Glossary

"Gnomes of Zurich"	Epithet coined by Britain's chancellor of the Exchequor for the speculators he thought were abandoning the British pound and making it increasingly difficult to defend a pegged exchanged rate in the mid-1960s.



"The Snake in the Tunnel"	A scheme set up by members of the EEC in 1971 whereby each currency would float inside a specified band against every other member currency (the snake), and a maximum limit was set on the difference between the most appreciating and most depreciating currencies (the tunnel). This was a predecessor to the EMS.



(Foreign) Exchange Rate	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 foreign currency.)



Absolute Advantage	A nation has an absolute advantage in a commodity it produces more efficiently (with higher productivity) than the rest of the world.



Adjustable Peg	A system in which a country tries to keep its exchange rate fixed for long periods of time and only changes the pegged rate when there is a substantial disequilibrium at that rate.



Adjustment assistance	Government financial assistance to relocate and retrain workers (and firms) for re-employment in expanding sectors and away from sectors that are declining as a result of import competition.



Ad Valorem Tariff	A tariff is set as a percentage of the value of the goods when they reach the importing country.



Aggregate Demand Policy Dilemma	Refers to the difficulty of improving the levels of both national income and balance of payments by manipulating only the level of aggregate demand.



Agricultural Policy	Government tends to tax exportable-good agriculture and to subsidize (protect) importable-good agriculture.



Antidumping Duty	Tariffs sanctioned under the International Anti-Dumping Code (signed by most members of the WTO) to counteract or prevent dumping. Antitrade Pattern of



Appreciation/Depreciation	An increase (decrease) in the market price of a currency under a floating exchange rate system.



Appropriability Theory	Explains FDI as a way for firms to appropriate the potential gains from firm-specific advantages; a firm seeks to earn returns from key productive inputs.



Arbitrage	Buying something at a low price in one market and reselling it at a higher price in another market.



Article XX	Lists general exceptions to its main free-trade rules, including allowing trade barriers that are necessary to protect human, animal, or plant life, and that relate to the conservation of exhaustible natural resources. The WTO is wary of the use of Article XX by countries simply seeking protection for their import-competing industries.



Asset Market Approach to Exchange Rates	Explains exchange rates in terms of demands and supplies of all assets denominated in different currencies. The monetary approach to exchange rates is a variant of this approach in which only demands and supplies of the money asset are considered.



Assignment Rule	A guideline for assigning goals to fiscal and monetary policies. Fiscal policy should aim at achieving internal balance, while monetary policy should aim at achieving external balance.



Average-Income Paradoxes	The counterintuitive results that the receiving country can gain from immigration, even if its per capita income falls after the arrival of the new immigrants; and the sending country can lose, even if its per capita income rises after the departure of the new emigrants.



Balance of Payments	The systematic set of accounts that record all economic transactions between residents of that country and the rest of the world during a given period of time.



Bandwagon	A situation in which investors expect the recent trend in exchange rates to be carried on in the future.



Barter Trade	A method of exchanging goods and services directly for other goods and services without using a separate unit of account or medium of exchange.



Basis for Trade	The mechanism that explains differences in (relative) prices in different countries, which in turn gives rise to trade between countries.



Beggary-thy-Neighbor Policies	Policies such as devaluations or tariffs intended to benefit one country's economy at the expense of another. Such policies were widespread during the Great Depression of the 1930s.



Brady Plan	A method devised by the U.S. Treasury for solving the 1980s debt crises. Bank borrowing of 18 debtor countries was restructured with some debt reduction and some repackagaging of loans as Brady bonds.



Brain Drain	The emigration mainly from developing countries of highly skilled and educated people toward better paying countries (usually industrial economies, but recently some OPEC nations as well).



Bretton Woods System	Under this post-World War II agreement, countries were allowed devaluations and revaluations of an adjustable peg exchange rate when faced with fundamental disequilibria that would otherwise require drastic domestic adjustment to keep the exchange rate fixed. Keynes was one of the architects of the Bretton Woods system.



Capital Account	Records the values of financial assets purchased and sold abroad by private residents (not monetary authorities) of the home country.



Capital Controls	Government limits placed on the use of the foreign exchange market to make payments related to international financial activity as opposed to payments for goods and services.



Capital Flight	When investors flee a country (taking their capital with them) because of doubts about government policies.



Capital Inflow	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.



Capital Outflow	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.



Central Bank	The official authority that controls monetary policy and also (usually) undertakes the official intervention in the foreign exchange market.



CITES	The Convention on International Trade in Endangered Species of Wild Fauna and Flora, first signed in 1973 and now with over 130 member countries. Calls for strict regulation of trade in products related to species threatened with extinction.



Clean Float	Exchange rates determined by a freely functioning foreign exchange market.



Clearing	Permitting payments to be made between entities who want to hold or use different currencies. Community Indifference



Common Market	An international union going beyond a customs union by also allowing for the free movement of labor and capital (factor flows) among member nations.



Comparative Advantage	A nation has a comparative advantage in the production of those goods which (compared to other goods and countries in the world) it produces less inefficiently than other commodities. A country will have a comparative advantage in one or more commodities, whether or not it has absolute advantages.



Consumer Surplus	The difference between what a person would be willing to pay and what she actually has to pay to buy a certain amount of a good. It is the area below the demand curve and above the price level.



Consumption Effect	The welfare loss to consumers in the importing nation that corresponds to their being forced to cut their total consumption as a result of the tariff.



Countervailing Import Duties	Retaliatory duties against a foreign government subsidizing exports into your national market.



Covered Interest Arbitrage	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 any forward premium on its currency.



Covered Interest Parity	The condition where the forward rate on a currency exceeds the spot rate by the percentage that its interest rate is lower than the other country's interest rate.



Covered International Investment	When the exchange rate at which anticipated foreign investment returns will be redeemed is determined in the present through a forward contract. The agent is protected from exchange rate risk when "covered."



Crawling Peg	An exchange rate system in which the pegged rate is changed frequently according to a set of indicators or in response to monetary authority direction.



Currency Board	One system for fixing a country's exchange rate. The board stands ready to exchange domestic currency for foreign currency at a rate specified and fixed rate, and can issue new domestic currency only in exchange for foreign reserves. In essence, the domestic currency is fully backed by reserves of foreign exchange. Currency boards are popular in emerging economies.



Currency Futures	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.



Currency Options	A currency options contract 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 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.



Currency Swaps	A contract to buy/sell a currency now with a provision that the currency will be resold (or brought back) later. Often used by large corporations in financing debt.



Current Account	Records the values of goods and services sold and purchased abroad, plus net interest and other factor payments and net unilateral transfers and gifts.



Curves	An illustration of the different combinations of commodity quantities that would bring the whole community (here, the nation) the same level of satisfaction.



Customs Union	One 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). D



Deadweight Loss	The parts consumers lose as a result of a tariff that accrues to neither the government nor producers.



Debt Overhang	The amount by which a borrower's debt exceeds the present value of resource transfers that will be made for debt service. For example, if a loan is made for current consumption or for low-quality investment, today's value of the future income streams from those uses will be much less than the amounts the borrower owes.



Debt Service	Repayments of principal and interest. The debt service ratio is a measure of a country's debt burden and it expresses debt service as a percentage of total export revenues or GDP.



Deficits Without Tears	A situation in which a country's currency is considered an international reserve so that the country can finance its official settlements deficit by issuing its own currency. The U.S. had extraordinary leeway to finance its payments deficits by issuing dollars in the 1950s and 1960s.



Developmental Pattern of Agricultural Policy	As a nation becomes more developed, its policy switches from heavily taxing agriculture to heavily subsidizing it.



Dirty Float	Also known as managed float. An exchange rate which is generally floating but with government willingness to intervene to attempt to influence the equilibrium value of the rate.



Distortion	Restrictions that prevent the market from equating social benefits and costs of an economic activity. For example, the market price of cigarettes does not reflect the indirect effect (externally) on third parties (other than the producer and the smoker), resulting in too many cigarettes being produced and consumed. The total social cost of smoking is higher than the private cost.



Dollar Crisis	Denotes the situation prevailing toward the end of the Bretton Woods era, with the excessive build up of dollar reserves in the hands of foreign central banks due to the large and persistent U.S. payments deficit. The gold backing of the dollar was questioned and ultimately the dollar allowed to float freely starting in 1973.



Dollarization	An extreme form of fixed exchange rate system. A country surrenders its own currency and uses as its medium of exchange the currency of a foreign nation. The dollarized country has no independent money supply or monetary policy.



Domestic Adjustment	Refers to the necessary changes in the level of a country's aggregate demand to ensure that supply and demand for foreign exchange are back to equality and to avoid any further pressure on the exchange rate.



Domestic Content Requirement	Directs that a good made/assembled in a country must have a certain amount of "domestic value" in the form of local factors used in production/assembly of the good or locally made components that are part of the finished product.



Dumping	A form of international price discrimination in which an exporting firm sells at a lower price in a foreign market than it charges in other markets (usually its domestic market) or sells its exports at a price that is below its costs.



Dutch Disease	A famous example of the phenomenon described by the Rybczynski theorem. The term was used to describe a problem experienced by the Netherlands, where the discovery of new natural gas fields was thought to have led to a decline in the production of manufactured goods.



Economic Sanction	Discriminatory restrictions or complete bans on economics exchange, designed to punish the target country or countries.



Economic Union	One which extends a common market by harmonizing the monetary and fiscal policies of the member nations as well.



Economies of Scale	The percent reduction in average costs achieved by expanding all inputs by a given percentage.



Effective Rate of Protection	The percentage by which the entire set of a nation's trade barriers raises the industry's value added per unit of output. (Abbreviated e.r.p.)



Embargoes (boycotts)	Complete bans on economic exchange.



Endogenous Shocks	Shocks determined by factors within the model or system.



Engel's Law	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.



ERM of the EMS	The exchange rate mechanism (ERM) of the European Monetary System (EMS). Maintained pegged exchange rates among ERM member's currencies with currencies floating as a bloc against outside currencies such as the U.S. dollar. Predecessor to the euro zone.



Euro	The newly created currency of the European Union. As of 1999, 11 of the 15 EU countries have pegged their currencies to the euro and plan to replace their national currencies with the euro by 2002.



European Central Bank	This supra-national bank took over monetary policy in the EMU "euro zone" in 1999. Policy will be made by a council comprised of executive committee members and the directors of the member countries' national banks. A key concern for the ECB is how to balance goals of price stability versus growth and employment.



European Monetary Union	Outlined by the Maastricht Treaty in 1991 and ratified by the EU countries in 1993. One of its goals is to create a single Europe-wide currency. To join EU countries had to meet macro criteria regarding exchange rate stability, inflation and interest rates, and government finances. In 1998 11 EU countries joined the EMU. Britain, Denmark, and Sweden chose not to join, while Greece did not qualify.



Exchange Rate Overshooting	When the exchange rate is driven past its ultimate equilibrium rate (usually thought to be the PPP level) and then back to that rate later during the adjustment of the macroeconomy to an exogenous shock. This effect is the consequence of goods prices that are sticky in the short run.



Exchange Rate Risk	When the value of an economic agents' income, wealth, or net worth changes as exchange rates change unpredictably in the future.



Exogenous Shocks	Shocks determined by factors outside a model which are independent of other factors in the model or system.



Export Subsidy	Government policy to encourage export of goods and discourage sale of goods on the domestic market through low-cost loans or tax relief for exporters, government-financed international advertising, etc.



External Balance	Performance goal in which the country's economy has an overall balance of payments that is sustainable over time.



External Economics	Productivity gains and cost reductions that an individual firm reaps from the expansion of other firms in the same geographic area.



External Shocks	Sudden changes in international capital flows or in international trade.



Factor Abundance and Scarcity	A country is relatively abundant (scare) in some factor if the ratio of the amount of that factor to other factors in that country is higher (lower) than the rest of the world.



Factor Intensity	A product is intensive in some factor if the cost of that factor is a greater share of the product's value than it is of the value of other products.



Factor Price Equalization Theorem	Under certain assumptions free trade will equalize not only commodity



Factor Specialization	The degree of concentration of a factor in the production of a commodity or group of commodities.



FDI	Foreign direct investment. A flow of lending to, or purchase of ownership in, a foreign enterprise that is largely owned (at least 10 percent ownership, according to U.S. balance of payments accounts) by residents of the investing country. Direct investment implies full or partial control of the enterprise and, usually, physical presence by foreign firms or individuals in the host country.



FE Curve	This curve shows all combinations of interest rate and income which result in a zero balance in the country's overall international payments position (its official settlements balance is zero). The FE curve usually slopes upward because as income rises the demand for imports rises; interest rates must rise to attract capital so that the current account deficit is offset by a capital account surplus. The FE curve is horizontal if there is perfect capital mobility.



Firm-Specific Advantages	Managerial, technical, and marketing skills and patents that accrue to a particular firm and help it overcome the inherent native advantage of local rival firms.



Fixed Exchange Rate	A rate whose officially declared value is maintained by central bank intervention. (Also referred to as a pegged exchange rate.)



Fixed Favoritism	A way of allocating import licenses in which the government simply assigns fixed shares to firms, often based on the shares of imports the firms had before the quota was imposed.



Floating Exchange Rate	A rate whose value is determined purely by the market forces of supply and demand with no direct intervention of the central bank. (Also referred to as a flexible exchange rate.)



Foreign Defensive Treatment	Setting up enterprises abroad that are less profitable than the home country's production facilities, with the stated purposed of shutting out competition from other countries.



Foreign Exchange Controls	Restrictions on the ability of individuals to freely dispose of foreign exchange earned abroad and to acquire foreign exchange for spending abroad. For example, the excess demand for an officially undervalued foreign currency is dealt with by rationing the scarce supply available.



Foreign Exchange Market	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.



Foreign Exchange Market Intervention	The act or policy of buying and selling foreign exchange on the part of the central bank in order to manipulate or peg the exchange rate.



Foreign-Income Repercussions	The feedback effect on the national economy of a domestic income-induced change in imports that affects foreign income.



Foreign Investment	Lending to or purchasing ownership shares in a foreign enterprise largely owned and controlled by the investor (direct investment) or in a foreign enterprise not owned or controlled by the investor (portfolio investment).



Forward Exchange Contract	An agreement to buy/sell a foreign currency for future delivery at a price set now (the "forward exchange rate").



Forward Exchange Rate	The exchange rate applicable to foreign exchange transactions agreed upon today for later delivery (usually in 30, 90, or 180 days).



Free Ride	People who think the common cause will stand/fall regardless of their contribution and therefore do not contribute in the hope of riding free if the cause succeeds.



Free Trade Area	An area in which members remove trade barriers among themselves but keep their separate national barriers against trade with the outside world.



Fundamental Disequilibrium	A balance of payments surplus or deficits too great and/or enduring to be financed. It is easy to detect with hindsight, but difficult to detect at the onset.



Future Spot Rate	The spot exchange rate that will end up prevailing at some date in the future.



G-7 Countries	Canada, France, Germany, Great Britain, Italy, Japan and the United States. These countries first coordinated to intervene in exchange rate markets with the Plaza Accord in 1985. Sometimes referred to as G-8 when Russia is included.



Gold Standard Era	From about 1870 to WWI most nations tied their currency values to gold and allowed unrestricted import and export of gold. Officials were expected to adjust the whole economy to defend the exchange rate.



Guest Worker	A temporary foreign worker who does not intend to or is prevented from permanently living in the host country society. In German the term is Gastarbeiter.



Heckscher-Ohlin (H-O) Theory	A country will export that good which intensively uses the country's abundant (cheap) factor, and import the good which intensively uses its scarce (expensive) factor.



Hedging	The act of exactly matching assets and liabilities, such as foreign currencies, so as to avoid exchange rate risk.



Hymer View	The thesis that FDI is a way for an oligopolist to stifle competition and protect its market power. The Hymer View assumes imperfect competition in product markets.



ICRA	The Immigration Reform and Control Act. Passed by Congress in 1986, this legislation was designed to reduce illegal immigration and give permanent residence to people who had illegally immigrated prior to 1982.



Immiserizing Growth	In a large trading country which is heavily dependent on trade, growth in the export sector may lead to a deterioration in its terms of trade large enough to reduce the country's welfare.



Import License	A legal right to import goods subject to quotas or other nontariff barriers. Import licenses can be allocated by governments on a competitive auctions basis, fixed favoritism, or resource-using application procedures.



Import Quota	A limit on total quality of imports allowed into a country each year. It is the most prevalent nontariff trade barrier.



Income Elasticity of Demand	The percentage change in the demand for a good resulting from a one percent change in the income of consumers of the good.



Industrial Targeting	Having government and industry agree in advance on which industrial products need encouragement and subsidy in anticipation of being able to export them in the future.



Infant Government Argument	The notion that in poor countries taxes cannot be effectively collected and, hence, tariffs are an important source of public revenues.



Infant Industry Argument	The argument that a new industry (especially in less developed countries) needs protection until it attains a competitive level of cost (and output) in world markets.



Internal Balance	A performance goal in which the country's economy is producing at the full employment income level with price stability.



Internal Economies	Productivity gains and cost reductions that a firm reaps from expanding its own scale of production.



Internal Shocks	Sudden changes in domestic spending or in the financial sector (money demand or supply).



International Capital Flows	Financial flows of credit and ownership claims between countries. Flows of physical capital goods are typically treated as ordinary trade flows, not capital flows, in the balance of payments accounts.



International Investment Position	Measures a nation's stock of foreign assets and liabilities at a point in time.



International Macroeconomics Policy Coordination	The joint determination of several countries' macroeconomic policies to improve joint performance. An example is the 1987 Louvre Accord among the G-7 countries.



International Monetary Fund	The IMF was part of the postwar fixed exchange rate regime created by the Bretton Woods agreement in 1944. Its chief function is to provide loads to countries that are facing short-term balance of payments difficulties. Under "conditionality," countries that are granted loans must agree to correct the underlying economic problems causing the payments deficits.



Intra-Firm Trade	Trade between a parent company and one of its foreign affiliates of a multinational firm. A significant part of world trade occurs in the form of intra-firm trade.



Intra-Industry Trade	Two-way trade in similar products between countries.



IS Curve	This curve shows all combinations of interest rate and income which equilibrate the market for goods and services.



ISI	Import substituting industrialization. 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.



J Curve	When the price effect of a currency devaluation occurs more rapidly than the volume effect, the initial impact of a devaluation is to worsen the current account. After a period of months, the volume of imports falls and the volume of exports rises, causing the current account to improve. A trace of this time pattern in the current account results of this "J" shape.



Law of One Price	A single commodity will have the same price everywhere once the prices are expressed in the same currency. This is another way of stating the PPP hypothesis. It seems to be true chiefly for commodities that are standardized and heavily traded internationally.



Leaning Against the Wind	Occurs when a government intervenes in the foreign exchange market to moderate current movements in floating exchange rates.



LM Curve	This curve shows all combinations of interest rate and income which equilibrate money demand and money supply. The LM curve slopes upward because as national income rises, so does money demand; with a fixed money supply, interest rates must rise to re-equilibrate the money market.



Locomotive Theory	This says that growth in the largest countries may be sufficient to raise world growth overall. This theory comes from the observation that growth in the U.S., Europe and Japan tends to result in growth of other countries because these large countries import more when their income rises.



Long Position	A net asset position (e.g., owning a foreign currency).



Luxuries	Goods that take a rising share of expenditures as income increases. For luxuries, in other words, income elasticity is greater than one.



Maastricht Treaty	An agreement ratified in 1993 in which the EU countries set in motion a process to create a monetary union and common currency.



Magnification Effect	The principle that a factor's price changes by a greater percentage than the change in the commodity price that caused it.



Marginal Propensity to Import	The ratio of a change in import volumes to the change in real national income causing the import change. Graphically, it is represented by the slope of the import function.



Mercantilism	A school of thought which was dominant in Europe (roughly in the 16th century through the 18th century). Mercantilism advocates trade restrictions through restriction of imports and expansion of exports so as to accumulate gold and foreign exchange.



MFN	Most favored nation status. An agreement between two nations to levy tariffs on each other at rates as low as those levied on any other country. If one of these nations reduces tariffs on a third country, all of that nation's MFN partners also receive that lower tariff rate.



Monetary Approach to Exchange Rates	Seeks to explain exchange rates by focusing on demands and supplies for national moneys.



Monetary-Fiscal Policy Mix	A short-run solution to the aggregate demand policy dilemma; it exploits the opposite impacts of fiscal and monetary policies on the interest rate and, in consequence, on the balance of payments. Under fixed exchange rates and with imperfect capital mobility the policy mix suggested by the assignment rule will allow a country to achieve both internal and external balance in the short run.



Monetary Union	A collection of nations in which exchange rates are permanently fixed and a single monetary authority conducts a common monetary policy for the countries of the union.



Monopolistic Competition	A market structure with many firms selling a differentiated product, with low barriers to entry and exit in the industry. It is like monopoly in that the firm has some control over the price it charges since products are differentiated. Yet, since there are many sellers, it is like perfect competition in that the free entry and exit of other firms in the industry pushes each firm toward having zero net profit.



Montreal Protocol	A document first signed in 1987; over 160 nations are now signatories. It was designed to ban trade in (and later, production of) ozone-depleting chlorofluorocarbons.



Moral Hazard	A situation in which someone insured against risks will purposely engage in risky behavior, knowing that any costs incurred will be compensated by the insurer. A financial system which offers "rescue packages" may encourage borrowers and lenders to undertake low-quality or high-risk investments, thus increasing the likelihood of a crisis.



Multinational Firm	A firm that owns and controls enterprises in more than one country. The parent company is based in the home-country source for the FDI and has one or more foreign branches or subsidiaries. These firms are also referred to as multinational corporations (MNCs) and multinational enterprises (MNEs).



Nationally Optimal Tariff	A tariff set at the rate which maximizes the gains for a large country (at the expense of foreign countries). Technically, the optimal rate, as a fraction of the price paid to foreigners, equals the reciprocal of the elasticity of supply of a country's imports.



Nationally Optimal Tax on Fund Flows	As with an optimal tariff, a large country may be able to exert market power and turn the terms of trade in its favor. For example, if a lending country taxes the outflow of funds, it will raise the price that borrowers have to pay. The country's lenders earn a higher rate of return and the government collects the tax revenues. Although this may increase welfare in the lending country, it always reduces world welfare.



Net Foreign Investment	The part of national saving invested abroad instead of being channeled into domestic capital formation: (S = Id = If). It is also the difference between purchase of financial assets (lending) abroad and asset sales to foreigners (borrowing), that is, a country's accumulation of net claims on other countries.



Neutral Factor	A factor which accounts for the same share of the value of output in all commodity lines.



News	Unexpected information about economic performance or political situations that can cause sudden, sometimes large, changes in the exchange rates.



NICs	Newly industrialized countries. Commonly identified as South Korea, Taiwan, Hong Kong and Singapore. (These are also referred to as the "four tigers.") Their rates of growth in 1990-97 were as high as 6.6 percent per year. Singapore, the richest in the group, had the highest GDP per capita in the world in 1997.



Nominal Bilateral Exchange Rates	The exchange rates we see quoted in foreign exchange markets.



Nominal Effective Exchange Rate	The weighted-average exchange rate value of a country's currency, where the weights reflect the importance of other countries in the home country's total international trade.



Nominal Protection Coefficient	The ration of the price received by domestic producers to the world price of the same product as the nation's border. If NPC>1, producers of the good are protected by the government. If NPC<1, producers of the good are effectively taxed.



Official International Reserves Transactions	The changes in domestic official reserve assets and in domestic official liquid liabilities to foreign officials. It is derived by drawing the line through the balance of payments accounts so as to divide private transactions from official "accommodative" transactions.



Official Intervention	Government attempts to influence market exchange rate by buying or selling foreign currency in exchange for the domestic currency.



Official Settlements Balance	Also called "official balance." Equals the sum of the current account balance plus the private capital account balance. An imbalance in the official balance must be paid for through official reserves transactions.



Oligopoly	A market structure with a few firms supplying most of the output. Firms know that their actions affect each other.



One-Way Speculative Gamble	A bet which entails minimal or zero risk of loss for the gambler. A persistent payments imbalance under the Bretton Woods system, for example, clearly signaled the likelihood of a devaluation in the case of a deficit or a revaluation in the case of a surplus. There was, therefore, little risk of losing money by moving funds away from the currency to be devalued and toward the one to be revalued. At worse, speculators had to should the transaction costs.



OPEC	Organization of Petroleum Exporting Countries. Established in 1960, this cartel had a membership of 13 producers by 1975. 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.



Open Economy Spending Multiplier	This takes into account the leakage from the spending stream caused by the marginal propensity to import. For a small economy, the open economy multiplier is smaller than the closed economy multiplier. For a large country, however, the open economy multiplier may be augmented by foreign-income repercussions.



Par Value	The value of the exchange rate that government officials try to target. Often the government will allow some flexibility of the actual exchange rate in "a band" around the par value.



Pegged Exchange Rate	Term used in place of "fixed exchange rate" because, in practice, no exchange rate stays fixed forever, but can be changed by government action. This is a common exchange rate regime in developing countries.



Perfect Capital Mobility	Under this scenario a practically unlimited amount of lending shifts between countries in response to the slightest change in one country's interest rate.



Persistent Dumping	Dumping that goes on indefinitely, as opposed to "cyclical dumping," which occurs only during periods of economic downturn, or predatory dumping. It is used by firms who can price discriminate between markets.



PPP Hypothesis	Purchasing power parity. The home and foreign prices of goods will be equalized, so that P = rs x Pf, overall, where rs is the exchange rate, and P and Pf are the domestic and foreign price level, respectively.



Predatory Dumping	This type of dumping occurs when the firm temporarily discriminates in favor of some foreign buyers with the intent of eliminating competitors and later raising the price after the competition is dead.



Price Discipline Union	The suggestion a fixed exchange rate system results in reduced inflation rates globally, largely because high-inflation countries become less competitive and run out of reserves needed to finance payments deficits. They ultimately must tighten domestic money supply to maintain the fixed exchange rate. Inflation falls as a result.



Price-taking Countries	"Small" countries that cannot affect the outside world price of the goods and services they trade. In these countries, the import supply curve is infinitely elastic.



Producer Surplus	The difference between what a producer is paid for a certain amount of a good and the lowest price she requires in order to supply that amount. It is the area above the supply curve and below the price level.



Product cycle hypothesis	Predicts that as the technology of a product becomes more standardized and static, labor costs become amore important basis for comparative advantage compared to development.



Production Effect	The cost of shifting to more expensive home production in the import-competing sector, which is protected by the tariff on foreign goods.



Prohibitive Tariff	A tariff which is set so high that it makes all imports unprofitable.



Quantity Theory of Money	Theorizes that in any country the money supply is equated with the demand for money, which is directly proportional to the value of nominal gross domestic product (or M = kPY). Here money serves mainly as a medium of exchange.



Real Exchange Rate (RER)	A way of measuring the price of foreign goods not just in currency-adjusted terms but also in price-level adjusted terms. The real exchange rate is calculated as the nominal exchange rate multiplied by the ratio of the home country price level to the foreign country price level multiplied by 100. If purchasing power parity holds between two countries, their real exchange rate will be 100. If purchasing power parity holds between two countries, their real exchange rate will be 100. When the real exchange rate is above 100, the foreign currency is undervalued.



Reserve Assets	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 foreign key currencies, gold, official reserves at the IMF, and holdings of Special Drawing Rights (SDRs).



Revaluation (devaluation)	An official increase (decrease) in the par value of a currency under a fixed exchange rate system.



Rules of the Game	Also known as "classical medicine." Under fixed exchange rates or under the gold standard the "rules of the game" require the monetary authorities to refrain from sterilizing payments imbalances. Instead, they should actively make their domestic lending change in the same direction as the payments imbalance, so as to speed up the elimination of payments imbalances, even at the short-run cost of sacrificing the goal of internal balance.



Rybczynski Theorem	In a two-good world with constant product prices, the growth of one factor of production results in a decrease in the output of the good that does not use this factor intensively.



Second-best World	A world that contains market distortion.



Short Position	A net liability position (e.g., owing a foreign currency).



Small/Large Country Assumption	A small country has no impact on international prices; a large country can have an impact on prices.



Sovereign	Someone or something that has legal independence. This usually refers to national governments because (as in the case of debts they owe) they cannot be forced to repay, be sued, or have their domestic assets seized.



Special Drawing Rights	(SDRs) Fiduciary reserve assets created by the IMF beginning in 1970 as a supplement to existing reserve assets. The value of one SDR is determined by the weighted average of a basket of the currencies of the five countries with the largest share of world exports of goods and services - the U.S. dollar, the Japanese yen, the British pound, and the Euro (representing France and Germany).



Specificity Rule	This guideline states that it is more efficient to use those policy tools that are closest to the sources of the distortions separating private and social benefits or costs.



Specific Tariff	A tariff stipulated as a money amount per physical unit of import.



Speculation	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.



Spending Multiplier	The ratio of a change in national income to the change in autonomous spending that caused the income change. It is greater than one because an initial increase in autonomous spending (independent of income) generates many successive changes in induced spending (dependent on income).



Spot Exchange Rate	The (past, current, or future) rate applicable to foreign exchange transactions requiring contemporaneous delivery.



Staples	Goods that take a declining share of expenditures as income increase. For staples income elasticity is less than one.



Sterilization	Using monetary policy to offset the impact of official intervention on the domestic money supply.



Stolper-Samuelson Theorem	Under certain assumptions, moving from no trade to free trade unambiguously raises the returns to the factor used intensively in the rising-price industry and lowers the returns to the factor used intensively in the falling-price industry, regardless of which goods the owners of the factors prefer to consume.



Strategic Trade Policy	A government campaign to develop export advantage and cut imports in targeted sectors; to gain world market shares in global oligopoly industries.



Sudden-Damage Effect	Refers to public sympathy for groups whose incomes fall due to import competition, either suddenly or during a general depression.



Sustainable Use	To permit and manage some commercial exploitation of previously endangered species as a means of deterring ultimate extinction in the wake of a very successful rebound in elephant populations as a result of international bans on ivory trade. Also refers to restrictions placed on the use of any limited national resources to avoid depleting it entirely.



Switch-over Goods	Goods that countries convert from importable to exportables by offering generous subsidies to domestic producers.



Tariff Escalation	Refers to the tendency of tariffs and other import barriers to be higher on finished goods sold to consumers than on intermediate manufactured goods sold to industry (inputs).



Tequila Effect	When investors recall loans from all developing countries rather than only from the particular country facing the debt crises.



Terms of Trade	The ratio of the price of a country's exports to the price of its imports.



Trade Account (merchandise account)	Records the value of goods sold and purchased abroad by residents of the home country. The value of goods exported (credits) minus the value of goods imported (debits) is the merchandise trade balance.



Trade Blocs	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.



Trade Concession	In international trade negotiations it is customary to define cuts in one's own import barriers *(thereby letting in more inputs) as trade concessions, for which the liberalizing country ought to be compensated with reciprocal cuts abroad.



Trade Creation	The increase in trade volume caused by union with a lower cost (more efficient) supplier within the trade bloc.



Trade Diversion	The volume of trade shifted from a lower-cost (more efficient) supplier outside the trade bloc to a higher-cost (less efficient) supplier within the union.



Tragedy of the Commons	The over-use of a natural resource as a result of unclear property rights. If ownership of a resource is not established, everyone has an incentive to take as much of it as possible, quickly depleting the resource. A typical example is the decline in the fish population resulting from over-fishing of the ocean.



Transition Economies	Countries of the former Soviet Union (FSU) and its satellites that are moving from central planning to market orientation. Beginning in 1989 these countries have started to "liberalize" in the form of market-determined prices, private ownership of resources and business, and openness to international competition and trade.



Uncovered Interest Parity	When the expected rate of appreciation of a currency equals the percentage point amount by which its interest rate is lower than the other country's interest rate.



Uncovered International Investment	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."



UNCTAD	The United Nations Conference on Trade and Development. Since 1964, a permanent forum for the discussion of developing countries' concerns about international trade and investments.



Unsterilized Intervention	Under a fixed managed



Vehicle Currency	A currency used to accomplish an indirect trade between two other currencies. The U.S. dollar is often used as a vehicle currency.



VERS	Voluntary export restraints. Nontariff barriers to trade, equivalent to quotas. Exporting countries are coerced by the importing country into allocating a limited quota of exports. VERs are not legislated and cane be imposed with or without formal international negotiations.



World Trade Organization	An international organization of most of the world's countries which oversee governmental policies regarding international trade. The chief purposes are to liberalize trade, promote the MFN principle, and limit unfair export policies.