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.