Terminologies for Final

Question 1

Law of comparative advantage

Answer 1

when each nation specializes in the production of that good in which it has a relative advantage, the total output of each good increase; thus, all countries can realize welfare gains

Question 2

Free trade

Answer 2

a system of open markets between countries in which nations concentrate their production on goods they can make most cheaply, with all the consequent benefits of the division of labor

Question 3

Terms of trade

Answer 3

the relative prices at which two products are traded in the marketplace

Question 4

Customs Union

Answer 4

an agreement among two or more trading partners to remove all tariff and non-tariff trade barriers among themselves; each member nation imposes identical trade restrictions against non-participants

Question 5

Economic integration

Answer 5

a process of eliminating restrictions on international trade, payments, and factor mobility

Question 6

Brain drain

Answer 6

emigration of highly educated and skilled people from developing nations to industrial nations

Question 7

Foreign direct investment

Answer 7

foreign acquisition of a controlling interest in an overseas company or facility

Question 8

Guest workers

Answer 8

foreign workers, when needed, allowed to immigrate on a temporary basis

Question 9

Labor mobility

Answer 9

a measure of how labor migration responds to wage differentials

Question 10

Migration

Answer 10

moving from one country to settle in another

Question 11

Multinational enterprise (MNE)

Answer 11

an enterprise that cuts across national borders and is often directed from a company planning center that is distant from the host country

Question 12

Balance of payments

Answer 12

a record of the flow of economic transactions between the residents of one country and the rest of the world

Question 13

Current Account

Answer 13

the net value of monetary flows associated with transactions in goods and services, investment income, employee compensation, and unilateral transfers

Question 14

Trade balance

Answer 14

derived by computing the net exports (imports) in the merchandise accounts; also called merchandise trade balance

Question 15

Appreciation

Answer 15

(as applied to currency markets) when, over time, it takes fewer units of a nation’s currency to purchase a unit of some foreign currency

Question 16

Depreciation

Answer 16

(as applies to currency markets) when, over time, it takes more units of a nation’s currency to purchase a unit of some foreign currency

Question 17

Foreign-exchange market

Answer 17

the organizational setting within which individuals, businesses, governments, and banks buy and sell foreign currencies and other debt instruments

Question 18

Exchange rate

Answer 18

the price of one currency in terms of another

Question 19

Real interest rate

Answer 19

the nominal interest rate minus the inflation rate

Question 20

Gold standard

Answer 20

a monetary system in which each member nation’s money supply consisted of gold or paper money backed by gold, where each member nation defined the official price of gold in terms of its national currency and was prepared to buy and sell gold at that price; free import and export of gold was permitted by member nations

Question 21

Adjustable pegged

Answer 21

exchange rates a system of semifixed exchange rates where it is understood that the par value of the currency will be changed occasionally in response to changing economic conditions

Question 22

Capital controls

Answer 22

government-imposed barriers to foreign savers investing in domestic assets or to domestic savers investing in foreign assets; also known as exchange controls

Question 23

Clean float

Answer 23

when free-market forces of supply and demand are allowed to determine the exchange value of a currency

Question 24

Crawling peg

Answer 24

a system in which a nation makes small, frequent changes in the par value of its currency to correct balance-of-payments disequilibrium

Question 25

Currency board

Answer 25

a monetary authority that issues notes and coins convertible into a foreign anchor currency at a fixed exchange rate

Question 26

Devaluation

Answer 26

an official change in a currency’s par value, which causes the currency’s exchange value to depreciate

Question 27

Dirty float

Answer 27

a condition under a managed floating system when free-market forces of supply and demand are not allowed to achieve their equilibrating role; countries may manage their exchange rates to improve the competitiveness of their producers

Question 28

Exchange controls

Answer 28

government-imposed barriers to foreign savers investing in domestic assets (for example, government securities, stock, or bank deposits) or to domestic savers investing in foreign assets

Question 29

Exchange-stabilization fund

Answer 29

a government entity that attempts to ensure that the market exchange rate does not move above or below the official exchange rate through purchases and sales of foreign currencies

Question 30

Fixed exchange rates

Answer 30

a system used primarily by small developing nations whose currencies are anchored to a key currency, such as the U.S. dollar

Question 31

Floating (or flexible) exchange rates

Answer 31

when a nation allows its currency to fluctuate according to the free-market forces of supply and demand

Question 32

Fundamental disequilibrium

Answer 32

when the official exchange rate and the market exchange rate may move apart, reflecting changes in fundamental economic conditions—income levels, tastes and preferences, and technological factors

Question 33

Impossible trinity

Answer 33

a restriction whereby a country can maintain only two of the following three policies—free capital flows, a fixed exchange rate, and an independent monetary policy

Question 34

Fiscal policy

Answer 34

refers to changes in government spending and taxes

Question 35

Monetary policy

Answer 35

refers to changes in the money supply by a nation’s central bank

Question 36

Wage and price controls

Answer 36

intervention by the government to set price and wage levels

Question 37

Special Drawing Rights (SDR)

Answer 37

an artificial currency unit based on a basket of four currencies established by the IMF

Question 38

International Monetary Fund (IMF)

Answer 38

headquartered in Washington, and consisting of 184 nations, the IMF can be thought of as a bank for the central banks of member nations

Question 39

World Bank

Answer 39

an international organization that provides loans to developing countries aimed toward poverty reduction and economic development

Question 40

Organization of Petroleum Exporting Countries (OPEC)

Answer 40

a group of nations that sells petroleum on the world market and attempts to support prices higher than would exist under more competitive conditions to maximize member-nation profits

Question 41

World Trade Organization (WTO)

Answer 41

organization that embodies the main provisions of GATT, but its role was expanded to include a mechanism intended to improve GATT’s process for resolving trade disputes among member nations

Question 42

Generalized System of Preferences (GSP)

Answer 42

a system in which industrialized nations attempt to promote economic development in developing countries through lower tariffs and increased trade, rather than foreign aid

Question 43

Nontariff trade barriers (NTBs)

Answer 43

policies other than tariffs that restrict international trade

Question 44

Rules of Origin (RoO)

Answer 44

describe the local processing requirements necessary for a good to be considered as being of local origin and hence qualify for preferential market access under a given preferential trade agreement.