Begrippen International Economics

Merchandise trade: Trade in physical goods: manufactures, agricultural products and fuels and mining products.
Commercial services trade: Cross-border trade in services such as transport, travel, finance, insurance and business services.
Digitally delivered services: Services supplied across borders through computer networks, such as software, IT and consulting delivered online.
Re-exports: Imported goods that are exported again without substantial transformation; important for hubs such as Hong Kong and Singapore.
Trade balance: Exports minus imports of a country; positive is a surplus, negative a deficit.
Openness: Trade (exports plus imports) as a percentage of GDP; a measure of how important trade is for an economy.
Foreign direct investment (FDI): Investment that gives a firm a lasting interest and control in an enterprise in another country, such as building or acquiring a plant abroad.
Bound tariff: The maximum tariff rate a WTO member has committed not to exceed on a product.
MFN applied tariff: The tariff actually charged on imports from all WTO members that have no preferential agreement with the importer.
Tariff water: The gap between a country's bound tariff and its applied tariff; room to raise tariffs without breaking WTO rules.
EMDEs: Emerging market and developing economies, as opposed to advanced economies (AEs); EM3 are China, India and Brazil.
Regional trade agreement: An agreement among a group of countries to reduce trade barriers among themselves, such as a free-trade area or customs union.
Doha round: The WTO negotiating round launched in 2001 in Doha, intended to rebalance trade rules in favour of developing countries.
Less than full reciprocity: The principle that developing countries may liberalise more slowly and less than rich countries in trade negotiations.
Common-pool resource: A resource such as a fish stock that is overused when access is unregulated, because each user ignores the cost imposed on others.
Unit labour requirement: The number of units of labour needed to produce one unit of a good; the inverse of labour productivity.
Marginal product of labour (MPL): The extra output from one more unit of labour; in the Ricardian model it is constant and equal to average productivity.
Absolute advantage: A country has an absolute advantage in a good if it can produce it with less labour (higher productivity) than another country.
Comparative advantage: A country has a comparative advantage in the good it can produce at a lower opportunity cost than other countries; it determines the pattern of trade.
Opportunity cost: The amount of the other good that must be given up to produce one more unit of a good; in the Ricardian model the ratio of unit labour requirements.
Autarky: A situation without international trade, in which each country consumes only what it produces.
Relative price: The price of one good in terms of another, such as P A/P M; in Ricardian autarky it equals the ratio of unit labour requirements.
Real wage: The wage divided by a price, measuring how many units of a good one unit of labour can buy.
Relative wage: The wage in one country divided by the wage in another; under free trade it lies between the countries' relative productivities in the two goods.
Production possibilities frontier (PPF): The combinations of goods a country can produce with its resources; a straight line in the Ricardian model.
Specialisation: Producing only (or mainly) the good in which a country has a comparative advantage.
Gains from trade: The increase in consumption possibilities and real income that countries obtain by trading instead of remaining in autarky.
World relative price: The common relative price of goods under free trade; it lies between the autarky relative prices.
Trade balance condition: The value of exports equals the value of imports, so imports equal the relative price times exports.
Terms of trade: The price of a country's exports relative to the price of its imports; an improvement raises the gains from trade.
Specific factor: A factor of production that can be used in only one sector, such as land in agriculture or capital in manufacturing.
Mobile factor: A factor that can move between sectors; in the specific factors model this is labour.
Diminishing marginal product: Each additional worker adds less output than the previous one because the specific factor in the sector is fixed.
Value of the marginal product of labour (VMPL): The price of a good times the marginal product of labour; the value added by the last worker.
Labour demand curve: The relation between the wage and the quantity of labour a sector demands; in the SF model it is the VMPL curve.
Exportable: The good a country exports under free trade, in which it has a comparative advantage.
Importable: The good a country imports under free trade; its domestic producers are import-competing.
Rental on land: The income earned by landowners, equal to the value of output minus the wage bill in agriculture.
Return to capital: The income earned by capitalists, equal to the value of output minus the wage bill in manufacturing.
Winners and losers from trade: Trade raises the real income of the factor specific to the export sector and lowers that of the factor specific to the import-competing sector.
Nominal wage: The wage measured in money.
International factor movements: Movements of factors of production across borders: labour through migration and capital through foreign direct investment or lending.
Migration: Movement of workers from one country to another; in the SF model it increases the labour supply of the host country.
Immigration surplus: The net gain in the income of the host country's original residents from immigration, equal to two triangles (Γ + H) in the SF diagram.
Full employment: All workers who want to work are employed; in the migration model it is achieved by a flexible wage.
Perfect substitutes (labour): Immigrants and domestic workers with identical skills, who compete for the same jobs and earn the same wage.
Small economy: An economy too small to affect world prices; its goods prices are taken as given.
Host country: The country that receives the migrants.
Source country: The country from which the migrants leave.
Trade policy: Government measures that affect the domestic prices and quantities of tradable goods and, if possible, their world prices.
Import tariff: A tax on imports, either per unit (specific) or as a percentage of value (ad valorem).
Import quota: A limit on the quantity of a good that may be imported.
Small open economy (SOE): An economy that cannot affect world prices, and hence its terms of trade, through its policies.
Large open economy (LOE): An economy whose policies affect world prices and its terms of trade.
GATT: General Agreement on Tariffs and Trade (1947), the legal framework for reducing trade barriers; continued by the WTO since 1995.
World Trade Organization (WTO): The international organisation, since 1995, that administers the rules of the multilateral trading system.
Most-favoured-nation (MFN) principle: The rule that a country must apply the same trade barriers to all WTO members (GATT Article I).
Safeguard provision (escape clause): GATT Article XIX, allowing temporary tariff increases when imports hurt domestic producers.
Free-trade area: Countries remove trade barriers among themselves but keep their own tariffs against third countries.
Customs union: A free-trade area with a common external tariff.
Common market: A customs union with free mobility of labour and capital.
Economic union: A common market with coordination of fiscal, monetary and social policies.
Monetary union: An economic union with a single common currency.
RCEP: Regional Comprehensive Economic Partnership (2020) of ASEAN plus Australia, China, Japan, New Zealand and South Korea; the largest regional trade agreement.
Consumer surplus: The area below the demand curve and above the price: what consumers are willing to pay minus what they pay.
Producer surplus: The area above the supply curve and below the price: the return to the fixed factors in the industry.
Deadweight loss: A welfare loss not offset by a gain elsewhere; for a tariff the production loss plus the consumption loss.
Production loss: The part of the deadweight loss due to producing extra units at a marginal cost above the world price.
Consumption loss: The part of the deadweight loss due to consumers no longer buying units they valued above the world price.
Foreign export supply curve: The difference between foreign supply and foreign demand at each price; upward sloping for a large importer.
Terms-of-trade gain: The gain to a large importer when its tariff lowers the price charged by foreign exporters (area e).
Optimal tariff: The tariff that maximises the importing country's welfare; zero for a small country, 1/E* X for a large one.
Prohibitive tariff: A tariff high enough to eliminate all imports; welfare returns to the no-trade level.
Equivalent import tariff: The tariff that would give the same domestic price and import quantity as a given quota.
Quota rents: The difference between the domestic and world price times the quota quantity, earned by whoever holds the import rights.
Quota licences: Permits to import a quantity under a quota system.
Rent seeking: Unproductive activities (overproduction, bribery, lobbying) undertaken to obtain quota licences and their rents.
Voluntary export restraint (VER): A quota administered by the exporting country, so that foreign producers earn the quota rents; also called a voluntary restraint agreement (VRA).
Multifibre Arrangement (MFA): The worldwide system of quotas on textile and apparel imports, abolished on 1 January 2005.
Tariff-rate quota (TRQ): A tariff that applies only to imports above a given quota amount; common in agriculture.
Local content requirement: A rule requiring that a share of a product be produced or sourced domestically.
Administrative trade policies: Bureaucratic rules (fees, procedures, technical standards) that make it difficult for imports to enter.
Dumping: Selling an export below its home-market price or below its average cost of production.
Predatory dumping: Dumping aimed at driving foreign competitors out of the market in order to raise prices later.
Antidumping duty: A tariff (countervailing duty) levied on dumped imports to protect domestic producers.
Infant industry argument: The argument that a new industry should be protected temporarily until learning makes it internationally competitive.
Strategic trade policy: Government support that helps domestic firms gain first-mover advantages or overcome entry barriers in imperfectly competitive industries.
Export subsidy: A government payment to firms for each unit exported, either a fixed amount or a share of the sales price.
Common Agricultural Policy (CAP): The EU system of agricultural support, including export subsidies and price supports.
Indirect subsidies: Assistance to exporters that is not a direct payment per unit exported, such as subsidised credit; to be eliminated in parallel under the Hong Kong agreement.
Domestic farm supports: Any assistance given to farmers, even if not directly tied to exports.
Special products: Products that developing countries may shield from full tariff cuts for food security, livelihood security or rural development.
Terms-of-trade loss: The loss to a large exporter when its export subsidy lowers the world price of its exports (area e).
Production subsidy: A subsidy paid on every unit produced, whether sold at home or exported; it does not change the consumer price in a small country.
Targeting principle: To achieve an objective, use the policy instrument that achieves it most directly.
Trade adjustment assistance: Direct help to workers and firms hurt by import competition, preferred over tariffs by the targeting principle.
Spillover (positive externality): A benefit of an activity that accrues to other firms, used to justify subsidies to high-technology industries.
Duopoly: A market with two firms, such as Boeing and Airbus in large commercial aircraft.
Game theory: The modelling of strategic interactions between players who choose actions to maximise their returns.
Payoff matrix: A table showing the profits of each player for every combination of actions.
Nash equilibrium: A situation in which each player's action is the best response to the action of the other player.
Multiple equilibria: A game with more than one Nash equilibrium; an outside force such as a first-mover advantage decides which occurs.
First-mover advantage: The advantage of a firm that decides first, allowing it to capture the market in a game with multiple equilibria.
Strategic export subsidy: A subsidy that changes the payoffs of a game so that the domestic firm gains a profitable position, ideally by inducing the rival to exit.
Exchange rate: The price of one unit of foreign currency in terms of domestic currency, E domestic/foreign.
American and European terms: Two ways of quoting the same rate: dollars per euro (American terms) and euros per dollar (European terms), which are reciprocals.
Appreciation: A rise in the value of a currency: it buys more of another currency.
Depreciation: A fall in the value of a currency: it buys less of another currency.
Bilateral exchange rate: The exchange rate between two currencies.
Nominal effective exchange rate (NEER): A trade-weighted average of a currency's bilateral exchange rates, measuring its average value against trading partners.
Fixed (pegged) exchange rate: An exchange rate kept constant or within a narrow band against a base currency, through government intervention.
Floating (flexible) exchange rate: An exchange rate that fluctuates freely without government attempts to peg it.
Managed float: A regime in which the authorities limit large exchange rate movements without committing to a peg.
Crawl: A regime in which the exchange rate follows a preset trend.
Band: A regime in which the exchange rate may move within a range around a central rate, such as plus or minus 2% for the Danish krone.
Currency board: A very hard peg with special rules requiring the monetary base to be backed by foreign reserves.
Currency union: A group of countries sharing a common currency, usually with a joint monetary policy, such as the eurozone.
Dollarization: Unilateral adoption of another country's currency.
Over-the-counter (OTC) trading: Trading bilaterally between two parties rather than on an organised exchange.
Spot contract: An agreement to exchange currencies for immediate delivery at the spot exchange rate.
Spread: The difference between the buying and selling price of a currency; a transaction cost.
Derivative: A contract whose price derives from the spot rate, such as a forward, swap, future or option.
Forward contract: An agreement to exchange currencies at a set price on a future date; not tradable to third parties.
Swap: A spot trade combined with a reverse forward trade in one contract.
Futures contract: An agreement to exchange currencies at a set price in the future that can be traded on exchanges.
Option: The right but not the obligation to buy (call) or sell (put) currency at a set price in the future.
Hedging: Using financial contracts to reduce risk.
Speculation: Taking on risk in the hope of profiting from price movements.
Capital controls: Government restrictions on cross-border financial transactions and currency trading.
Black market: Illegal currency trading at rates different from the official rate.
Intervention: Central bank purchases or sales of currency to influence the exchange rate.
Arbitrage: A trading strategy that exploits price differences to make a riskless profit.
No-arbitrage condition: The equilibrium condition that no riskless profit opportunities remain.
Cross rate: An exchange rate between two currencies derived from their rates against a third currency.
Vehicle currency: A third currency through which two currencies are traded; mostly the US dollar.
Exchange rate risk: The risk that the value of an asset changes because of changes in the exchange rate.
Forward exchange rate: The price of a forward contract; the rate agreed today for a future exchange.
Covered interest parity (CIP): The no-arbitrage condition that returns on deposits in two currencies are equal when covered with a forward contract.
Uncovered interest parity (UIP): The condition that expected returns on deposits in two currencies are equal when converted at the expected future spot rate.
Risk neutrality: Indifference to risk: an investor cares only about expected returns.
Forward premium: F/E minus 1: how much more (or less) the forward costs than the spot.
Expected rate of depreciation: E e/E minus 1: the expected percentage change of the home currency's price of foreign currency.
Rate of return, risk and liquidity: The three attributes investors weigh when choosing assets: higher return, lower risk and higher liquidity are preferred.
Law of one price (LOOP): Without trade frictions and with flexible prices, identical goods sell for the same price in different locations when expressed in a common currency.
Integrated market: Markets in different locations between which goods move freely so that prices are equalised.
Purchasing power parity (PPP): The theory that the price levels of two countries are equal when expressed in a common currency; the macro counterpart of LOOP.
Absolute PPP: The exchange rate equals the ratio of price levels, E = P US/P EUR, so the real exchange rate equals 1.
Relative PPP: The rate of depreciation of the nominal exchange rate equals the inflation differential between two countries.
Real exchange rate: The relative price of the foreign basket in terms of the home basket, q = E P foreign/P home.
Real depreciation: A rise in the real exchange rate: more home goods are needed to buy foreign goods.
Real appreciation: A fall in the real exchange rate: fewer home goods are needed to buy foreign goods.
Overvalued currency: A currency whose country's goods are more expensive than foreign goods in a common currency (real exchange rate away from PPP).
Undervalued currency: A currency whose country's goods are cheaper than foreign goods in a common currency.
Inflation: The rate of change of the price level.
Speed of convergence: The rate at which deviations from PPP die out, about 15% per year.
Half-life: The time needed for half of a deviation to disappear; about four years for PPP deviations.
Nontraded goods: Goods and services that cannot be traded internationally, which prevents price equalisation.
Big Mac Index: The Economist's measure of currency over- or undervaluation based on the dollar price of a Big Mac in different countries.
Store of value: The function of money that allows purchasing power to be carried into the future.
Unit of account: The function of money as the unit in which prices are quoted.
Medium of exchange: The function of money as the means of payment that avoids barter.
Monetary aggregates: Measures of money such as currency, M0 (monetary base), M1 and M2.
Central bank: The institution that controls the money supply and conducts monetary policy.
Quantity theory of money: The theory that money demand is proportional to nominal income, M d = L P Y.
Real money balances: The money supply divided by the price level, M/P: the purchasing power of money.
Monetary approach to exchange rates: The long-run theory combining PPP with the monetary theory of the price level to explain the exchange rate.
Money supply growth rate: The percentage change in the money supply, μ.
Hyperinflation: A sustained inflation of more than 50% per month.
Redenomination: Replacing an old currency unit with a new one equal to 10 to the power N old units.
Real money demand function: L(i) Y: the demand for real balances, decreasing in the nominal interest rate and increasing in real income.
Fisher effect: A rise in expected inflation leads to an equal rise in the nominal interest rate; interest differentials equal expected inflation differentials.
Real interest rate: The nominal interest rate minus inflation: the inflation-adjusted return.
Real interest parity: The condition that expected real interest rates are equal across countries when PPP and UIP hold.
World real interest rate: The common long-run expected real interest rate r* shared by all countries.
Nominal anchor: A long-run constraint on monetary policy that keeps inflation within bounds: an exchange rate, money supply or inflation target.
Monetary regime: The policy framework combining long-run nominal anchoring with short-run flexibility.
Exchange rate target: A nominal anchor that fixes the exchange rate or its rate of change, tying home inflation to foreign inflation.
Money supply target: A nominal anchor that fixes the growth rate of the money supply.
Inflation target plus interest rate policy: A nominal anchor that sets interest rates to keep expected inflation at a target, relying on the Fisher effect.
Central-bank independence: Freedom of the central bank from political pressure, which makes nominal anchors more credible.
Increasing returns to scale: A technology where average cost falls as output rises, for example because of a fixed cost F with constant marginal cost c (AC = F/Q + c).
Internal economies of scale: Cost per unit falls with the size of the firm itself. Leads to imperfect competition (monopoly, oligopoly, monopolistic competition).
External economies of scale: Cost per unit falls with the size of the whole industry (clusters, knowledge spillovers), so the industry can remain perfectly competitive.
Imperfect competition: A market structure in which firms have some control over their price because they face downward-sloping demand curves.
Marginal revenue (MR): The extra revenue from selling one more unit. Below price for a firm with downward-sloping demand; with P = a minus bQ, MR = a minus 2bQ.
Duopoly: A market with two firms. Each firm's demand curve is flatter than market demand because a price cut takes customers from the rival.
Monopolistic competition: Many firms, each selling a differentiated variety, with increasing returns and free entry. Firms set MR = MC and long-run profits are zero.
Product differentiation: Goods in an industry are similar but not identical (car models, beer brands), so each firm has a small monopoly over its own variety.
Tangency equilibrium: Long-run equilibrium of monopolistic competition where the firm's demand curve just touches the AC curve: P = AC and MR = MC, zero profit.
Excess capacity: In long-run monopolistic competition firms produce on the falling part of AC, below the output of minimum AC.
Gains from variety: The welfare gain to consumers from a wider choice of product varieties after trade opens.
Adjustment costs: Short-run costs of trade liberalization such as unemployment and firm closures when less efficient firms exit.
Intra-industry trade: Two-way trade: a country exports and imports goods from the same industry (Germany exports and imports cars).
Inter-industry trade: Trade in which a country exports goods of one industry and imports goods of another, explained by comparative advantage.
Grubel-Lloyd index: Index of intra-industry trade = min(X, M)/[(X + M)/2], between 0 (one-way trade) and 1 (exports equal imports).
Gravity equation: Trade between two countries = B × GDPi × GDPj/distn: larger and closer countries trade more.
Border effect: Trade across a national border is much lower than predicted by size and distance; McCallum found Canadian provinces traded 22 times more with each other than with US states.
NAFTA: North American Free Trade Agreement (1994) between Canada, Mexico and the US, replaced by the USMCA in 2020; used by FT to test the monopolistic competition model.
Maquiladoras: Mexican plants, mostly near the US border, that import inputs and assemble goods for export to the US; productivity and wages there rose after NAFTA.
Trade adjustment assistance (TAA): US program giving extra unemployment benefits, retraining and support to workers who lose jobs due to import competition.
Dumping: Selling a product abroad at a price below the home price (or below average cost); a form of international price discrimination.
Antidumping duty: A tariff on dumped imports equal to the dumping margin, allowed under WTO rules if dumping causes material injury to the domestic industry.
Gross national expenditure (GNE): Total spending by residents on final goods and services: GNE = C + I + G.
Gross domestic product (GDP): Value of final goods and services produced within a country's borders: GDP = GNE + TB.
Trade balance (TB): Exports minus imports of goods and services, TB = EX minus IM; the gap between GDP and GNE.
Net factor income from abroad (NFIA): Factor income (interest, dividends, profits, wages) received from abroad minus factor income paid to foreigners.
Gross national income (GNI): Income earned by residents wherever their factors are located: GNI = GDP + NFIA (formerly called GNP).
Net unilateral transfers (NUT): Gifts received from abroad (aid, remittances) minus gifts given; not payment for goods or factor services.
Gross national disposable income (GNDI): Income residents have available to spend: Y = GNI + NUT = C + I + G + CA.
Current account (CA): CA = TB + NFIA + NUT = Y minus GNE = S minus I.
National saving: S = Y minus C minus G, the sum of private saving Sp = Y minus T minus C and government saving Sg = T minus G.
Twin deficits: The idea that budget deficits cause current account deficits, from CA = (Sp minus I) + (T minus G); one for one only if Sp and I are fixed.
Balance of payments (BOP): Record of all transactions between residents and the rest of the world, using double-entry bookkeeping: CA + FA + KA = 0 (FT convention).
Financial account (FA): Net trade in financial assets: exports of assets (capital inflows) minus imports of assets (capital outflows), including official reserves.
Capital account (KA): Capital transfers (such as debt forgiveness, migrants' assets) and trade in nonproduced, nonfinancial assets; usually small.
Double-entry bookkeeping: Every international transaction is recorded twice, as a credit and an equal debit, so the BOP accounts sum to zero.
Official settlements balance: The change in a central bank's official reserve holdings; part of the financial account.
Statistical discrepancy: Errors and omissions entry that makes the measured BOP add up to zero because recorded credits and debits do not match exactly.
External wealth (NIIP): W = A minus L, home's foreign assets minus foreign-owned home assets; negative for a net debtor.
Valuation effects: Capital gains or losses on existing external assets and liabilities from asset price or exchange rate changes; ΔW = CA + KA + capital gains.
Exorbitant privilege: The US ability to borrow cheaply in dollars while earning higher returns on foreign assets, keeping NFIA positive despite large net debt.
Original sin: The inability of many emerging economies to borrow abroad in their own currency, so a depreciation raises the burden of foreign debt.
Remittances: Money sent home by migrant workers; recorded as unilateral transfers and large relative to GDP for some poor countries.
Asset approach: Theory of the short-run exchange rate that combines UIP (FX market) with money market equilibrium, treating the exchange rate as an asset price with sticky goods prices.
Sticky prices: The assumption that the price level does not adjust immediately to monetary shocks, so in the short run P is fixed and real and nominal exchange rates move together.
Domestic return: The return on home currency deposits measured in home currency: the home interest rate i. Vertical line in the FX diagram.
Foreign return: The expected home-currency return on foreign deposits: i* + (E e minus E)/E. Downward sloping in the FX diagram.
Forex market equilibrium: The spot rate at which the domestic return equals the foreign return, so UIP holds and investors are indifferent between currencies.
Expected depreciation: (E e minus E)/E: the expected percentage rise in the price of foreign currency, i.e. the expected loss in value of the home currency.
Real money demand: L(i) Y: the demand for real balances, proportional to real income and decreasing in the nominal interest rate.
Liquidity function L(i): Real money demand per unit of real income; it falls when the interest rate (the opportunity cost of holding money) rises.
Money market equilibrium: M/P = L(i)Y. In the short run, with P and Y fixed, the interest rate adjusts to clear the market.
Temporary shock: A policy change that is reversed later, so it does not affect long-run expectations: E e is unchanged.
Permanent shock: A policy change that lasts, so it changes the long-run price level and exchange rate and therefore E e today.
Overshooting: The short-run change in the exchange rate after a monetary shock is larger than the long-run change (Dornbusch 1976); caused by sticky prices plus UIP.
Money neutrality (long run): A permanent change in M changes P and E in the same proportion in the long run and leaves real variables and the interest rate unchanged.
Peg (fixed exchange rate): A regime in which the central bank fixes E at a central value; if credible, E e = E and i = i*.
Base country: The country whose currency a pegging country fixes to, and whose interest rate the pegging country must follow.
Endogenous money supply: Under a credible peg with capital mobility, M is determined by money demand at i = i*, so the central bank cannot choose it.
Monetary policy autonomy: The ability of a central bank to set its interest rate (or money supply) to pursue domestic goals.
Capital mobility: The ability of investors to move funds freely across borders, which makes UIP hold.
Policy trilemma: A country can have at most two of: a fixed exchange rate, capital mobility and monetary policy autonomy.
Capital controls: Restrictions on cross-border financial flows; they break UIP and allow a fixed exchange rate together with monetary autonomy.
Aggregate demand (open economy): D = C(Y minus T) + I(i) + G + TB(EP*/P, Y minus T, Y* minus T*): total spending on home output.
Marginal propensity to consume (MPC): The fraction of an extra unit of disposable income spent on consumption.
Marginal propensity to import (MPM): The fraction of an extra unit of disposable income spent on imports; a leakage out of home demand.
Expenditure switching: The shift of spending between home and foreign goods when the real exchange rate changes.
Marshall-Lerner condition: The condition that the sum of export and import demand elasticities exceeds 1, so a real depreciation improves the trade balance.
Keynesian cross: Diagram with demand D against output Y; goods market equilibrium is where the demand line crosses the 45-degree line D = Y.
Open economy multiplier: 1/(1 minus MPC + MPM): the change in equilibrium output per unit change in autonomous demand, holding i and E fixed.
IS curve: Combinations of Y and i with goods and forex market equilibrium; downward sloping because lower i raises investment and depreciates the currency.
LM curve: Combinations of Y and i with money market equilibrium M/P = L(i)Y; upward sloping.
IS-LM-FX model: The short-run open economy model combining goods market (IS), money market (LM) and forex market (UIP) equilibrium.
Crowding out: The reduction in investment (through higher i) and in net exports (through appreciation) that partly offsets a fiscal expansion.
Stabilization policy: Use of monetary or fiscal policy to offset shocks and keep output near its full-employment level.
Accommodation (under a peg): The central bank adjusting the money supply to keep i = i*, which makes fiscal policy fully effective.
Mundell-Fleming result: With capital mobility, monetary policy is effective under floating and ineffective under fixed rates; fiscal policy is more effective under fixed rates.
Exchange rate pass-through: The fraction of an exchange rate change that is passed into the prices of traded goods; incomplete pass-through weakens expenditure switching.
J curve: The pattern in which the trade balance first worsens after a depreciation (prices adjust before quantities) and then improves.
Liquidity trap: Situation with the nominal interest rate at zero, where extra money cannot lower i further, weakening monetary policy.
Internal devaluation: Regaining competitiveness under a fixed exchange rate by lowering domestic wages and prices instead of depreciating, as Latvia did after 2008.
DD-AA model: KOM's version: DD (goods market, upward sloping in Y-E space) and AA (asset markets, downward sloping); same results as IS-LM-FX.
Twin deficits: A budget deficit together with a trade deficit, as in the US in the early 1980s when fiscal expansion raised i and appreciated the dollar.
Exchange rate regime: The rules a country follows for its exchange rate, ranging from a hard peg or currency union to a free float, with intermediate forms (crawling peg, band, managed float).
Economic integration (FT): The extent of trade, capital and labor flows between home and the base country. The benefit of fixing rises with it.
Symmetric shock: A shock that hits home and the base country in the same way, so the same monetary policy suits both. Makes a peg cheap.
Asymmetric shock: A shock that hits home but not the base country (or both differently). Under a peg home cannot respond with its own interest rate.
Stabilization cost: The output loss from giving up monetary policy autonomy under a peg when shocks are asymmetric.
FIX line: The downward sloping line in the symmetry-integration diagram along which the benefit of fixing equals its cost. Fix above it, float below it.
Nominal anchor: A target (such as a peg to a low-inflation currency) that ties down inflation expectations. With PPP and a credible peg, π = π*.
Seigniorage: Government revenue from printing money. A peg limits it, which may impose fiscal discipline.
Original sin: The inability of a country to borrow internationally in its own currency (Eichengreen and Hausmann).
Currency mismatch: A situation in which liabilities are in foreign currency while assets or income are in home currency, so depreciation reduces net worth.
Fear of floating: The reluctance of officially floating emerging markets to let their currencies move, mainly because of foreign currency debt (Calvo and Reinhart).
Reserve currency system: A fixed rate system in which one center country sets monetary policy and the others peg to its currency and hold it as reserves. Asymmetric.
N - 1 problem: With N currencies only N - 1 exchange rates are independent, leaving one degree of freedom that must be assigned to a center country or a commodity like gold.
Beggar-thy-neighbor: A policy (such as a devaluation) that raises home output by shifting demand away from trading partners.
Gold standard: A system in which central banks fix the price of their currency in gold, which fixes all mutual exchange rates. Symmetric; classical period about 1870 to 1914.
Mint parity: The exchange rate implied by two currencies' gold prices, for example $20.67 / £4.25 = $4.86 per pound.
Price-specie-flow mechanism: Hume's automatic adjustment under gold: a deficit country loses gold, its prices fall, its competitiveness improves and the deficit closes.
Rules of the game: The informal gold standard rule that central banks should reinforce gold flows (tighten when losing gold, ease when gaining) rather than sterilize them.
Bretton Woods system: The 1944 to 1973 gold exchange standard: dollar fixed at $35 per ounce, other currencies pegged to the dollar, adjustable pegs, capital controls, and the IMF.
Triffin dilemma: Under Bretton Woods, growing world demand for dollar reserves increased foreign dollar holdings beyond US gold, undermining the credibility of convertibility.
Trilemma: A country can have at most two of: fixed exchange rate, full capital mobility, monetary policy autonomy.
Exchange rate crisis: A large, sudden depreciation that ends a fixed or tightly managed exchange rate (for example 15% or more after a stable period).
Twin and triple crises: Exchange rate crises occurring together with a banking crisis (twin) or with both a banking crisis and a sovereign default (triple).
Sudden stop: An abrupt halt or reversal of capital inflows, forcing a rapid current account adjustment.
Central bank balance sheet: Assets are reserves R and domestic credit B; liabilities are the money base M, so M = B + R.
Domestic credit (B): The central bank's holdings of domestic assets, such as government bonds and loans to banks.
Foreign reserves (R): The central bank's holdings of foreign currency assets, used to buy home currency when defending a peg.
Backing ratio: R/M, the share of the money supply backed by foreign reserves.
Currency board: A peg with a legal backing ratio of at least 100%, so all home money is convertible into reserves; examples are Hong Kong and Argentina 1991 to 2001.
Lender of last resort: A central bank that lends to banks in a panic. Under a peg such lending raises B and drains reserves.
Currency premium: The extra interest home assets must pay because investors expect a devaluation.
Default risk premium: The extra interest investors demand because of the risk the borrower will not repay.
Speculative attack: Massive sales of home currency for reserves in expectation of a devaluation, exhausting the central bank's reserves.
First-generation crisis model: Crises caused by inconsistent fundamentals (domestic credit growth to finance deficits); the attack is predictable and occurs before reserves would run out (Krugman, Flood and Garber).
Shadow exchange rate: The floating rate that would prevail if the peg were abandoned at a given moment; the first-generation attack occurs when it equals the peg.
Second-generation crisis model: Crises in which the government weighs the costs and benefits of the peg, and costs depend on expectations, allowing self-fulfilling attacks (Obstfeld).
Multiple equilibria: In the second-generation model, the situation in which both keeping the peg and abandoning it are consistent with rational expectations.
Self-fulfilling crisis: A crisis that happens because markets expect it: expected devaluation raises interest rates, making the peg too costly to keep.
Contagion: The spread of a crisis from one country to others via trade links, financial links, wake-up calls or shifts in beliefs.
IMF conditionality: The policy reforms a borrowing country must carry out to receive IMF loans.
Moral hazard: The tendency of governments and lenders to take more risk when they expect to be rescued.
Corralito: The freeze on bank deposit withdrawals in Argentina in December 2001, just before the collapse of the currency board.
Labour requirement (unit labour requirement): The number of units of labour needed to produce one unit of a good; the inverse of labour productivity. In the lecture: Greece 2 for A and 4 for M, Denmark 1 for each.
Autarky relative price: The price of one good in terms of the other without trade; in the Ricardian model equal to the ratio of labour requirements. Greece 0.5, Denmark 1 for P^A/P^M.
Real wage (Ricardian model): The wage divided by the price of a good: the units of that good one unit of labour can buy. In autarky it equals labour productivity in that good.
Balanced trade condition: The value of exports equals the value of imports: P^A × X^A = P^M × IM^M, so imports = relative price × exports.
Relative wage range: The band within which W^G/W^D must lie so that each country can produce one good competitively; its bounds are the productivity ratios of the two goods (1/4 and 1/2 in the lecture).