies The import duties levied by theEU on imports of agricultural commodities andequal to the difference between the high farmprices established by the EU and the lower worldprices.

Vehicle currency A currency such as the U.S. dollarused to denominate international contracts andfor international transactions.

Vent for surplus The view that exports could be anoutlet for the potential surplus of agriculturalcommodities and raw materials in somedeveloping countries.

VER Voluntary Export Restraint.

Vertical integration The expansion of a firm backward

to supply its own raw materials and intermediateproducts and/or forward to provide its own salesor distribution networks.

Voluntary export restraints (VERs) Refer to animporting country inducing another country to“voluntarily” reduce its exports of a commodityto the importing nation under the threat of higherall-around trade restrictions.

W

Wealth effect The change in the output per worker or perperson as a result of growth in the nation.

World Trade Organization (WTO) The organization setup at the Uruguay Round to replace the GeneralAgreement on Tariffs and Trade (GATT)secretariat with authority over trade in industrialgoods, agricultural commodities, and services,and with greater authority to settle trade disputes.

WTO World Trade Organization.

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1. This glossary was compiled from many sources. These included: (a) Dominick Salvatore, InternationalEconomics, Sixth Edition, Prentice Hall, 1998. (b) Wilfred J. Ethier, Modern International Economics, ThirdEdition, W.W. Norton, 1998.

Eshragh MotaharSeptember 8, 2000