| Absolute advantage | For a product, a country has a higher level of labor productivity (or a higher level of some similar measure of productivity) than the other country has.
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| Absolute purchasing power parity | The proposition that a basket or bundle of tradable products will have the same cost in different countries if the costs are stated in the same currency by using the appropriate spot exchange rate.
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| Ad valorem tariff | A tax on imports levied as a percentage of the imported product's value as the product reaches the importing country.
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| Adjustable peg | An exchange rate policy in which the government sets a pegged or fixed rate value, endeavors to keep the fixed value for long periods of time, but can sometimes change the fixed value.
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| Aggregate demand curve | The schedule or curve that shows how different domestic price levels would result in different levels of short-run equilibrium real GDP for a country.
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| Antidumping duty | An extra tariff equal to the discrepancy (the dumping margin) between the actual export price and the normal value.
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| Appreciation | An increase in the exchange rate value of a currency, under a floating rate system.
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| Arbitrage | The process of buying something at a low price and reselling it at a higher price, to make a (nearly) riskless profit.
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| Asset market approach to exchange rates | A theory of what determines exchange rates (or places pressure on exchange rate values) that emphasizes the role of portfolio repositioning by international financial investors.
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| Assignment rule | For a country with a fixed exchange rate, internal balance and external balance can effectively be achieved if fiscal policy is given the task of stabilizing the domestic economy (pursuing internal balance) and monetary policy is given the task of stabilizing the balance of payments (defending the fixed exchange rate value).
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| Balance of payments | The set of accounts recording all flows of value between a country's residents and residents of the rest of the world, during a period of time.
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| Balanced growth | Economic growth in which the country's production possibility curve shifts out proportionately so that the relative shapes of the ppc's remain the same.
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| Bandwagon | Investors and speculators base their expectations of future exchange rate values on the continuation of the recent trend in the exchange rate value.
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| Biased growth | Economic growth that favors producing relatively more of one of the products, so that the relative shape of the new production possibility curves skews toward the faster-growing product.
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| Bretton Woods system | An exchange rate system in which other currencies were effectively pegged to the U.S. dollar, each other country was permitted to adjust the pegged rate value in response to a fundamental disequilibrium, and the U.S. government committed to exchange dollars for gold in transactions with the monetary authorities of other countries at the fixed official dollar price of gold.
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| Bubble | An ongoing one-directional movement in the value of an exchange rate that appears to be driven by a bandwagon, so that the resulting exchange rate value appears to be inconsistent with any form of economic fundamentals.
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| Capital account balance | The sum of all credit and debit items that are flows of financial assets and similar claims (excluding official international reserve assets flows).
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| Capital controls | Governmentally imposed restrictions (limits or requiring approvals) on the ability of international financial investors to transfer moneys in or out of the country (or to make specified international financial investments.)
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| CITES | A multilateral agreement that establishes international cooperation to prevent international trade from endangering the survival of species. (Full name: Convention on International Trade in Endangered Species of Wild Fauna and Flora.)
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| Clean float | An exchange rate policy in which the government permits private (or nonofficial) supply and demand to determine exchange rates, with no government actions designed to directly influence the exchange rate.
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| Common market | A bloc of countries that have a customs union and also allow freedom of factor flows (migration of labor and capital) among themselves.
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| Community indifference curve | A schedule or curve that purports to show the various combinations of consumption quantities of products that give a group (e.g., people in a country) the same level of well-being or happiness.
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| Conditionality | The practice of the International Monetary Fund that the IMF makes a loan to a country only if the country commits to and enacts changes in its policies, with quantified performance criteria. The policy changes (the conditions) are intended to guide the country to achieving external payments balance in a reasonable period of time (and to assure that the country can then pay back the IMF loan).
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| Constant returns to scale | Average cost does not change when the quantity of output in a firm or industry changes, assuming long-run adjustments of all factor inputs as well as constant factor input prices.
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| Consumer surplus | The difference between the value that consumers place on the units of the product that they buy and the payment that they make to obtain these units.
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| Consumption effect | The inefficiency caused by a tariff (or similar policy, like an import quota or an export subsidy) because the policy causes a reduction in the domestic quantity demanded of the product. The loss of consumer surplus for those domestic consumers squeezed out of buying the product because the policy artificially raises the domestic price of the product.
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| Contagion | The spread of a financial crisis from one country to other countries, so these other countries are very adversely affected and may be hit with their own financial crises.
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| Countervailing duty | An extra tariff equal to the price or cost advantage that has been created by a subsidy to foreign exports of the product.
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| Covered interest arbitrage | The process of buying a country's currency spot and selling it forward, to make profit from a non-zero covered interest differential.
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| Covered interest differential | The difference between the overall covered return on a foreign-currency financial investment and the return on a comparable domestic-currency investment (where the overall covered return includes the gain or loss on the spot exchange purchase of the foreign currency and the forward exchange sale of the foreign currency).
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| Covered interest parity | The equilibrium condition that the covered interest differential is zero. A currency is a forward premium by as much as its interest rate is lower than the interest rate in the other country. The overall covered return on the foreign-currency investment equals the rate of return on the comparable domestic-currency investment.
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| Covered international investment | A foreign-currency financial investment in which a forward foreign exchange contract is used to eliminate the exposure to exchange rate risk.
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| Crawling peg | An exchange rate policy in which the government sets a pegged or fixed rate value, and the government is expected to and does change the fixed value often (for example, monthly).
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| Credit item | In a balance of payments transaction, an item for which the country must be paid. It is the item that the country is giving up in the transaction, and it is measured with a positive sign.
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| Currency board | A national monetary authority that focuses almost exclusively on maintaining a fixed exchange rate, because its major activity is exchanging foreign money for domestic money at the fixed rate, and because it cannot sterilize because it holds only foreign-currency assets (it holds no domestic assets).
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| Currency futures | A contact, traded on an organized exchange, to buy or sell a standard amount of foreign currency at a standard (maturity) date in the future.
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| Currency option | A contract that gives its buyer (or holder) the right, but not the obligation, to buy foreign currency (a call option) or to sell foreign currency (a put option) at some time in the future, at a price that is set today.
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| Currency swap | A contract that establishes a sequence of exchanges of two different currencies during a specified period of time. A set of a spot exchange and two or more forward foreign exchanges packaged into a single contract.
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| Current account balance | The sum of all credit and debit items that are exports and imports of goods and services, income flows, and unilateral transfers.
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| Customs union | A trade bloc in which the member countries remove trade barriers among themselves and adopt a common set of barriers to trade with outside countries.
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| Cyclical dumping | A low export price that results from an industry downturn or recession in which demand is unusually low.
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| Debit item | In a balance of payments transaction, an item for which the country must pay. It is the item that the country is receiving in the transaction, and it is measured with a negative sign.
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| Debt restructuring | Changes in the terms of a debt contract, which can be some combination of debt rescheduling (changing the timing of payments by the debtor) and debt reduction (lowering the amount of debt owed by the debtor).
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| Demand for imports | A relationship showing the quantities of a product that a country wants to import at different possible international prices.
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| Depreciation | A decrease in the exchange rate value of a currency, under a floating rate system.
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| Devaluation | A decrease in the par value of a currency, under a fixed rate system.
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| Developing government argument | For a government that does not have the administrative resources to collect elaborate or broad-based taxes (like income taxes), tariffs (and possibly also taxes on exports) can be a crucial source of government revenue because these taxes are relatively easy to collect. The proposition is that in such a situation tariffs can provide a net benefit to the country, because the benefits to the country from using the tariff revenues to expand provision of such public goods as education and health care can exceed the costs of the inefficiencies caused by the tariffs.
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| Diffusion | The spread of technologies internationally, from the countries that invent or first use the technologies to other countries that then can also use the technologies.
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| Dirty float | An exchange rate policy in which the government generally permits private (or nonofficial) supply and demand to determine exchange rates, but the government also is willing to use official intervention to influence exchange rate values.
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| Dollarization | A monetary arrangement in which the county uses the money of some other country (for example, the U.S. dollar) as its own money.
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| Domestic assets | A central bank's holdings of financial assets that are denominated in the country's own currency.
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| Domestic content requirement | A government policy that mandates that a product produced and sold in a country must have specified minimum amount of domestic production value, usually in the form of wages paid to local workers and materials and components produced in the country.
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| Domestic monetary shock | An exogenous change in the country's money supply or in one of the determinants of the demand for money (how people decide how much money to hold).
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| Domestic spending shock | An exogenous change in one of the components (or one of the determinants of the components) of domestic expenditure (consumption, domestic real investment, government spending on goods and services).
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| Dumping | Selling exports at a price that it too low, less than normal value or fair market value.
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| Dutch disease | New production of a natural resource in a country results in a decline in the production of manufactured products in this country.
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| Economic failure of an embargo | The trade embargo does not change the target country's policy that provoked the embargo, because the embargo inflicts little damage on the target country (but it may impose substantial damage on the imposing country).
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| Economic growth | Expansion over time in the capabilities of an economy to produce goods and services.
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| Economic union | A bloc of countries that have a common market and also unify other economic policies, including monetary, fiscal, and welfare policies.
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| Economies of scale | Average cost declines when the quantity of output increases, assuming long-run adjustments of all factor inputs as well as constant input prices, because increases in expenditures on inputs increase output quantity by a larger percentage.
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| Effective rate of protection | Percentage by which the entire set of a country's trade barriers raises an industry's value added per unit of output.
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| Elasticity | The percent change in one variable that is caused by a one percent increase in another variable.
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| Eurocurrency deposit | A bank deposit that is not subject to the usual government regulations imposed by the country of the currency in which the deposit is denominated. (The traditional definition is a bank deposit denominated in currency different from the currency of the country where the bank is located.)
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| European Central Bank (ECB) | The institution, established in 1998, that decides and implements unionwide monetary policy for the countries that use the euro as members of the European Monetary Union.
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| European Monetary Union | The agreement among some of the European Union member countries (12 countries as of 2005) to adopt the euro as a common currency, to abolish their national currencies, and to have the European Central Bank as the institution that decides and implements unionwide monetary policy.
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| Exchange control | A government policy that places some form of restriction on access to or use of the foreign exchange market.
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| Exchange Rate Mechanism (ERM) | The system (that existed from 1979 through 1998) of adjustable pegged exchange rates among the national currencies of many of the member countries of the European Union. After this broad system was no longer needed with the creation of the euro in 1999, a successor ERM II has adjustable pegged exchange rates between the euro and the currencies of some of the EU member countries that have not (yet) adopted the euro.
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| Exchange rate risk | Unpredictable changes in future exchange rates can cause the value of the income, wealth, or net worth of a person (or organization like a firm) to change.
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| Exchange rate | The price of one country's money in terms of another country's money.
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| Expected uncovered interest differential | The difference between the overall expected return on a foreign-currency financial investment and the return on a comparable domestic-currency investment (where the overall expected return includes the expected gain or loss on the spot exchange purchase of the foreign currency and the future sale of the foreign currency at the expected future spot exchange rate).
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| Export subsidy | Government financial assistance to firms based on how much of a product the firms export.
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| External balance | In macroeconomic analysis, the objective of achieving a reasonable and sustainable composition of a country's balance of payments with the rest of the world.
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| External scale economies | Expansion of the size of the industry within a specified geographic area is the basis for the decline in the typical local firm's average cost as the overall production quantity for the industry in this geographic area increases.
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| Externalities | Net direct effects (costs or benefits) of market activity (production or consumption) to parties other than those agreeing to buy and sell in the marketplace.
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| Factor-price equalization theorem | Given certain conditions and assumptions, free trade that equalizes product prices between countries also equalizes the prices of individual production factors between the countries (so that each factor has the same real wage or real return across the countries), even if the factors themselves cannot move between the countries.
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| FE curve | A schedule or curve that shows all combinations of domestic product levels and interest rates that result in a zero value for the country's official settlements balance.
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| Firm-specific advantages | One or more assets of the MNE that are not assets held by its local competitors in the host country (or, perhaps, by any other firm in the world).
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| Fiscal policy | Government policy toward government expenditures (government spending on goods and services and transfer payments) and taxation.
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| Fixed exchange rate system | Government officials select a central value or par value for the spot exchange rate and attempt to keep the actual exchange rate at this value or within a narrow band around this value.
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| Fixed favoritism | A method for allocating import licenses used to enforce an import quota, in which the government assigns the licenses to firms or individuals without competition, applications, or negotiations.
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| Floating exchange rate system | The spot exchange rate between two currencies is market-driven and determined by private (or nonofficial) demand and supply for the two currencies.
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| Foreign affiliate | An MNE's business entity (subsidiary or branch) located outside of its home country.
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| Foreign direct investment (FDI) | The flow of funding provided by an investor or lender (usually a firm) to establish or acquire a foreign company or to expand or finance an existing foreign company that the investor owns and controls. Using the international standard for control (the ability to influence management decisions): Any flow of lending to, or purchase of ownership in, a foreign firm in which the investor (usually a firm) has (or gains) ownership of 10 percent or more of the foreign firm. Also, the stock of such financing that exists at a point in time.
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| Foreign exchange swap | A package trade that includes a spot exchange of two currencies and the reverse forward exchange of the two currencies.
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| Foreign exchange | The act of trading different countries' moneys. Also, the holdings of foreign currencies.
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| Foreign-income repercussions | The tendency for an expansion (recession) in a large country to cause follow-on changes that expand (contract) other countries' economies, so that the changes in these other countries in turn reinforce the expansion (recession) in the first country (and so forth). These repercussions operate through changes in imports and exports that link the countries' economies to each other.
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| Forward exchange rate | The price that is set now for an exchange of one money for another that will occur at a specified date in the future.
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| Forward foreign exchange contact | An agreement to exchange one currency for another currency on a specified date in the future at a price that is set at the time that the agreement is reached (this price is the forward exchange rate).
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| Forward premium | The proportionate difference between the current forward exchange rate value of a currency and its current spot exchange rate value. (If this is negative, we often call it a forward discount.)
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| Free-rider problem | The difficulty of undertaking group efforts in which all individuals in the group share in the benefits from the effort regardless of how much (or little) each has contributed to it, because each selfishly rational individual in the group tends to refuse to contribute to the effort, and instead each tends to hope that others in the group will contribute to the effort.
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| Free-trade area | A trade bloc in which the member countries remove trade barriers among themselves but each keeps its own separate barriers to trade with outside countries.
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| General Agreement on Tariffs and Trade (GATT) | The provisional agreement signed in 1947 that provided oversight of global rules of government policies toward international trade and a forum for negotiating global trade agreements. The GATT was folded into the World Trade Organization in 1995.
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| Gold standard | An exchange rate system in which each national monetary authority fixes the value of the country's money to a specified quantity of gold, so the gold values imply fixed exchange rates between the various currencies that are each fixed to gold.
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| Goods and services balance | The sum of all credit and debit items that are exports and imports of goods and services. Also called net exports or the trade balance.
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| Heckscher-Ohlin theory | A country will export product(s) that use the country's relatively abundant factors relatively intensively (in the production of these exported products) and import product(s) that use the country's relatively scarce factors relatively intensively (in the production of these imported products).
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| Hedging | The act of reducing exposure to exchange rate risk (or any other rate risk), by reducing or eliminating any net asset position or net liability position in the foreign currency.
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| Home country | The national location of the parent firm of an MNE.
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| Host country | The national location of a foreign affiliate of an MNE.
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| Immiserizing growth | National economic growth that, by expands the country's willingness to trade, causes such a large decline in the country's terms of trade that the country is worse for growing.
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| Import quota (or just quota) | A limit on the (maximum) total quantity of imports of a product allowed into a country during a period of time.
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| Import-license auction | A method for allocating import licenses used to enforce an import quota, in which the government sells import licenses on a competitive basis to the highest bidders.
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| Import-substituting industrialization (ISI) | A development strategy in which the government encourages the growth of domestic manufacturing industries by imposing high barriers to the imports of a range of manufactured products.
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| Increasing marginal costs | As one industry expands its production quantity, increasing amounts of other products must be given up to get each extra unit of the expanding industry's product.
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| Indifference curve | A schedule or curve that shows the various combinations of consumption quantities of products that give a consumer the same level of well-being or happiness.
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| Infant industry argument | The proposition that a temporary tariff can benefit the country imposing it because the tariff protects and permits early production by a domestic industry that is initially high cost by world standards, to give the industry time to learn to lower its costs, so that the country will eventually have domestic production that does meet global cost standards.
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| Inherent disadvantages | The drawbacks facing an MNE trying to operate in a foreign country, based on lack of local knowledge and understanding, the extra costs of managing business operations across national borders, and actual or potential discrimination against foreign firms by the host country government.
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| Internal balance | In macroeconomic analysis, the objectives of achieving full employment (a suitably low level of unemployment of labor and other factor resources) and price stability (an acceptable rate of product price inflation).
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| Internal scale economies | Expansion of the size of the individual firm is the basis for the decline in average cost as the firm's production quantity increases.
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| Internalization advantages | The net benefits of using an asset within the firm rather than finding other (outside) firms that will buy, rent, or license the asset.
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| International capital-flow shock | An exogenous change in international financial flows into or out of country, or in one of the determinants of these international financial flows.
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| International cartel | An agreement among producers of product (such as oil or another primary product) to raise the international price of the product (and to move toward a monopoly-like price for the product), usually by limiting their production and restricting competition.
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| International investment position | A statement of the stocks of a country's international assets and foreign liabilities at a point in time.
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| International macroeconomic policy coordination | The joint determination of several countries' macroeconomic policies (fiscal policy, monetary policy, and exchange rate policy) to improve the joint performance of the countries' economies.
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| International migration | The movement of people from one country to another country in which they intend to reside for some noticeable period of time.
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| International Monetary Fund (IMF) | A multilateral organization established as part of the Bretton Woods system. It has several functions, including lending reserve assets to member countries to finance their temporary balance of payments deficits or to give them time to adjust their policies to correct payments imbalances.
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| International price | The equilibrium product price that results from international trade.
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| International reserve assets | Money-like assets that are held by governments (especially central banks) and that are recognized by governments as fully acceptable for payments between them.
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| International trade shock | An exogenous change in a country's exports or imports of goods and services, or in one of the determinants of these exports and imports.
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| Intrafirm trade | International trade in which the product is exported by a unit of an MNE in one country and imported by another unit of this same MNE in another country. It is international trade because the product crosses national boundaries, but it is occurring within the MNE as an multi-country organization.
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| Intra-industry trade (IIT) | Two-way trade in a product, in which a country both exports and imports the same or very similar products (products in the same industry).
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| IS curve | A schedule or curve that shows all combinations of domestic product levels and interest rates for which the domestic product market is in equilibrium.
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| Isocost line | The schedule or line that shows different input-quantity combinations that each has the same level of total cost, given specified prices for the inputs.
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| J curve | The pattern over time of how the value of the current account balance responds to a large devaluation or depreciation of a country's currency—the trade balance value at first moves in the negative direction (worsens) and later moves in the positive direction (improves).
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| Kyoto Protocol | A multilateral agreement in which the industrialized countries that have ratified it (the United States and Australia have not) agree to cut their 2008-2012 emissions of greenhouse gases to an average of about 5 percent below their 1990 emissions levels.
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| Labor productivity | The number of units of output that a worker can produce in one hour.
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| Labor-abundant | A relatively labor abundant country is a country that has a higher ratio of (nationally available) labor to (nationally available) other factors than does the rest of the world.
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| Labor-intensive | A relatively labor-intensive product is a product for which labor costs are a greater share of its value than they are of the value of other products.
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| Large country | A country whose trade (and changes in its trade) can have an impact on international product prices.
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| Law of one price | The proposition that a product that is easily and freely traded should have the same price everywhere, once the prices at different places are expressed in the same currency by using the appropriate spot exchange rates.
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| License | An agreement for one firm to use another firm's asset, with restrictions on how the asset can be used, and with payments for the right to use the asset.
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| LM curve | A schedule or curve that shows all combinations of domestic product levels and interest rates for which the money market is in equilibrium.
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| Location factors | The advantages and disadvantages of producing in one country (for instance, the home country of an MNE) or producing in another country.
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| Long run | In international trade analysis, the period of time in which factors can move employment between industries or sectors (so they are not tied to the industry in which they previously were employed).
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| Long-run aggregate supply curve | A vertical line that shows the full-employment level of real GDP for a country (based on the assumption that in the long run overall supply is independent of the price level).
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| Managed float | An exchange rate policy in which the government generally permits private (or nonofficial) supply and demand to determine exchange rates, but the government also is willing to use official intervention to influence exchange rate values.
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| Marginal propensity to import | The increase in imports that results from one dollar of additional production and income in the country.
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| Marshall-Lerner condition | A condition for stability in the response of the trade balance value to a change in the exchange rate value of a country's currency—the absolute value of the sum of the two countries' price elasticities of demands for imports must be greater than one.
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| Mercantilism | The philosophy that in international trade exports are good and imports are (usually) bad, because foreign payments for exports can be used to increase national holdings of gold and silver (and this country's payments for imports drain national holdings of gold and silver), or because exports can used to increase jobs (and imports shift jobs to other countries).
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| Mixing requirement | A government policy that mandates that an importer or import distributor must also buy a certain percentage of the product locally.
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| Monetary approach to exchange rates | A theory of what determines exchange rates (or places pressure on exchange rate values) that emphasizes the role of money supplies and money demands in the countries.
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| Monetary base | The total value of two central-bank liabilities, currency and deposits from banks.
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| Monetary policy | The set of central-bank rules, regulations, and actions that determine the availability of bank deposits and currency in circulation, and thus determine the country's money supply.
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| Monetary union | An agreement among member countries to permanently fix exchange rates between their national currencies (or adopt a single unionwide currency) and to have a single unionwide monetary policy.
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| Money supply | The total value of currency held by the public, various types of deposits (like checking accounts) that the public has at regular banks, and perhaps also other money-like items that are held by the public in a country.
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| Monopolistic competition | A market structure in which products are differentiated, internal scale economies in production are modest or moderate, and entry and exit of firms is easy in the long run, so that a large number of firms compete vigorously with each other in producing and selling varieties of the same basic product.
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| Monopsony power | The ability of a large buyer to lower the market price so that it benefits from this lower price for the units that it buys.
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| Montreal Protocol | A multilateral agreement that initially banned international trade in chlorofluorocarbons (CFCs) and halons, and then was tightened to phase out production of these chemicals, to reverse the depletion of ozone in the upper atmosphere.
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| Moral hazard | The incentive that insurance creates for the insured to be less careful because the insurance offers compensation if bad things happen. In the context of international finance, the incentive for overlending and overborrowing if the lenders and/or borrowers expect to be bailed out by rescue packages when financial crises occur.
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| Multinational enterprise (MNE) | A firm that owns and controls business operations in more than one country.
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| National defense argument | The proposition that import barriers provide a net benefit to the country imposing them because they help the country to have or be ready to produce products that would be important in a future military emergency.
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| Nationally optimal tariff | The tariff rate that creates the largest possible net gain in well-being for the country that imposes the tariff.
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| Nationally optimal tax | The tax rate on international lending or borrowing that creates the largest possible net gain in well-being for the country that imposes the tax.
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| Net foreign investment | The increase the country's foreign financial assets minus the increase in the country's foreign financial liabilities.
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| Net national gains from trade | The gain to a country from permitting free international trade (rather than permitting no international trade), based on the conclusion (reached using the one-dollar, one-vote metric) that the gain to some groups in the country exceeds the loss to other groups in the country.
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| Net trade | For a country, the difference between the value of its exports of a product and the value of its imports of this product.
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| Nominal bilateral exchange rate | The exchange rate measured as the number of units of one currency per unit of the other currency. (This is the regular exchange rate as quoted in the foreign exchange market.)
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| Nominal effective exchange rate | The weighted average exchange rate value of a country's currency (measured using the set of nominal bilateral exchange rates between this country's currency and each of the various foreign currencies included in the average).
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| Nontariff barrier (NTB) | Any policy, other than a tariff, used by the government of a country to reduce imports of a specific product.
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| Normal value | In analysis of export prices for possible dumping, (a) the price charged to comparable domestic buyers in the home market (or to comparable buyers in other markets), or (b) the average cost of producing the product, including overhead costs and profit.
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| Offer curve | The schedule or curve that shows simultaneously how much a country is willing to export of one product and how the country wants to import of another product, for each possible international price ratio for the two products.
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| Official international reserve assets | Money-like assets that are held by governments (especially central banks) and that are recognized by governments as fully acceptable for payments between them.
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| Official intervention | A government action in which the monetary authority enters the foreign exchange market to buy or sell foreign currency (in exchange for domestic currency).
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| Official settlements balance | The sum of the current account balance and the (nonofficial) capital account balance.
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| Oligopoly | A market structure in which a few large firms dominate total industry sales, perhaps because of substantial internal scale economies (or other barriers to entry).
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| One-dollar, one-vote metric | Measurement of the net effect of a change using the assumption that each dollar of gain or loss to different individuals and groups is valued equally.
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| One-way speculative gamble | For those interested in trying to profit from a possible imminent change in a fixed exchange rate value, a situation in which the direction of any change in the fixed value is fully predictable, because the economic context indicates that there is only one direction in the which the fixed value will move (if the fixed value is changed by the government).
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| Opportunity cost | The value of the next best foregone alternative when a resource is used in an activity. For resources used in producing a product, the value of other goods and services that are not produced because the resources are used instead to produce this product.
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| Organization of Petroleum Exporting Countries (OPEC) | The international crude-oil cartel formed by the governments of a number of the major crude-oil producing countries in the world.
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| Overall balance | A measure of whether the country's balance of payments has achieved an composition that is sustainable over time. The indicator of this that is often used is the official settlements balance.
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| Overshooting | A theory of exchange rate changes in which international investors react rationally to news or a shock (such as a large change in a country's money supply) by driving the exchange rate to change quickly by more than it should change in the new long run equilibrium (so that it jumps past this new long-run equilibrium value), and then the exchange rate value slowly reverts to this new long-run equilibrium value.
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| Parallel market | A second foreign exchange market that exists outside of the government's normal rules governing the first (official) foreign exchange market. It is typically used as a way to evade exchange controls.
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| Parent firm | The headquarters or base firm of an MNE.
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| Pegged exchange rate | Another name for a fixed exchange rate, used to emphasize that a government monetary authority has the ability to change the "fixed" rate value (that is, no exchange rate value can be fixed forever).
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| Perfect capital mobility | A setting in which international financial investors are willing to shift practically unlimited amounts of funds from one country to another in response to even small deviations from uncovered interest parity, so that international capital flows are extremely sensitive to interest rates.
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| Persistent dumping | A low export price that results from the exporting firm practicing price discrimination between segmented national markets, with the export price being low because the import market has the higher price elasticity of demand (perhaps due to more intense competition in the importing country's market).
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| Political failure of an embargo | The trade embargo does not change the target country's policy, even though the target country suffers substantial economic costs, because the target country's national decision-makers have too much at stake in the policy that provoked the embargo and will not change it.
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| Predatory dumping | A low export price used by the exporting firm with the intention to drive its competitors in the importing country out of business.
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| Price discipline | The tendency of a fixed exchange rate system to lower the average global rate of product price inflation because the fixed rate system places greater pressure on countries with payments deficits to tighten up their macroeconomic policies than it places pressures on surplus countries to loosen up their macroeconomic policies.
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| Price discrimination | A pricing strategy in which the firm charges different prices to different groups of buyers based on differences in the price elasticities of demand for the different groups.
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| Price elasticity of demand | The percent change in quantity demanded of a product caused by a one percent increase in the price of this product.
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| Price elasticity of supply | The percent change in quantity supplied of a product caused by a one percent increase in the price of this product.
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| Principle of comparative advantage | A country will export products that it can produce at a low opportunity cost and import products that it would otherwise produce at high opportunity cost (with these opportunity costs measured relative to opportunity costs in the other country).
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| Producer surplus | The difference between the revenues that producers receive for the units of a product that they produce and sell and the lowest amount that would have drawn out their supply (this lowest amount is the cost of producing these units).
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| Product cycle hypothesis | A theory that there is a regular pattern to production locations and international trade patterns for a product after it is invented. The product is invented and first produced in an industrialized country, so at first these countries export the product. Over time, production shifts to other industrialized countries and then to developing countries, so the identity of the major exporting countries also changes.
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| Product differentiation | Consumers view the products (or product varieties) offered by firms in an industry as being close but not perfect substitutes for each.
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| Production effect | The inefficiency caused by a tariff (or similar policy, like an import quota or an export subsidy) because the policy causes an increase in the domestic quantity supplied of the product. The waste of resources used to produce units with domestic production costs that exceed the world price (the world standard for production cost).
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| Production function | The relationship that shows the quantity of output of a product that can be produced from each possible combination of amounts of inputs.
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| Production isoquant | The schedule or curve that shows the different input-quantity combinations that each can be used to produce a specified quantity of output of a product.
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| Production-possibility curve (ppc) | A schedule or curve that shows all possible combinations of amounts of different products that an economy can produce, with full employment of its resources and maximum feasible productivity of those resources.
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| Purchasing power parity (PPP) | A theory of what determines exchange rates (or what exchange rate values should be) that emphasizes goods and services prices quoted in different currencies. The exchange rate value between two currencies should be based on the prices of products in one of the countries (as these prices are quoted in this country's currency) relative to the prices of products in the other country (as these prices are quoted in the other country's currency).
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| Quantity theory equation | A country's money supply is equated to the demand for the country's money, and the demand for money is directly proportional to the money value of the country's gross domestic product.
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| Real bilateral exchange rate | The exchange rate value of a country's currency relative to the currency of one other country, adjusted for product price levels in each of the two countries (and measured relative to the relationship among the exchange rate and the two country's product price levels that existed in a chosen base year).
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| Real effective exchange rate | The weighted average of the real bilateral exchange rates between the country and each of a set of foreign countries.
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| Receiving country | The country that an international migrant moves to (the country of immigration).
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| Relative price | The ratio of one product price to another product price.
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| Relative purchasing power parity | The proposition that the difference between changes over time in product-price levels in two countries will be offset by the change in the exchange rate value between the two countries' currencies over this time. The rate of appreciation of the exchange rate value of a country's currency will equal the amount by which this country's inflation rate is less than the other country's inflation rate.
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| Rescue package | Commitments of loans, usually in large amounts and usually from the International Monetary Fund and some industrialized country governments, to assist a country in getting through and resolving a financial crisis.
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| Research and development (R&D) | Organized efforts to create, refine, and commercialize new technologies.
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| Reserve currency | A currency that is the currency of denomination of large amounts of foreign exchange assets held by other countries' monetary authorities as official international reserve assets.
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| Resource-using application procedures | A method for allocating import licenses used to enforce an import quota, in which the firms or individuals that want to obtain the licenses must use some costly procedure (such as first-come, first served; demonstrating need or worthiness; or negotiations) to compete to obtain the licenses from the government.
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| Revaluation | An increase in the par value of a currency, under a fixed rate system.
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| Rules of origin | Rules that determine which products have been produced within a free-trade area (or other form of trade bloc), so these products can be traded freely within the area, and which products do not qualify as having been produced within the area, so these other products are not eligible to be traded freely within the area.
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| Rybczynski theorem | Given certain conditions and assumptions, including that product prices are constant, growth in the country's endowment of one factor of production, with the other factor unchanged, results in (a) an increase in the output quantity of the product that uses the growing factor intensively, and (b) a decrease in the output quantity of the other product.
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| Safeguard policy | A government policy of temporary import protection imposed in response to a sudden import increase that causes injury to domestic producers of this product.
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| Seasonal dumping | A low export price that is intended to sell off excess inventories of a product.
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| Second-best world | The reality that the economy includes distortions that cause the economy to fall short of full economic efficiency. The distortions are the result of private market failures or distortionary government policies.
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| Section 301 | The part of the U.S. Trade Act of 1974 that gives the president the power to negotiate to eliminate unfair trade practices of foreign governments that limit exports by the United States to these countries, and to threaten or carry out retaliation against countries whose governments do not eliminate or reform such practices.
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| Sending country | The country of origin of an international migrant (the country of emigration).
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| Short run | In international trade analysis, the period of time in which factors of production (workers, land, and so forth) can be employed only in the industry or sector in which they are currently employed (so the factors cannot move to employment in another industry).
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| Short-run aggregate supply curve | The schedule or curve that shows how the level of real GDP (or, more precisely, the deviation of actual real GDP from full-employment real GDP) determines the country's price level for a short-run time period.
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| Small country | A country whose trade (or realistic changes in its trade) does not affect international product prices.
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| Special drawing right (SDR) | An official international reserve asset created by the International Monetary Fund. Its value is determined as a basket of specified amounts of the four major currencies (U.S. dollar, euro, Japanese yen, British pound).
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| Specific tariff | A tax on imports levied as a set amount of money per unit of imported product.
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| Specificity rule | To address the inefficiency caused by a distortion (such as that caused by an externality), it is usually more efficient to use the government policy tool that acts as directly as possible on the source of the distortion separating private and social benefits or costs. Similarly, to achieve a noneconomic objective at the least economic cost, it is usually better (lower cost) to use the government policy that acts as directly as possible on the specific objective. (In short, for both versions, identify the problem or issue precisely and intervene with policy as directly as possible.)
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| Speculating | The act of taking a net asset position or a net liability position in a foreign currency (or any other asset class), to attempt to make a profit from the position.
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| Spending multiplier for a small open economy | The increase in real GDP that results from one dollar of additional real government spending (or some similar exogenous increase in a component of aggregate demand), inclusive of the dampening effect of subsequent increases in imports.
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| Spillover effects | Net direct effects (costs or benefits) of market activity (production or consumption) to parties other than those agreeing to buy and sell in the marketplace.
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| Spot exchange rate | The price for "immediate" exchange of one money for another. (For standard large trades, immediate means in one or two days.)
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| Sterilization | An action by a country's monetary authority used to reduce or eliminate the effect that official intervention (in the foreign exchange market) would otherwise have on the country's money supply.
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| Sterilized intervention | A set of actions taken by a country's monetary authority, combining official intervention (in the foreign exchange market) with another action to eliminate the effect that this intervention otherwise would have on the country's money supply.
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| Stolper-Samuelson theorem | Given certain conditions and assumptions, an event that changes product prices in a country unambiguously (a) raises the real return to the factor used intensively in the rising-price industry, and (b) lowers the real return to the factor used intensively in the falling price industry.
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| Strategic trade policy | The proposition that in certain circumstances government assistance to a national firm can benefit the country because it helps the national firm to win an international game (for instance, competition for shares of sales in foreign markets) so that the firm collects more of the international prize (for instance, larger total profits from greater sales to foreigners).
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| Sudden-damage effect | Sympathy from others for those who suffer a big income loss that sets in quickly.
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| Supply of exports | A relationship showing the quantities of a product that a country wants to export at different possible international prices.
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| Tariff escalation | The tendency for nominal tariff rates (and also effective rates of protection) to increase with the stage of production (from raw materials through intermediate materials and components and on to finished goods).
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| Tariff | A tax on importing a good or service into a country.
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| Terms of trade | The ratio of the (average) price that a country receives from foreigners for its exports to the (average) price that this country pays foreigners for its imports.
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| Terms-of-trade effect | The change in the international price of a product that results from a large country imposing a tariff (or similar policy like an import quota). Because the tariff causes a decrease in the international price of the imported product, the large country imposing the tariff benefits from improved terms of trade internationally.
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| Trade adjustment assistance | Government policies specifically designed to assist workers and firms in industries that are adversely affected by rising imports.
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| Trade bloc | A group of countries that have agreed to have low or no barriers on trade among themselves, while maintaining regular barriers to trade with countries outside the bloc.
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| Trade creation | The net volume of new trade resulting from forming or joining a trade bloc, and one source of gains in well-being from the trade bloc.
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| Trade diversion | The volume of trade shifted from low-cost outside exporters to higher-cost bloc-partner exporters, resulting from forming or joining a trade bloc, and the source of losses of well-being from the trade bloc.
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| Trade embargo | Imposing bans or extra barriers on trade with a specific foreign country (exports to this foreign country, imports from this country, or both), usually because of a policy dispute.
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| Transborder pollution | Pollution in one country has direct negative effects on other countries in the area, because the pollutants cross national boundaries.
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| Transfer pricing | The setting by the firm of monetary values (prices) for things that move between units of the firm (such as things that move among the parent firm and the foreign affiliates of an MNE).
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| Triangular arbitrage | The process of making a profit from a discrepancy among the three exchange rates that exist for three currencies (for instance, the exchange rates of two other currencies with respect to the U.S. dollar and the cross-rate between these two other currencies).
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| Uncovered interest parity | The condition that the expected uncovered interest differential is zero. A currency is expected to appreciate by as much as its interest rate is lower than the interest rate in the other country. The expected overall uncovered return on the foreign-currency investment equals the rate of return on the comparable domestic-currency investment.
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| Uncovered international investment | A foreign-currency financial investment which is exposed to exchange rate risk.
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| Voluntary export restraint (VER) | A quantitative limit on exports from the exporting country to the importing country, resulting from some form of coercion by the importing country government to compel the exporting country to impose the limit.
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| World price | The equilibrium product price that results from international trade.
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| World Trade Organization (WTO) | The multilateral organization that oversees the global rules of government policies toward international trade and provides the forum for negotiating global agreements to improve these rules.
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