Finance Keywords and Phrases Financial Keywords and Phrases

A Collection of Financial Keywords and Phrases


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A Collection of Economics Keywords and Phrases
A Collection of Keywords and Phrases for Decision Making


CCCN: Customs Cooperation Council Nomenclature
CPI: Consumer price index
EC: European Communities
ECU: European Currency Unit
EEC: European Economic Community
EU: European Union
LDC: Least Developed Country
FDI: Foreign Direct Investment
FIR: Factor intensity reversal
FTA: Free trade area
GATT: General Agreement on Tariffs and Trade
GDP: Gross domestic product
GMO: Genetically modified organism
ICA: International commodity agreement
ITA: International Trade Administration
ITC: International Trade Commission
NAFTA: North American Free Trade Agreement
NGO: Non-governmental organization
NIC: Newly Industrializing Country
NTB: Nontariff barrier
MNC: Multinational Corporation
MNE: Multinational Enterprise
OECD: Organization for Economic Co-operation and Development
SDR: Special Drawing Right
TRIP: Trade-Related Intellectual Property Rights
UNCTAD: United Nations Conference on Trade and Development
VER: Voluntary export restraint
WTO: World Trade Organization

Abandonment value: The value of a project if the project's assets were sold externally; or alternatively, its opportunity value if the assets were employed elsewhere in the firm.
ABC method of inventory control: Method that controls expensive inventory items more closely than less expensive items.
Absolute advantage: The ability to produce a good at lower cost, in terms of labor, than another country. An absolute advantage exists when a nation or other economic region is able to produce a good or service more efficiently than a second nation or region.
Absolute-priority rule: The rule in bankruptcy or reorganization that claims of a set of claim holders must be paid, or settled, in full before the next, junior, set of claim holders may be paid anything.
Absorption and balance of trade: Total demand for goods and services by all residents (consumers, producers, and government) of a country (as opposed to total demand for that country's output). The balance of trade is equal to income minus absorption.
Accelerated depreciation: Methods of depreciation that write off the cost of a capital asset faster than under straight-line depreciation.
Acceptance: A time draft that is accepted by the drawee. Accepting a draft means writing accepted across its face, followed by an authorized person’s signature and the date. The party accepting a draft incurs the obligation to pay it at maturity.
Accession: The process of adding a country to an international agreement, such as the GATT (General Agreement on Tariffs and Trade), WTO (World Trade Organization), EU (European Communities), or NAFTA (North American Free Trade Agreement).
Accommodating transaction: In the balance of payments, a transaction that is a result of actions taken officially to manage international payments; in contrast with autonomous transaction. Thus official reserve transactions are accommodating, as may be short-term capital flows that respond to expectations of intervention.
Accounting (translation) exposure: Changes in a corporation’s financial statements as a result of changes in currency values. The change in the value of a firm’s foreign-currency-denominated accounts due to change in exchange rates.
Accounts receivable: Amounts of money owed to a firm by customers who have bought goods or services on credit. A current asset, the accounts receivable account is also called receivables.
Accrued expenses: Amounts owed but not yet paid for wages, taxes, interest, and dividends. The accrued expenses account is a short-term liability.
Acid-test (quick) ratio: Current assets less inventories divided by current liabilities. It shows a firm's ability to meet current liabilities with its most liquid (quick) assets.
Acquisition of assets: In an acquisition of assets, one firm acquires the assets of another company. None of the liabilities supporting that asset are transferred to the purchaser.
Acquisition of stock: In an acquisition of stock, one firm buys an equity interest in another.
Acquisition premium: In a merger or acquisition, the difference between the purchase price and the pre-acquisition value of the target firm.
Act of State Doctrine: This doctrine says that a nation is sovereign within its own borders and its domestic actions may not be questioned in the courts of another nation.
Active fund management: An investment approach that actively shifts funds either between asset classes (i.e. asset allocation) or between individual securities (i.e. security selection).
Active income: In the U.S. tax code, income from an active business as opposed to passive investment income.
Activity based cost (i.e. ABC) : An accounting method that allocates costs to specific products based on breakdowns of cost drivers.
Activity ratios: Ratios that measure how effectively the firm is using its assets.
Ad valorem tariff: A tariff assessed as a percentage of the value of an import.
Additional paid-in capital: Funds received by a company in a sale of common stock that are in excess of the par or stated value of the stock.
Adjustable peg: An exchange rate that is pegged, but for which it is understood that the par value will be changed occasionally. This system can be subject to extreme speculative attack and financial crisis, since speculators may easily anticipate these changes.
Adjusted beta: An estimate of a security's future beta that involves modifying the security's historical (measured) beta owing to the assumption that the security's beta has a tendency to move over time toward the average beta for the market or the company's industry.
Adjusted for inflation: Corrected for price changes to yield an equivalent in terms of goods and services. The adjustment divides nominal amounts for different years by price indices for those years -- e.g. the CPI (Consumer price index) or the implicit price deflator -- and multiplies by 100. This converts to real values, i.e. valued at the prices of the base year for the price index.
Adjusted present value (APV): The sum of the discounted value of a project's operating cash flows (assuming equity financing) plus the value of any tax-shield benefits of interest associated with the project's financing minus any flotation costs. It is a valuation method that separately identifies the value of an un-levered project from the value of financing side effects. It is the net present value of a project using the all-equity rate as a discount rate. The effects of financing are incorporated in separate terms.
Administered price: A price for a good or service that is set and maintained by government, usually requiring accompanying restrictions on trade if the administered price differs from the world price.
Administered protection: Protection, tariff or NTB (Nontariff barrier), resulting from the application of any one of several statutes that respond to specified market circumstances or events, usually as determined by an administrative agency. Several such statutes are permitted under the GATT (General Agreement on Tariffs and Trade), including anti-dumping duties, countervailing duties, and safeguards protection.
Administrative agency: A unit of government charged with the administration of particular laws. In the United States, those most important for administering laws related to international trade are the ITC (International Trade Commission) and ITA (International Trade Administration).
Administrative pricing rule: IRS rules used to allocate income on export sales to a foreign sales corporation.
Advance deposit requirement: A requirement that some proportion of the value of imports, or of import duties, be deposited prior to payment, without competitive interest being paid.
Advance payment: Trading method in which the buyer pays for the goods before they are sent out , method is used when buyer is of unknown credit worthiness.
Advance pricing agreement (APA): Procedure that allows the multinational firm, the IRS, and the foreign tax authority to work out, in advance, a method to calculate transfer prices.
Adventure: It is also called marine adventure. It is a term of art in the marine insurance business. All insured cargo owners and every shipper on that vessel are part of the adventure.
Adverse Incentives: moral hazard.
Adverse selection: The possibility that only the highest-risk customers will seek insurance.
Adverse terms of trade: A terms of trade that is considered unfavorable relative to some benchmark or to past experience. Developing countries specialized in primary products are sometimes said to suffer from adverse or declining terms of trade.
Advising bank: Bank, usually in the country of the seller, whose primary function is to authenticate the letter of credit and advise it to the seller.
Advisory Capacity: Used to indicate that a shipper's agent or representative is not empowered to make definitive changes or adjustments without approval of the group or individual represented.
African Development Bank (AFDB): The AFDB makes or guarantees loans and provides technical assistance to member states for various development projects.
Agency (theory): A branch of economics relating to the behavior of principals (such as owners) and their agents (such as managers).
Agency costs: Costs that stem from conflicts between managers and stockholders and between stockholders and bondholders. The costs incurred to ensure that agents act in the best interest of the principal. Costs associated with monitoring management to ensure that it behaves in ways consistent with the firm's contractual agreements with creditors and shareholders.
Agent: In Principal-Agent Theory, the person whose job it is to act to the benefit of someone else (the principal), but who may require some incentive to do so. Agent(s) are the Individual(s) authorized by another person, called the principal, to act in the latter's behalf.
Agglomeration economy: Any benefit that accrues to economic agents as a result of having large numbers of other agents geographically close to them, thus tending to lead to agglomeration. This is a basic feature of the New Economic Geography.
Aggregate demand: The total demand of all potential buyers of a commodity or service. It is the total demand for a country's output, including demands for consumption, investment, government purchases, and net exports.
Aggregate measurement of support: The measurement of subsidy to agriculture used by the WTO as the basis for commitments to reduce the subsidization of agricultural products. It includes the value of price supports and direct subsidies to specific products, as well as payments that are not product specific.
Aggregate supply: The total supply of a country's output, usually assumed to be an increasing function of its price level in the short run but independent of the price level in the long run.
Aggregation: The combining of two or more kinds of an economic entity into a single category. Data on international trade necessarily aggregate goods and services into manageable groups. For macroeconomic purposes, all goods and services are usually aggregated into just one.
Aging accounts receivable: The process of classifying accounts receivable by their age outstanding as of a given date.
Agricultural good: A good that is produced by agriculture. Contrasts with manufactured good.
Agriculture: Production that relies essentially on the growth and nurturing of plants and animals, especially for food, usually with land as an important input; farming. Contrasts with manufacturing.
All-Equity Rate: The discount rate that reflects only the business risks of a project and abstracts from the effects of financing. It is the beta associated with the un-leveraged cash flows of a project or company.
All-in Cost: The effective interest rate on a loan, calculated as the discount rate that equates the present value of the future interest and principal payments to the net proceeds received by the borrower; it is the internal rate of return on the loan. The percentage cost of a financing alternative, including any bank fees or placement fees.
Allocation: An assignment of economic resources to uses. Thus, in general equilibrium, an assignment of factors to industries producing goods and services, together with the assignment of resulting final goods and services to consumers, within a country or throughout the world economy. The question is to whether or not an allocation is efficient. A change from an allocation that is not efficient to one that is may be termed an increase in efficiency.
Allocational efficiency: The efficiency with which a market channels capital toward its most productive uses.
Allocation-of-income rules: In the U.S. tax code, these rules define how income and deductions are to be allocated between domestic-source and foreign-source income.
Alternative minimum tax (AMT): An alternative, separate tax calculation based on the taxpayer's regular taxable income, increased by certain tax benefits, collectively referred to as tax preference items. The taxpayer pays the larger of the regularly determined tax or the AMT.
American Depository Receipt (ADR): A certificate of ownership issued by a U.S. bank as a convenience to investors in lieu of the underlying foreign corporate shares it holds in custody. Contrast with European option.
American option: An option that can be exercised anytime until expiration. It is an option that can be exercised at any time up to the expiration date.
American shares: Shares of a foreign corporation issued directly to U.S. investors through a transfer agent in accordance with SEC regulations. Securities certificates issued in the United States by a transfer agent acting on behalf of the foreign issuer. The certificates represent claims to foreign equities.
American terms: Method of quoting currencies; it is expressed as the number of U.S. dollars per unit of foreign currency. It is a foreign exchange quotation that states the U.S. dollar price per foreign currency unit. Contrast with European terms.
Amortization schedule: A table showing the repayment schedule of interest and principal necessary to pay off a loan by maturity.
Amortization: The deduction of an expense in installments over a period of time, rather than all at once.
Amplitude: The extent of the up and down movements of a fluctuating economic variable; that is, the difference between the highest and lowest values of the variable.
Annuity factor: The term used to calculate the present value of the stream of level payments for a fixed period.
Annuity: A level stream of equal dollar payments that lasts for a fixed time. An example of an annuity is the coupon part of a bond with level annual payments. It is a series of equal payments or receipts occurring over a specified number of periods. In an ordinary annuity, payments or receipts occur at the end of each period; in an annuity due, payments or receipts occur at the beginning of each period.
Anti-dumping duty: Tariff levied on dumped imports. The threat of an anti-dumping duty can deter imports, even when it has not been used, and anti-dumping is therefore a form of non-tariff barrier. Anti-dumping suit is a complaint by a domestic producer that imports are being dumped, and the resulting investigation and, if dumping and injury are found, anti-dumping duty.
Anti-dumping laws: Laws that are enacted to prevent dumping-offering prices in the overseas market that is lower than that at which a product is sold in its home domestic market.
Apparel Clothing: The apparel sector is important for trade because, as a very labor intensive sector, it is a likely source of comparative advantage for developing countries.
Apparent consumption: Production plus imports minus exports, sometimes also adjusted for changes in inventories. The intention here is not to distinguish different uses for a good within the country, but only to infer the total that is used there for any purpose.
Applied tariff rate: The actual tariff rate in effect at a country's border.
Appreciation: An increase in a currency value relative to another currency in a floating exchange rate system. A rise in the value of a country's currency on the exchange market, relative either to a particular other currency or to a weighted average of other currencies. The currency is said to appreciate, i.e., revaluation. Opposite of depreciation.
Arab Fund for Economic and Social Development (AFESD): A multilateral Arab fund that actively searches for projects in Arab League countries and then assumes responsibility for project implementation.
Arbitrage pricing theory (APT): A theory where the price of an asset depends on multiple factors and arbitrage efficiency prevails.
Arbitrage: The purchase of securities or commodities on one market for immediate resale on another in order to profit from a price discrepancy. A combination of transactions designed to profit from an existing discrepancy among prices, exchange rates, and/or interest rates on different markets without risk of these changing. Simplest is simultaneous purchase and sale of the same thing in different markets, but more complex forms include triangular arbitrage and covered interest arbitrage. It is finding two assets that are essentially the same, buying the cheaper, and selling the more expensive. The process of purchasing and selling foreign exchange, stocks, bonds and other commodities in several markets intending to make profit from the difference in price.
Arm’s-Length Price: Price at which a willing buyer and a willing unrelated seller would freely agree to transact (i.e., a market price).
Arrearage: A late or overdue payment, which may be cumulative.
Asiacurrency ( or Asiadollar) Market: Offshore financial market located in Singapore that channels investment dollars to a number of rapidly growing Southeast Asian countries and provides deposit facilities for those investors with excess funds.
Asian Development Bank (ADB): The ADB guarantees or makes direct loans to member sates and private ventures in Asian/Pacific nations and helps to develop local capital markets by underwriting securities issued by private enterprises.
Ask (i.e. offer) rates: The rate at which a market maker is willing to sell the quoted asset.
Ask: The price at which one can sell a currency. It is also known as the offer price.
Asset allocation policy: The target weights given to various asset classes in an investment portfolio.
Asset approach: It is for determination of the exchange rate that focuses on its role as the price of an asset. With high capital mobility, equilibrium requires that expected returns on comparable domestic and foreign assets be the same.
Asset securitization: The process of packaging a pool of assets and then selling interests in the pool in the form of asset-backed securities (ABS).
Asset: An item of property, such as land, capital, money, a share in ownership, or a claim on others for future payment, such as a bond or a bank deposit.
Asset-backed securities (ABS): Debt securities whose interest and principal payments are provided by the cash flows coming from a discrete pool of assets.
Assets-in-place: Those assets in which the firm has already invested. Compare to growth options.
Assigned (or stated) value: A nominal value assigned to a share of no-par common stock that is usually far below the actual issuing price.
Assignment problem: How to use macroeconomic policies to achieve both internal balance and external balance; specifically, with only monetary and fiscal policies available under fixed exchange rates, which instrument should be assigned to which goal? It is often the case that monetary policy should be assigned to external balance.
Asymmetric information: The failure of two parties to a transaction to have the same relevant information. Examples are buyers who know less about product quality than sellers, and lenders who know less about likely default than borrowers. Both are common in international markets.
Asymmetric shock: An exogenous change in macroeconomic conditions affecting differently the different parts of a country, or different countries of a region. Often it is mentioned as a source of difficulty for countries sharing a common currency, such as the Euro Zone.
At par: At equality. Two currencies are said to be at par if they are trading one-for-one. The significance is more psychological then economic, but the long decline of the Canadian dollar below par with the U.S. dollar, and the more recent decline of the euro from above to below par, also with the U.S. dollar, has been cause for concern.
Atlantic Development Group for Latin America (ADELA): An international private investment company dedicated to the socioeconomic development of Latin America. Its objective is to strengthen private enterprise by providing capital and entrepreneurial and technical services.
At-the-money option: An option with an exercise price that is equal to the current value of the underlying asset. An option whose exercise price is the same as the spot exchange rate.
Autarky price: Price in autarky; that is, the price of something within a country when it is not traded by that country. Relative autarky prices turn out to be the most theoretically robust (but empirically elusive) measures of comparative advantage.
Autarky: In models of international trade, a situation in which there is no cross-border trade. It is the situation of not engaging in international trade; self-sufficiency. Not to be confused with autarchy which in at least some dictionaries is a political term rather than an economic one, and means absolute rule or power?
Automated clearinghouse (ACH) electronic transfer: This is essentially an electronic version of the depository transfer check.
Automatic stabilizer: It is an institutional feature of an economy that dampens its macroeconomic fluctuations, e.g., an income tax, which acts like a tax increase in a boom and a tax cut in a recession.
Autonomous transaction: In the balance of payments, a transaction that is not itself a result of actions taken officially to manage international payments; in contrast with accommodating transaction.
Autonomous: Refers to an economic variable, magnitude, or entity that is caused independently of other variables that it may in turn influence; exogenous.
Aval: A guarantee of the buyer's credit provided by the guarantor, unless the buyer is of unquestioned financial standing. The aval is an endorsement note as opposed to a guarantee agreement.
Avalisation: Payment undertaking given by a bank in respect of a bill of exchange drawn.
Average accounting return (AAR): The average project earnings after taxes and depreciation divided by the average book value of the investment during its life.
Average cost: Total cost divided by output.
Average product: The average product of a factor in a firm or industry is its output divided by the amount of the factor employed.
Average tariff: An average of a country's tariff rates. This can be calculated in several ways, none of which are ideal for representing how protective the country's tariffs are. Most common is the trade-weighted average tariff, which under-represents prohibitive tariffs, since they get zero weight.

B2B exchange: Business-to-business Internet marketplace that matches supply and demand by real-time auction bidding.
Back-to-Back Loan: An intercompany loan, also known as a fronting loan or link financing that is channeled through a bank.
Backward bending: Refers to a curve that reverses direction, usually if, after moving out away from an origin or axis, it then turns back toward it. The term is used most frequently to describe supply curves for which the quantity supplied declines as price rises above some point, as may happen in a labor supply curve, the supply curve for foreign exchange, or an offer curve.
Backward innovation: Building a more basic version of an existing product for a lesser-developed market.
Backward integration: Acquisition by a firm of its suppliers.
Backward linkage: The use by one firm or industry of produced inputs from another firm or industry.
Baker Plan: A plan by U.S. Treasury Secretary James Baker under which 15 principal middle-income debtor countries (the Baker countries) would undertake growth-oriented structural reforms, to be supported by increased financing from the World Bank and continued lending from commercial banks.
Balance of merchandise trade: The value of a country's merchandise exports minus the value of its merchandise imports.
Balance of payments adjustment mechanism: Any process, especially any automatic one, by which a country with a payments imbalance moves toward balance of payments equilibrium. Under the gold standard, this was the specie flow mechanism.
Balance of payments argument for protection: A common reason for restricting imports, especially under fixed exchange rates, when a country is losing international reserves due to a trade deficit. It can be argued that this is a second best argument, since a devaluation could solve the problem without distorting the economy and therefore at smaller economic cost.
Balance of payments deficit: A negative balance of payments surplus.
Balance of payments equilibrium: Meaningful only under a pegged exchange rate, this referred to equality of credits and debits in the balance of payments using the traditional definition of the capital account. A surplus or deficit implied changing official reserves, so that something would ultimately have to change.
Balance of payments surplus: A number summarizing the state of a country's international transactions, usually equal to the balance on current account plus the balance on capital account. This equals zero* and is uninformative under the modern definition of the latter, but with official reserve transactions excluded, or omitting also other volatile short-term capital-account transactions, it indicates the stress on a regime of pegged exchange rates.
Balance of payments: Net value of all economic transactions-including trade in goods and services, transfer payments, loans, and investments-between residents of the same country and those of all other countries. The International Money Fund’s accounting system that tracks the flow of goods, services, and capital in and out of each country. It is a list or accounting, of all of a country's international transactions for a given time period, usually one year. Payments into the country (receipts) are entered as positive numbers, called credits; payments out of the country (payments) are entered as negative numbers called debits. A single number summarizing all of a country's international transactions: the balance of payments surplus.
Balance of trade: The difference between a country’s total imports and exports. It is the net flows of goods (exports minus imports) between countries. It is the value of a country's exports minus the value of its imports. Unless specified as the balance of merchandise trade, it normally incorporates trade in services, including earnings (interest, dividends, etc.) on capital.
Balance on capital account: A country's receipts minus payments for capital account transactions.
Balance on current account: A country's receipts minus payments for current account transactions. It equals the balance of trade plus net inflows of transfer payments.
Balance sheet: A statement showing a firm's accounting value on a particular date. It reflects the equation, Assets = Liabilities + Stockholders' equity. It is a summary of a firm's financial position on a given date that shows total assets = total liabilities - owners' equity.
Balanced budget:
1. A government budget surplus that is zero, thus with net tax revenue equaling expenditure.
2. A balanced budget change in policy or behavior is one in which a component of the government budget, usually taxes, is adjusted as necessary to maintain a balanced budget.
Balanced growth: Growth of an economy in which all aspects of it, especially factors of production, grow at the same rate.
Balanced trade:
1. A balance of trade equal to zero. 2. The assumption that the balance of trade must be zero in equilibrium, as would be the case with a floating exchange rate and no capital flows. This is a standard assumption in real models of international trade, which exclude financial assets.
Balance-Sheet exposure: Accounting exposure.
Balassa-Samuelson Effect: The hypothesis that an increase in the productivity of tradable relative to non-tradable, if larger than in other countries, will cause an appreciation of the real exchange rate.
Baldwin envelope: The consumption possibility frontier for a large country, constructed as the envelope formed by moving the foreign offer curve along the country's transformation curve.
Balloon payment: A payment on debt that is much larger than other payments. The ultimate balloon payment is the entire principal at maturity.
Bank capital: The equity capital and other reserves available to protect bank depositors against credit losses.
Bank draft: A draft addressed to a bank. A payment instrument used to make international payments.
Bank for International Settlements (BIS): Organization headquartered in Basle that acts as the central bank for the industrial countries’ central banks. The BIS helps central banks manage and invest their foreign exchange reserves and also holds deposits of central banks so that reserves are readily available. It is an international organization that acts as a bank for central banks, fostering cooperation among them and with other agencies.
Bank loan swap: Debt swap.
Bank rate: The interest rate charged by a central bank to commercial banks for very short term loans; the discount rate.
Bank-based corporate governance system: A system of corporate governance in which the supervisory board is dominated by bankers and other corporate insiders.
Banker’s acceptance: Draft accepted by a bank. It a time draft drawn on and accepted by a commercial bank. Short-term promissory trade notes for which a bank (by having accepted them) promises to pay the holder the face amount at maturity.
Bargain purchase option: A lease provision allowing the lessee, to purchase the equipment for a price predetermined at lease inception, which is substantially lower than the expected fair market value at the date the option can be exercised.
Barrier Option: knockout option.
1. Any impediment to the international movement of goods, services, capital, or other factors of production. Most commonly a trade barrier.
2. An entry barrier.
Barter economy: An economic model of international trade in which goods are exchanged for goods without the existence of money. Most theoretical trade models take this form in order to abstract from macroeconomic and monetary considerations.
Barter: The exchange of goods for goods, without using money.
Base year: The year used as the basis for comparison by a price index such as the CPI. The index for any year is the average of prices for that year compared to the base year; e.g., 110 means that prices are 10% higher than in the base year. The base year is also the year whose prices are used to value something in real terms or after adjusting for inflation.
Basic balance: One of the more frequently used measures of the balance of payments surplus or deficit under pegged exchange rates, the basic balance was equal to the current account balance plus the balance of long-term capital flows.
Basis point: One hundred basis points equal one percent of interest.
Basis risk: The risk of unexpected change in the relationship between futures and spot prices.
Basis swap: Swap in which two parties exchange floating interest payments based on different reference rates. It is a floating-for-floating interest rate swap that pairs two floating rate instruments at different maturities, such as six-month LIBOR versus thirty-day U.S. T-bills.
Basis: The simple difference between two nominal interest rates.
Bear spread: A currency spread designed to bet on a currency’s decline. It involves buying a put at one strike price and selling another put at a lower strike price.
Bearer Securities: Securities that are unregistered.
Beggar thy neighbor: For a country to use a policy for its own benefit that harms other countries. Examples are optimal tariffs and, in a recession, tariffs and/or devaluation to create employment.
Beggar-Thy-Neighbor Devaluation: A devaluation that is designed to cheapen a nation’s currency and thereby increase its exports at others’ expense and reduce imports. Such devaluations often led to trade wars.
Benchmarking: A systematic procedure of comparing a company’s practices against the best practice and modifying actual knowledge to achieve superior performance.
Bertrand competition: The assumption, assumed to be made by firms in an oligopoly, that other firms hold their prices constant as they themselves change behavior. It contrasts with Cournot competition. Both are used in models of international oligopoly, but Cournot competition is used more often.
Best efforts offering: A security offering in which the investment bankers agree to use only their best efforts to sell the issuer's securities. The investment bankers do not commit to purchase any unsold securities.
Beta: A measure of the systematic risk faced by an asset or project. Beta is calculated as the covariance between returns on the asset and returns on the market portfolio divided by the variance of returns on the market portfolio. It is an index of systematic risk. It measures the sensitivity of a stock's returns to changes in returns on the market portfolio. The beta of a portfolio is simply a weighted average of the individual stock betas in the portfolio.
1. Bias of technology, either change or difference, refers to a shift towards or away from use of a factor. The exact meaning depends on the definition of neutral used to define absence of bias. Factor bias matters for the effects of technological progress on trade and welfare.
2. Bias of a trade regime refers to whether the structure of protection favors importable or exportable, based on comparing their effective rates of protection. If these are equal, the trade regime is said to be neutral.
3. Bias of growth refers to economic growth through factor accumulation and/or technological progress and whether if favors one sector or another. Growth is said to be export biased if the export sector expands faster than the rest of the economy, import biased if the import-competing sector does so.
Bicycle Theory: With regard to the process of multilateral trade liberalization, the theory that if it ceases to move forward (i.e., achieve further liberalization), then it will collapse (i.e., past liberalization will be reversed).
Bid rate: The rate at which a market maker is willing to buy the quoted asset.
Bid: The price at which one can buy a currency.
Bid-ask spread: The difference between the buying and selling rates. It is the difference between the price that a buyer must pay on a market and the price that a seller will receive for the same thing. The difference covers the cost of, and provides profit for, the broker or other intermediary, such as a bank on the foreign exchange market.
Bid-offer spread: The difference between the interest rate at which the bank borrows money and lends money.
Bilateral agreement: An agreement between two countries, as opposed to a multilateral agreement.
Bilateral exchange rate: The exchange rate between two countries' currencies, defined as the number of units of either currency needed to purchase one unit of the other.
Bilateral quota: An import (or export) quota applied to trade with a single trading partner, specifying the amount of a good that can be imported from (exported to) that single country only.
Bilateral trade: The trade between two countries; that is, the value or quantity of one country's exports to the other, or the sum of exports and imports between them.
Bilateral transfer: A transfer payment from one country to another.
Bilateral: Between two countries, in contrast to ploy-lateral and multilateral.
Bill of exchange: Any document demanding payment such as a bank draft.
Bill of lading: The receipt given by a transportation company to an exporter when the former accepts goods for transport. It includes the contract specifying what transport service will be provided and the limits of liability. A contract between a carrier and an exporter in which the former agrees to carry the latter’s goods from port of shipment to port of destination. It is also the exporter’s receipt for the goods. A document that establishes the terms and conditions of a contract between a shipper and a shipping company under which freight is to be moved between specified points for a specified charge. It is a shipping document indicating the details of the shipment and delivery of goods and their ownership.
Black market: An illegal market, in which something is bought and sold outside of official government-sanctioned channels. Black markets tend to arise when a government tries to fix a price without itself providing all of the necessary supply or demand. Black markets in foreign exchange almost always exist when there are exchange controls.
Black Market: An illegal market that often arises when price controls or official rationing lead to shortages of goods, services, or assets.
Black-Scholes Option Pricing Model: The most widely used model for pricing options.
Blank endorsement: The method whereby a bill of lading is made into a freely negotiable document of title.
Blanket bond: A bond that coves a group of people, articles or properties.
Blanket contracts: A long-term contract in which the supplier promises to re-supply the buyers as needed at agreed-upon prices over the contracting time.
Blocked Currency: A currency that is not freely convertible to other currencies due to exchange controls.
Blocked funds: Cash flows generated by a foreign project that cannot be immediately repatriated to the parent firm because of capital flow restrictions imposed by the host government.
Blue sky laws: State laws regulating the offering and sale of securities.
Bond discount: The amount by which the face value of a bond exceeds its current price.
Bond equivalent yield: A bond quotation convention based on a 365-day year and semiannual coupons. Contrast with effective annual yield.
Bond premium: The amount by which the current price of a bond exceeds its face value.
Bond: A long-term debt instrument issued by a corporation or government. A debt instrument, issued by a borrower and promising a specified stream of payments to the purchaser, usually regular interest payments plus a final repayment of principal. Bonds are exchanged on open markets including, in the absence of capital controls, internationally, providing a mechanism for international capital mobility.
Bonded Warehouse: A warehouse authorized for storage of good on which payment of duty is deferred until the goods are removed from the warehouse. A warehouse authorized by customs authorities for storage of goods on which payment of duties is deferred until the goods are removed.
Book value:
(1) An asset: the accounting value of an asset – the asset's cost minus its accumulated depreciation.
(2) a firm: total assets minus liabilities and preferred stock as listed on the balance sheet.
Boom-bust cycle: A pattern of performance over time in an economy or an industry that alternates between extremes of rapid growth and extremes of slow growth or decline, as opposed to sustained steady growth. For an economy, this indicates an extreme form of the business cycle.
Border price: The price of a good at a country's border.
Border tax adjustment: Rebate of indirect taxes (taxes on other than direct income, such as a sales tax or VAT) on exported goods and levying of them on imported goods. May distort trade when tax rates differ or when adjustment does not match the tax paid.
Borderless world: The concept that national borders no longer matter, perhaps for some specified purpose.
Borrowing: The amount that an entity, usually a country or its government, has borrowed. Thus it is often the (negative of) the net foreign asset position or the national debt.
Boycott: To protest by refusing to purchase from someone, or otherwise do business with them. In international trade, a boycott most often takes the form of refusal to import a country's goods.
BP-Curve: In the Mundell-Fleming model, the curve representing balance of payments equilibrium. It is normally upward sloping because an increase in income increases imports while an increase in the interest rate increases capital inflows. The curve is used under pegged exchange rates for effects on the balance of payments and under floating rates for effects on the exchange rate.
Brady Bonds: New government securities issued under the Brady Plan whose interest payments were backed with money from the International Monetary Fund.
Brady Plan: Plan developed by U.S. Treasury Secretary Nicholas Brady in 1989 that emphasized LDC debt relief through forgiveness instead of new lending. It gave banks the choice of either making new loans or writing off portions of their existing loans in exchange for Brady Bonds.
Brain drain: The migration of skilled workers out of a country.
Branch: A foreign operation incorporated in the home country.
Break-even analysis: Analysis of the level of sales at which a project would make zero profit. It is a technique for studying the relationship among fixed costs, variable costs, sales volume, and profits. It is also called cost/volume/profit (C/V/P) analysis.
Break-even chart: A graphic representation of the relationship between total revenues and total costs for various levels of production and sales, indicating areas of profit and loss.
Break-even point: The sales volume required so that total revenues and total costs are equal; may be expressed in units or in sales dollars.
Bretton Woods System: International monetary system established after World War II under which each government pledged to maintain a fixed, or pegged, exchange rate for its currency vis-à-vis the dollar or gold. As one ounce of gold was set equal to $35, fixing a currency’s gold price was equivalent to setting its exchange rate relative to the dollar. The U.S. government pledged to maintain convertibility of the dollar into gold for foreign official institutions.
Bretton Woods: A town in New Hampshire at which a 1944 conference launched the IMF and the World Bank. These, along with the GATT (General Agreement on Tariffs and Trade), WTO (World Trade Organization) became known as the Bretton Woods Institutions, and together they comprise the Bretton Woods System.
Bribe: A payment made to person, often a government official such as a customs officer, to induce them to treat the payer favorably.
Broker's fee: The fee for a transaction charged by an intermediary in a market, such as a bank in a foreign-exchange transaction.
Brown field investment: FDI (Foreign Direct Investment) that involves the purchase of an existing plant or firm, rather then construction of a new plant. It contrasts with green field investment.
Bubble economy: Term for an economy in which the presence of one or more bubbles in its asset markets is a dominant feature of its performance.
Bubble: A rise in the price of an asset based not on the current or prospective income that it provides but solely on expectations by market participants that the price will rise in the future. When those expectations cease, the bubble bursts and the price falls rapidly.
Budget constraint:
1. For an individual or household, the condition that income equals expenditure (in a static model), or that income minus expenditure equals the value of increased asset holdings (in a dynamic model).
2. For a country, the condition that the value of exports equals the value of imports or, if capital flows are permitted, that exports minus imports equals the net capital outflow. It is equivalent to income from production equaling expenditure on goods plus net acquisition of foreign assets.
3. It is a function usually a straight line representing either of these conditions.
Budget deficit: The negative of the budget surplus; thus the excess of expenditure over income.
Budget surplus: Refers in general to an excess of income over expenditure, but usually refers specifically to the government budget, where it is the excess of tax revenue over expenditure (including transfer and interest payments).
Buffer stock: A large quantity of a commodity held in storage to be used to stabilize the commodity's price. This is done by buying when the price is low and adding to the buffer stock, selling out of the buffer stock when the price is high, hoping to reduce the size of price fluctuations.
Bull Spread: A currency spread designed to bet on a currency’s appreciation. It involves buying a call at one strike price and selling another call at a higher strike price.
Bureau of Economic Analysis: The government agency within the United States Department of Commerce that collects macroeconomic data, especially the National Income and Product Accounts, as well as data on balance of payments and international investment.
Business cycle: The pattern followed by macroeconomic variables, such as GDP and unemployment that rise and fall irregularly over time, relative to trend. There is some tendency for cyclical movements of large countries to cause similar movements in other countries with whom they trade.
Business risk: The inherent uncertainty in the physical operations of the firm. Its impact is shown in the variability of the firm's operating income (EBIT).
Business-to-business (B2B): Communications and transactions conducted between businesses, as opposed to between businesses and end customers. Expressed in alphanumeric form (i.e., B2B), it refers to such transactions conducted over the Internet.

1. Navigation and trade by ship along a coast, especially between ports within a country. Restricted in the U.S. by the Jones Act to domestic shipping companies.
2. Air transportation within a country. Often restricted to domestic carriers, in an example of barriers to trade in services.
Cairnes-Haberler Model: A trade model in which all factors of production are assumed immobile between industries.
Call option: The right to buy the underlying currency at a specified price and on a specified date. It is a contract that gives the holder the right to purchase a specified quantity of the underlying asset at a predetermined price (the exercise price) on or before a fixed expiration date.
Call premium: The excess of the call price of a security over its par value.
Call price: The price at which a security with a call provision can be repurchased by the issuer prior to the security's maturity.
Call provision: A feature in an indenture that permits the issuer to repurchase securities at a fixed price (or a series of fixed prices) before maturity; also called call feature. Clause giving the borrower the option of retiring the bonds before maturity should interest rates decline sufficiently in the future.
Canonical model of currency crises: This term has been used to refer to the model that used for a currency crisis that results when domestic policy is pursued in a manner inconsistent with a pegged exchange rate.
Capacity building: The term used repeatedly in the Doha Declaration referring to the assistance to be provided to developing countries in establishing and administering their trade policies, conducting analysis, and identifying their interests in trade negotiations.
Capital (financial) structure: The proportion of debt and equity and the particular forms of debt and equity chosen to finance the assets of the firm.
Capital abundant: A country is capital abundant if its endowment of capital is large compared to other countries. Relative capital abundance can be defined by either the quantity definition or the price definition.
Capital account:
1. It refers to a minor component of international transactions, involving unilateral transfers of ownership of property. The common definition, below, describes what is now called the financial account.
2. A country's international transactions arising from changes in holdings of real and financial capital assets, but not income on them, which is in the current account. Includes FDI, plus changes in private and official holdings of stocks, bonds, loans, bank accounts, and currencies.
3. Same as 2 except excluding official reserve transactions. This definition was used under the Bretton Woods System of pegged exchange rates, but is less meaningful under floating exchange rates.
A measure of change in cross-border ownership of long-term financial assets, including financial securities and real estate. It is the net results of public and private international investment and lending activities.
Capital adequacy ratio: The ratio of a bank's capital to its risk-weighted credit exposure. International standards recommend a minimum for this ratio, intended to permit banks to absorb losses without becoming insolvent, in order to protect depositors.
Capital Asset Pricing Model (CAPM): A model for pricing risk. The CAPM assumes that investors must be compensated for the time value of money plus systematic risk, as measured by an asset’s beta. It is an asset pricing model that relates the required return on an asset to its systematic risk. A model that describes the relationship between risk and expected (required) return; in this model, a security's expected (required) return is the risk-free rate plus a premium based on the systematic risk of the security.
Capital augmenting: Said of a technological change or technological difference if one production function produces the same as if it were the other, but with a larger quantity of capital. It is same as factor augmenting with capital the augmented factor. It is also called Solow neutral.
Capital budgeting: The process of identifying, analyzing, and selecting investment projects whose returns (cash flows) are expected to extend beyond one year. Planning and managing expenditures for long-lived assets.
Capital consumption allowance: The name used in the National Income and Product Accounts for depreciation of capital.
Capital control: Any policy intended to restrict the free movement of capital, especially financial capital, into or out of a country.
Capital flight: The transfer of capital abroad in response to fears of political risk. Large financial capital outflows from a country prompted by fear of default or, especially, by fear of devaluation.
Capital formation: The process of increasing the amount of capital goods - also called capital stock - in a country.
Capital gain (loss): The amount by which the proceeds from the sale of a capital asset exceeds (is less than) the asset's original cost. The positive change in the value of an asset, a negative capital gain is a capital loss. The gain in value that the owner of an asset experiences when the price of the asset rises, including when the currency in which the asset is denominated appreciates. It contrasts with capital loss.
Capital good: A good, such as a machine, that, once in place, becomes part of the capital stock.
Capital inflow: A net flow of capital, real and/or financial, into a country, in the form of increased purchases of domestic assets by foreigners and/or reduced holdings of foreign assets by domestic residents. It is Recorded as positive, or a credit, in the balance on capital account.
Capital infusion: An increase in financial capital provided from outside a bank, corporation, or other entity.
Capital intensive: Describing an industry or sector of the economy that relies relatively heavily on inputs of capital, usually relative to labor, compared to other industries or sectors. A measure of the relative use of capital, compared to other factors such as labor, in a production process. It is often measured by the ratio of capital to labor, or by the share of capital in factor payments.
Capital loss: The loss in value that the owner of an asset experiences when the price of the asset falls, including when the currency in which the asset is denominated depreciates. It contrasts with capital gain.
Capital market imperfections: Distortions in the pricing of risk, usually attributable to government regulations and asymmetries in the tax treatment of different types of investment income. Anything that interferes with the ability of economic agents to borrow and lend as much as they wish at a fixed rate of interest that truly reflects probability of repayment. A common source of imperfection is asymmetric information.
Capital market integration: The situation that exists when real interest rates are determined by the global supply and global demand for funds.
Capital market line: The line between the risk-free asset and the market portfolio that represents the mean-variance efficient set of investment opportunities in the CAPM.
Capital market segmentation: The situation that exists when real interest rates are determined by local credit conditions.
Capital market: The market for relatively long-term (greater than one year original maturity) financial instruments (e.g., bonds and stocks). The markets for financial assets and liabilities with maturity greater than one year, including long-term government and corporate bonds, preferred stock, and common stock.
Capital mobility: The ability of capital to move internationally. The degree of capital mobility depends on government policies restricting or taxing capital inflows and/or outflows, plus the risk that investors in one country associate with assets in another.
Capital movement: capital inflow and/or outflow.
Capital outflow: A net flow of capital, real and/or financial, out of a country, in the form of reduced holdings of domestic assets by foreigners and/or increased purchases of foreign assets by domestic residents. It is recorded as negative, or a debit, in the balance on capital account.
Capital productivity: The ratio of output (goods and services) to the input of physical capital (plant and equipment).
Capital rationing: A situation where a constraint (or budget ceiling) is placed on the total size of capital expenditures during a particular period. It is the case where funds are limited to a fixed dollar amount and must be allocated among the competing projects.
Capital scarce: A country is capital scarce if its endowment of capital is small compared to other countries. Relative capital scarcity can be defined by either the quantity definition or the price definition.
Capital stock: The total amount of physical capital that has been accumulated, usually in a country.
Capital structure: The mix of the various debt and equity capital maintained by a firm. It is also called financial structure. The composition of a corporation's securities used to finance its investment activities; the relative proportions of short-term debt, long-term debt, and owners' equity. It is the mix (or proportion) of a firm's permanent long-term financing represented by debt, preferred stock, and common stock equity.
1. The plant and equipment used in production.
2. One of the main primary factors, the availability of which contributes to the productivity of labor, comparative advantage, and the pattern of international trade.
3. A stock of financial assets.
Capitalism: An economic system that is based on private ownership; economic development is proportionate to and dependent upon the accumulation and reinvestment of profits.
Capitalization rate: The discount rate used to determine the present value of a stream of expected future cash flows.
Capitalized expenditures: Expenditures that may provide benefits into the future and therefore are treated as capital outlays and not as expenses of the period in which they were incurred.
Capital-saving: A technological change or technological difference that is biased in favor of using less capital, compared to some definition of neutrality.
Capital-using: A technological change or technological difference that is biased in favor of using more capital, compared to some definition of neutrality.
Carrier: A firm that provides transportation of persons or goods. An individual or entity that transports persons or goods for compensation under the contract of carriage.
Cartel: An agreement among, or an organization of, suppliers of a product. A group of firms that seeks to raise the price of a good by restricting its supply. The term is usually used for international groups, especially involving state-owned firms and/or governments.
Cascading tariffs: Same as tariff escalation.
Cash Against Documents (CAD): Payment for goods where a commission house or other intermediary transfers title documents to the buyer upon payment in cash.
Cash budget: A forecast of a firm's future cash flows arising from collections and disbursements, usually on a monthly basis.
Cash concentration: The movement of cash from lockbox or field banks into the firm's central cash pool residing in a concentration bank.
Cash cover: In a letter of credit transaction, money deposited by the applicant with the issuing bank.
Cash cycle: The length of time from the actual outlay of cash for purchases until the collection of receivables resulting from the sale of goods or services; also called cash conversion cycle.
Cash discount period: The period of time during which a cash discount can be taken for early payment.
Cash discount: A percentage (%) reduction in sales or purchase price allowed for early payment of invoices. It is an incentive for credit customers to pay invoices in a timely fashion.
Cash dividend: Cash distribution of earnings to stockholders, usually on a quarterly basis.
Cash equivalents: Highly liquid, short-term marketable securities that are readily convertible to known amounts of cash and generally have remaining maturities of three months or less at the time of acquisition.
Cash flow: Cash generated by the firm and paid to creditors and shareholders. It can be classified as
1 - cash flow from operations,
2 - cash flow from changes in fixed assets, and
3 - cash flow from changes in net working capital.
Cash in Advance (CIA): Payment for goods in which the price is paid in full before the shipment is made. This type of payment is usually only made for very small shipments or when goods are made in order. It is the payment for goods prior to its shipment.
Cash insolvency: Inability to pay obligations as they fall due.
Cash Pooling: Pooling.
Cash-flow exposure: Used synonymously with economic exposure, it measures the extent to which an exchange rate change will change the value of a company through its impact on the present value of the company’s future cash flows.
Central bank: The institution in a country (or a currency area) that is normally responsible for managing to supply of the country's money and the value of its currency on the foreign exchange market. The nation’s official monetary authority.
Central Intelligence Agency: Intelligence gathering (and espionage) agency of the United States government, publisher of the World Fact Book.
Central planning: The guidance of the economy by direct government control over a large portion of economic activity, as contrasted with allowing markets to serve this purpose.
Centrally planned economy: An economy in which the government, rather than free-market activity, controls the allocation of resources.
Certainty equivalent (CE): The amount of cash someone would require with certainty at a point in time to make the individual indifferent between that certain amount and an amount expected to be received with risk at the same point in time.
Certainty: Precise knowledge of an economic variable, as opposed to belief that it could take on multiple values. It contrasts with uncertainty. It is one aspect of complete information.
Certificate of acceptance: Term used in leasing. A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.
Certificate of analysis/certificate of inspection: Documents that may be asked for by the importer and/or the authorities of the importing country, as evidence of quality or conformity to specifications.
Certificate of manufacture: A statement that is usually notarized in which the producer of goods certifies that the goods have been produced and are now available to the buyer.
Certificate of origin: Documents that may be asked for by the authorities of the importing country, as evidence of the country of manufacture of the goods.
Certificate of product origin: A document required by certain foreign countries for tariff purpose, certifying the country of origin of specified goods.
Chain of comparative advantage: A ranking of goods or countries in order of comparative advantage. With two countries and many goods, goods can be ranked by comparative advantage, e.g., by relative unit labor requirements in the Ricardian model. A country's exports will then lie nearer one end of the chain than its imports. With two goods, many countries can be ordered similarly.
Change in consumer surplus: The change in consumer surplus due to a change in market conditions, usually a price change. For a price change, it is measured by the area to the left of the demand curve between the two prices, indicating a gain if price falls and a loss if it rises.
Change in net working capital: Difference between net working capital from one period to another.
Change in producer surplus: The change in producer surplus due to a change in market conditions, usually a price change. For a price change, it is measured by the area to the left of the (upward sloping part of the) supply curve between the two prices, indicating a gain if price rises and a loss if it falls.
Characteristic line: The line relating the expected return on a security to different returns on the market. It is a line that describes the relationship between an individual security's returns and returns on the market portfolio. The slope of this line is beta.
Chattel mortgage: A lien on specifically identified personal property (assets other than real estate) backing a loan.
Chicago Mercantile Exchange (CME): The largest market in the world for trading standardized futures and options contracts on a wide variety of commodities, including currencies and bonds.
CHIPS (Clearing House Interbank Payments System) : Financial network through which banks in the United States conduct their financial transactions.
CIF: The price of a traded good including transport cost. It stands for cost, insurance, and freight, but is used only as these initials (usually lower case: c.i.f.). It means that a price includes the various costs, such as transportation and insurance, needed to get a good from one country to another. It contrasts with FOB.
CITES: Convention on the International Trade in Endangered Species
Civil society organizations (CSOs): Non-governmental and non-profit groups that work to improve society and the human condition.
Civil society: The name used to encompass a wide and self-selected variety of interest groups, worldwide. It does not include for-profit businesses, government, and government organizations, whereas it does include most NGOs.
Classical: Referring to the writings, models, and economic assumptions of the first century of economics, including Adam Smith, David Ricardo, and John Stuart Mill.
Clayton Act: A 1914 federal antitrust law designed to promote competition that addresses several antitrust matters, including interlocking directorates, race discrimination, exclusive dealing, and mergers.
Clean bill of lading: A receipt for goods issued by a carrier that indicates that the goods were received in apparently good order and without damage.
Clean collection: Collection in which only the financial document is sent through the banks.
Clean Draft: A draft unaccompanied by any other papers; it is normally used only for nontrade remittances.
Clean Float: Free float.
Cleanup Clause: A clause inserted in a bank loan requiring the company to be completely out of debt to the bank for a period of at least 30 days during the year.
Clear: A market is said to clear if supply is equal to demand. Market clearing can be brought about by adjustment of the price (or the exchange rate, in the case of the exchange market), or by some form of government (or central bank) intervention in or regulation of the market.
Clearance: The completion of customs entry requirements that results in the release of goods to the importer.
Clearing House Interbank Payments System (CHIPS): A computerized network for transfer of international dollar payments, linking about 140 depository institutions that have offices or affiliates in New York City. An automated clearing system used primarily for international payments. The British counterpart is known as CHAPS.
Clearing system: An arrangement among financial institutions for carrying out the transactions among them, including canceling out offsetting credits and debits on the same account.
Clearing: The settlement of a transaction, often involving exchange of payments and/or documentation.
Closed economy: An economy that does not permit economic transactions with the outside world; a country in autarky.
Closed-end fund: A mutual fund in which the amount of funds under management is fixed and ownership in the funds is bought and sold in the market like a depository receipt.
Coase Theorem: The proposition that the allocation of property rights does not matter for economic efficiency, so long as they are well defined and a free market exists for the exchange of rights between those who have them and those who do not.
Coefficient of variation (CV): The ratio of the standard deviation of a distribution to the mean of that distribution. It is a measure of relative risk.
Collection order: In a collection, the document in which the seller instructs the banks as to how the collection is to be conducted.
Collective action problem: The difficulty of getting a group to act when members benefit if others act, but incur a net cost if they act themselves.
Collectivist society: A society in which people feel more comfortable thinking and acting in groups.
Collusion: Cooperation among firms to raise price and otherwise increase their profits.
Command economy: An economy in which decisions about production and allocation are made by government dictate, rather than by decentralized responses to market forces. An economy based on government ownership and/or control of society's resources; during the 20th century, the dominant form of command economy was communism.
Commercial bank: An institution that accepts and manages deposits from households, firms and governments and uses a portion of those deposits to earn interest by making loans and holding securities.
Commercial document: General term for documents describing various aspects of a transaction, e.g. commercial invoice, transport document, insurance document, certificate of origin, certificate of inspection etc.
Commercial Invoice: A document that contains an authoritative description of the merchandise shipped, including full details on quality, grades, price per unit, and total value, along with other information on terms of the shipment.
Commercial Paper (CP): A short-term unsecured promissory note that is generally sold by large corporations on a discount basis to institutional investors and to other corporations. It is a short-term, unsecured promissory notes generally issued by large corporations (unsecured corporate IOUs). It is a short-term, negotiable debt of a firm; thus a bond of short maturity issued by a company.
Commercial policy: Government policies intended to influence international commerce, including international trade. Includes tariffs and NTBs (Nontariff barrier), as well as policies regarding exports.
Commitment fee: A fee charged by the lender for agreeing to hold credit available.
Commodity pattern of trade: The trade pattern of a country or the world, focusing on goods and services traded as opposed to the factor content of that trade.
Commodity price risk: The risk of unexpected changes in a commodity price, such as the price of oil.
Commodity prices: Usually means the prices of raw materials and primary products.
Commodity swap: A swap in which the, often notional, principal amount on at least one side of the swap is a commodity such as oil or gold.
Commodity: Could refer to any good, but in a trade context a commodity is usually a raw material or primary product that enters into international trade, such as metals (tin, manganese) or basic agricultural products (coffee, cocoa).
Common Agricultural Policy (CAP) : The regulations of the European Union that seek to merge their individual agricultural programs, primarily by stabilizing and elevating the prices of agricultural commodities. The principle tools of the CAP are variable levies and export subsidies.
Common carrier: An organization that transports persons or goods for a fee.
Common currency: A currency that is shared by more than one country. Thus it is the currency of a currency area.
Common external tariff: The single tariff rate agreed to by all members of a customs union on imports of a product from outside the union.
Common market: A group of countries that eliminate all barriers to movement of both goods and factors among themselves, and that also, on each product, agree to levy the same tariff on imports from outside the group. It is equivalent to a customs union plus free mobility of factors.
Common stock: Securities that represent the ultimate ownership (and risk) position in a corporation.
Common tangent: A straight line that is tangent to two or more curves. Used in the Lerner diagram.
Common-size analysis: An analysis of percentage financial statements where all balance sheet items are divided by total assets and all income statement items are divided by net sales or revenues.
Community indifference curve: One of a family of indifference curves intended to represent the preferences, and sometimes the well-being, of a country as a whole. This is a handy tool for deriving quantities of trade in a two-good model, although its legitimacy depends on the existence of community preferences, which in turn requires very restrictive assumptions.
Community preferences: A set of consumer preferences, analogous to those of an individual as might be represented by a utility function, but representing the preferences of a group of consumers. The existence of well-behaved community preferences requires restrictive assumptions about individual preferences and/or incomes.
Comparative advantage: The ability to produce a good at lower cost, relative to other goods, compared to another country. In a Ricardian model, comparison is of unit labor requirements; more generally it is of relative autarky prices. With perfect competition and undistorted markets, countries tend to export goods in which they have comparative advantage. A comparative advantage exists when a nation or economic region is able to produce a product at a lower opportunity cost compared to another nation or region. The rule of economics that states: Each country should specialize in producing those goods that it is able to produce relatively most efficiently.
Comparative static: Refers to a comparison of two equilibriums from a static model, usually differing by the effects of a single small change in an exogenous variable.
Compensated demand curve: A demand curve constructed under the assumption that demander's income is not held constant, but rather is varied to hold level of utility at a constant level. The change in consumer surplus calculated from particular compensated demand curves measures compensating variation and equivalent variation.
Compensating balance: Demand deposits maintained by a firm to compensate a bank for services provided, credit lines, or loans. As a basis for welfare comparisons, the idea that if a policy change (such as a tariff reduction) could be Pareto improving if it were accompanied by appropriate lump-sum transfers that tax winners in order to compensate losers, then it is viewed as beneficial even when those transfers do not occur. The fraction (usually 10% to 20%) of an outstanding loan balance that a bank requires borrowers to hold on deposit in a non-interest-bearing account.
Compensating variation: An amount of money that just compensates a person, group, or whole economy, for the welfare effects of a change in the economy, thus providing a monetary measure of that change in welfare. It is same as willingness to pay. It contrasts with equivalent variation.
Compensation trade: Counter trade, including especially payment for foreign direct investment out of the proceeds from that investment.
1. The GATT (General Agreement on Tariffs and Trade ) principle that members who violate GATT rules must compensate other countries by lowering tariffs or making other concessions, or be subject to retaliation.
2. The actual or potential payment by the winners from a change in trade or other policy to the losers, intended to undo the harm to the latter. Actual compensation is rare, but the potential for compensation is used as the basis for most evaluations of the gains from trade.
Competition policy: Policies intended to prevent collusion among firms and to prevent individual firms from having excessive market power. Major forms include oversight of mergers and prevention of price fixing and market sharing. It is called anti-trust policy in the U.S.
Competition: The interactions between two or more sellers or buyers in a single market, each attempting to get or pay the most favorable price. Economists usually interpret and model these interactions as among individual economic agents -- firms or consumers. Popular terminology extends also to competition among nations, especially competing exporters.
Competitive advantage: Competitiveness. It contrasts with comparative advantage.
Competitive: Used alone, this usually means perfectly competitive. It contrasts with imperfectly competitive.
Competitiveness: Usually refers to characteristics that permit a firm to compete effectively with other firms due to low cost or superior technology, perhaps internationally. When applied to nations, instead of firms, the word has a mercantilist connotation.
Complete information: The assumption that economic agents (buyers and sellers, consumers and firms) know everything that they need to know in order to make optimal decisions. Types of incomplete information are uncertainty and asymmetric information.
Complete specialization:
1. Non-production of some of the goods that a country consumes, as in definition 2 of specialization.
2. Production only of goods that are exported or no traded, but none that compete with imports.
3. Production of only one good.
4. Being the only country in the world to produce a good.
Compliant documents: Documents presented under a letter of credit that comply with all its terms and conditions. The banks are only obliged to pay the beneficiary if documents are totally compliant.
Composite currency: A currency defined as a specified combination of two or more currencies, normally existing only as a unit of account rather than as a physical currency. Examples include the SDR (Special Drawing Right) and the ECU (European Currency Unit).
Compound interest: Interest paid (earned) on any previous interest earned, as well as on the principal borrowed (lent). It is earned both on the initial principal and on interest earned on the initial principal in previous periods. The interest earned in one period becomes in effect part of the principal in a following period.
Compound tariff: A tariff that combines both a specific and an ad valorem component.
Compound value: Value of a sum after investing it over one or more periods. It is also called future value.
Compounding: Process of reinvesting each interest payment to earn more interest. Compounding is based on the idea that interest itself becomes principal and therefore also earns interest in subsequent periods.
Compulsory licensing: A legal requirement for the owner of a patent to let other firms produce its product, under specified terms. Countries sometimes require foreign patent holders to license domestic firms so as to improve access to the patented product at lower cost. This is permitted by the TRIPs (Trade-Related Intellectual Property Rights) Agreement for certain purposes, such as protecting public health.
Computable general equilibrium: Refers to economic models of microeconomic behavior in multiple markets of one or more economies, solved computationally for equilibrium values or changes due to specified policies. The equations are anchored with data from the countries being modeled, while behavioral parameters are either assumed or adapted from estimates elsewhere.
Concentration ratio: A common measure of industry concentration, defined as the percent of sales in the industry accounted for by the largest n firms, n is some small number such as 4 or 6, and the result is called the n-firm concentration ratio.
Concertina tariff reduction: The reduction of a country's highest tariff to the level of the next highest, followed by the reduction of both to the level of the next highest after that, and so forth. It is also called the concertina rule. This is known to raise welfare if all goods are net substitutes.
Concession Agreement: An understanding between a company and the host government that specifies the rules under which the company can operate locally.
Concession: The term used in GATT (General Agreement on Tariffs and Trade) negotiations for a country's agreement to bind a tariff or otherwise reduce import restrictions, usually in return for comparable concessions by other countries. Use of this term, with its connotation of loss, for what economic theory suggests is often a beneficial act, is part of what has been called GATT-Speak.
Concessional financing: Loans made by a government at an interest rate below the market rate as an indirect method of providing a subsidy.
Conditional sales contract: A means of financing provided by the seller of equipment, who holds title to it until the financing is paid off.
Conditionality: The requirements imposed by the IMF and World Bank on borrowing countries to qualify for a loan, typically including a long list of budgetary and policy changes comprising a structural adjustment program.
Confirming bank: Bank that adds its payment undertaking to a letter of credit.
Conservative social welfare function: A social welfare function that takes special account of the costs to individuals of losing relative to the status quo, and that therefore seeks to avoid large losses to significant groups within the population.
Consignee: Party to whom goods are to be delivered.
Consignment: Delivery of merchandise from an exporter (i.e. the consignor) to an agent (i.e. the consignee) under agreement that the consignee sells the merchandise of the account of the consignor, while the consignor retains title to the goods until the consignee sells them. Under this selling method, goods are only shipped, but not sold, to the importer. The exporter (consignor) retains title to the goods until the importer (consignee) has sold them to a third party. This arrangement is normally made only with a related company because of the large risks involved.
1. Something that is put into the care of another, as when a batch of traded goods is consigned to a shipper for transport to another location.
2. A method of marketing in which the seller entrusts a product to an agent, who then attempts to sell it on the seller's behalf, or on consignment.
Consol: A bond that never matures; a perpetuity in the form of a bond.
Consolidated income: The sum of income across all of the multinational corporation’s domestic and foreign subsidiaries.
Consolidation: The combination of two or more firms into an entirely new firm. The old firms cease to exist. Though technically different, the terms merger (where one firm survives) and consolidation tend to be used interchangeably. It is a form of corporate reorganization in which two firms pool their assets and liabilities to form a new company.
Constant dollars: Dollars of constant purchasing power. That is, corrected for inflation. More precisely includes reference to a base year for comparison, e.g. in constant 1992 dollars. It is same as constant prices.
Constant elasticity of transformation function: A function representing an economy's transformation curve along which the elasticity of transformation is constant.
Constant returns to scale (CRTS) : A property of a production function such that scaling all inputs by any positive constant also scales output by the same constant. Such a function is also called homogeneous of degree one or linearly homogeneous. CRTS is a critical assumption of international trade. It contrasts with increasing returns and decreasing returns.
Consular Invoice: An invoice, which varies in its details and information requires from nation to nation, that is presented to the local consul in exchange for a visa.
Consular statement: A document required by some foreign countries, describing a shipment of goods and showing information such as the consignor, consignee, and value of shipment. Certified by a consular official of the foreign country, it is used by the country's officials to verify the value, quantity, and nature of the shipment.
Consumer movement: One of four modes of supply of traded services, this one entails the buyer moving (temporarily) to the foreign location of the seller, as in the case of tourism.
Consumer price index: A price index for the goods purchased by consumers in an economy, usually based on only a small sample of what they consume. It contrasts with the implicit price deflator.
Consumer support estimate (CSE) : Introduced by the OECD (Organization for Economic Co-operation and Development ) to quantify agricultural policies, this measures transfers to or from consumers that are implicit in these policies. Since industrialized-country agricultural producers are routinely supported by raising prices, CSE estimates are usually negative.
Consumer surplus: The difference between the maximum that consumers would be willing to pay for a good and what they actually do pay. For each unit of the good, this is the vertical distance between the demand curve and price. For all units purchased at some price, it is the area below the demand curve and above the price. It is normally useful only as the change in consumer surplus.
Consumption externality: An externality arising from consumption.
Consumption possibility frontier: A graph of the maximum quantities of goods (usually two) that an economy can consume in a specified situation, such as autarky and free trade. It is used to illustrate the potential benefits from trade by showing that it can expand consumption possibilities.
Contagion: The phenomenon of a financial crisis in one country spilling over to another, which then suffers many of the same problems.
Contingency insurance: Contingency insurance protects the exporter in any situation in which exporter responsibility relied on the buyer to insure, but sustained a loss because of inadequate coverage from that source. It will cover situations in which the FOB endorsement would have otherwise served had that been in force.
Contingent claim: Claim whose value is directly dependent on, or is contingent on, the value of its underlying assets. For example, the debt and equity securities issued by a firm derive their value from the total value of the firm.
Continuous compounding: Interest compounded continuously, every instant, rather than at fixed intervals.
Continuous quotation system: A trading system in which buy and sell orders are matched with market makers as the orders arrive, ensuring liquidity in individual shares.
Continuum-of-goods model: A class of trade models in which goods are indexed by a continuous variable, approximating the case of very large numbers of goods.
Contract curve
1. In an Edgeworth Box for consumption, the allocations of 2 goods to 2 consumer that are Pareto efficient. Starting with an allocation that may not be on the contract curve, it shows the ways that the consumers might contract to exchange the goods with each other.
2. In an Edgeworth Box for production, this name is sometimes also used for the efficiency locus.
Contract manufacturing: A firm allowing another firm to manufacture a pre-specified product.
Contracting party: A country that has signed the GATT (General Agreement on Tariffs and Trade). The term Contracting Parties with both words capitalized means all Contracting Parties acting jointly.
Contractionary: Tending to cause aggregate output (GDP: Gross domestic product) and/or the price level to fall. Term is typically applied to monetary policy (a decrease in the money supply or an increase in interest rates) and to fiscal policy (a decrease in government spending or a tax increase), but may also apply to other macroeconomic shocks. It contrasts expansionary.
Contribution margin: Amount that each additional product, such as a jet engine, contributes to after-tax profit of the whole project.
Controlled disbursement: A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to give early or mid-morning notification of the total dollar amount of checks that will be presented against its account that day.
Controlled Foreign Corporation (CFC): A foreign corporation whose young stock is more than 50% owned by U.S. stockholders, each of whom owns at least 10% of the voting power. In the U.S. tax code, a foreign corporation owned more than 50 percent either in terms of market value or voting power.
Convergence: The process of becoming quantitatively more alike. In an international context, it often refers to countries becoming more alike in terms of their factor prices or in terms of their per capita incomes, perhaps as a result of trade or other forms of economic integration.
Conversion price: The price per share at which common stock will be exchanged for a convertible security. It is equal to the face value of the convertible security divided by the conversion ratio.
Conversion ratio: The number of shares of common stock into which a convertible security can be converted. It is equal to the face value of the convertible security divided by the conversion price.
Conversion value: The value of the convertible security in terms of the common stock into which the security can be converted. It is equal to the conversion ratio Verdana the current market price per share of the common stock.
Convertible bonds: Fixed-rate bonds that are convertible into a given number of shares prior to maturity. Bonds sold with a conversion feature that allows the holder to convert the bond into common stock on or prior to a conversion date and at a pre-specified conversion price.
Convertible currency: A currency that can be traded for other currencies at will. A currency that can legally be exchanged for another or for gold. In times of crisis, governments sometimes restrict such exchange, giving rise to black market exchange rates.
Convertible security: A bond or a preferred stock that is convertible into a specified number of shares of common stock at the option of the holder.
Convex tax schedule: A tax schedule in which the effective tax rate is greater at high levels of taxable income than at low levels of taxable income. Such a schedule results in progressive taxation.
Copenhagen Criteria: The rules and regulations that all applicant countries to the European Union must meet, and to which all EU member nations must maintain.
Core inflation: The rate of inflation excluding certain sectors whose prices are most volatile, specifically food and energy.
Core propositions: The core propositions are the factor price equalization theorem
Corporate culture: The set of values, beliefs, relationships between individuals and functions that guide the decisions of a company to achieve its objectives.
Corporate governance: The system by which corporations are managed and controlled. It encompasses the relationships among a company's shareholders, board of directors, and senior management. The way in which the major stakeholders exert control over the modern corporation. The means whereby companies are controlled.
Corporate income tax: A tax on the profits of corporations. Differences in corporate tax rates across countries can be a cause of foreign direct investment as well as transfer pricing.
Corporate restructuring: Any change in a company's capital structure, operations, or ownership that is outside its ordinary course of business.
Corporate social responsibility: The responsibilities that corporations, including MNCs, have to workers and their families, to consumers, to investors, and to the natural environment.
Corporation: Form of business organization that is created as a distinct legal person composed of one or more actual individuals or legal entities. Primary advantages of a corporation include limited liability, ease of ownership, transfer, and perpetual succession. A business form legally separate from its owners. Its distinguishing features include limited liability, easy transfer of ownership, unlimited life, and an ability to raise large sums of capital.
Correlation coefficient: A standardized statistical measure of the linear relationship between two variables. Its range is from -1.0 (perfect negative correlation), through 0 (no correlation), to 1.0 (perfect positive correlation).
Correlation: A measure of the covariability of two assets that is scaled for the standard deviations of the assets.
Correspondent bank: A bank that, in its own country, handles the business of a foreign bank. A bank located in any other city, state, or country that provides a service for another bank.
Corruption perceptions index (CPI): A ranking of countries by level of corruption that is researched and published by Transparency International (TI), the world's leading non-governmental organization dedicated to fighting corruption.
Cost advantage: Possession of a lower cost of production or operation than a competing firm or country. In the case of countries, this could refer to an absolute advantage, although it is more likely a comparative advantage.
Cost and Freight: A pricing term that indicates that the cost of the goods and freight charges are included in the quoted price.
Cost function: A function relating the minimized total cost in a firm or industry to output and factor prices.
Cost of capital: The required rate of return on the various types of financing. The overall cost of capital is a weighted average of the individual required rates of return (costs).
Cost of debt (capital: The required rate of return on investment of the lenders of a company.
Cost of equity capital: The required rate of return on investment of the common shareholders of the company. It is the required return on the company's common stock in capital markets. It is also called the equity holders' required rate of return because it is what equity holders can expect to obtain in the capital market. It is a cost from the firm's perspective. It is the minimum rate of return necessary to induce investors to buy or hold a firm’s stock. It equals a basic yield covering the time value of money plus a premium for risk.
Cost of goods sold: Product costs (inventoriable costs) that become period expenses only when the products are sold; equals beginning inventory plus cost of goods purchased or manufactured minus ending inventory.
Cost of preferred stock (capital): The required rate of return on investment of the preferred shareholders of the company.
Cost, Insurance, and Freight (CIF): The price of a traded good including transport cost. It means that a price includes the various costs, such as transportation and insurance, needed to get a good from one country to another. It contrasts with FOB.
Cost-benefit analysis: The use of economic analysis to quantify the gains and losses from a policy or program as well as their distribution across different groups in a society.
Counter credit: Another name for back-to-back letter of credit.
Countertrade: The sale of goods or services that are paid for in whole or part by the transfer of goods or services from a foreign country. Generic term for barter and other forms of trade that involve the international sale of goods or services that are paid for – in whole or in part – by the transfer of goods or services from a foreign country. A form of barter in which the exporting firm is required to take the countervalue of its sale in local goods or services instead of in cash.
Countervailing duties: Duties levied on an imported good that has been unfairly subsidized by a foreign government. Imposing duties on the good is meant to raise the product's price to a fair market value. A tariff levied against imports that are subsidized by the exporting country's government, designed to offset (countervail) the effect of the subsidy.
Country of origin: The country in which a good was produced, or sometimes, in the case of a traded service, the home country of the service provider.
Country risk: The risk associated with operating in, trading with, or especially holding the assets issued by, a particular country. In the case of assets, country risk helps to explain why borrowers in some country must pay higher interest rates than borrowers from other countries, thus paying a country risk premium. The general level of political and economic uncertainty in a country affecting the value of loans or investments in that country. From a bank’s standpoint, it refers to the possibility that borrowers in a country will be unable to service or repay their debts to foreign lenders in a timely manner. The political and financial risks of conducting business in a particular foreign country.
Country size: Any of many measures of the size of a country. For most economic comparisons, however, country size refers to GDP (Gross domestic product).
Coupon rate: The stated rate of interest on a bond; the annual interest payment divided by the bond's face value.
Coupon swap: Swap in which one party pays a fixed rate calculated at the time of trade as a spread to a particular Treasury bond, and the other side pays a floating rate that resets periodically throughout the life of the deal against a designated index. A fixed-for-floating interest rate swap.
Coupon: The stated interest on a debt instrument. The interest payment on a bond, so-named because bonds originally were pieces of paper with small sections, called coupons, that were cut off and exchanged for the interest payments.
Cournot competition: The assumption, assumed to be made by firms in an oligopoly, that other firms hold their outputs constant as they themselves change behavior. It contrasts with Bertrand competition. Both are used in models of international oligopoly, but Cournot competition is used more often.
Cournot's law: That the sum of the balances of payments or of trade across all countries must be zero.
Covariance: A measure of the covariability of two assets. It is a statistical measure of the degree to which two variables (e.g., securities' returns) move together. A positive value means that, on average, they move in the same direction.
Covenant: A restriction on a borrower imposed by a lender: for example, the borrower must maintain a minimum amount of working capital.
Cover note: Insurance document evidencing that insurance cover for a consignment has been taken out, but not giving full details.
Cover: To use the forward market to protect against exchange risk. Typically, an importer with a future commitment to pay in foreign currency would buy it forward, and exporter with a future receipt would sell it forward, and a purchaser of a foreign bond would sell forward the expected proceeds at maturity.
Coverage ratios: Ratios that relate the financial charges of a firm to its ability to service, or cover, them.
Covered interest arbitrage: Movement of short-term funds between two currencies to take advantage of interest differentials with exchange risk eliminated by means of forward contracts.
Covered interest differential: The difference between the domestic interest rate and the hedged foreign interest rate.
Covered interest parity: Equality of returns on otherwise comparable financial assets denominated in two currencies, assuming that the forward market is used to cover against exchange risk. As an approximation, covered interest parity requires that i = i* + p where i is the domestic interest rate, i* is the foreign interest rate, and p is the forward premium. A combination of transactions on two countries' securities and exchange markets designed to profit from failure of covered interest parity. A typical set of transactions would include selling bonds in one market, using the proceeds to buy spot foreign currency and foreign bonds, and selling forward the return at a future date.
Covered interest rate: The covered interest rate, in a currency other than your own, is the nominal interest rate plus the forward premium on the currency; thus the percent you will earn holding the foreign asset while protecting against exchange-rate change by selling the foreign currency forward.
Crawling peg: An exchange rate that is pegged, but for which the par value is changed frequently in a preannounce fashion in response to signals from the exchange market.
Credit crunch: A shortage of available loans. In well-functioning markets, this would simply mean a rise in interest rates, but in practice it often means that some borrowers cannot get loans at all, a situation of credit rationing.
Credit period: The total length of time over which credit is extended to a customer to pay a bill.
Credit risk insurance: Insurance that covers the risk of nonpayment for delivered goods.
Credit standard: The minimum quality of creditworthiness of a credit applicant that is acceptable to the firm.
1. Recorded as positive (+) in the balance of payments, any transaction that gives rise to a payment into the country, such as an export, the sale of an asset (including official reserves), or borrowing from abroad. It is opposite of debit.
2. A loan, for example, a trade credit.
Creditor nation: A country whose assets owned abroad are worth more than the assets within the country that are owned by foreigners. It contrasts with debtor nation.
Credit-scoring system: A system used to decide whether to grant credit by assigning numerical scores to various characteristics related to creditworthiness.
Creeping inflation: This term seems to be used both for a rate of inflation that is low but nonetheless high enough to cause problems, and for a rate of inflation that itself gradually moves higher over time.
Crony capitalism: Used to describe a capitalist economy in which government or corporate officials and insiders provide lucrative opportunities for their friends and relatives. Term became popular during the Asian Crisis to describe some of the victim countries, but is now often used elsewhere as well.
Cross elasticity:
1. An elasticity that has been ignored by a student in a problem set.
2. The elasticity of supply or demand for one good or service with respect to the price of another.
Cross rate:
1. The exchange rate between two currencies as implied by their values with respect to a third currency.
2. Thus, since most currencies are commonly quoted in U.S. dollars, the exchange rate between any two currencies other than the dollar. A futures hedge using a currency that is different from, but closely related to, the currency of the underlying exposure.
Cross subsidy: The use of profits from one activity to cover losses from another. Thus the use of high prices for some of a firm's products, for example, to permit it to price below cost for others. In international trade, this could be one explanation for dumping.
Cross-border supply: The provision of an internationally traded service across national borders without requiring physical movement of buyer or seller, as when the service can be provided by long-distance communication. One of four such modes of supply of traded services.
Cross-Default Clause: Clause in a loan agreement which says that a default by a borrower to one lender is a default to all lenders.
Cross-hauling: The simultaneous shipment of the same product in opposite directions over the same route. The export of the same good by two countries to each other would be cross-hauling, if it occurs at the same time.
Cross-Hedge: Hedging exposure in one currency by the use of futures or other contracts on a second currency that is correlated with the first currency.
Cross-Rate: The exchange rate between two currencies, neither of which is the U.S. dollar, calculated by using the dollar rates for both currencies.
CTD: WTO Committee on Trade and Development
Cultural argument for protection: The view that imports undermine a country's culture and identity -- for example by changing consumption patterns to ones more similar to those abroad, or by reducing demands for domestically produced art and music -- and therefore that imports should be restricted.
Culture: Collective mental paradigms that a society imparts to individuals in the form of behavior patterns, shared values, norms and institutions.
Cumulation: In an anti-dumping case against imports from more than one country, the summation of these imports for the purpose of determining injury. That is, the imports are deemed to have caused injury if all of them together could have done so, even if individually they would not.
Cumulative dividends feature: A requirement that all cumulative unpaid dividends on the preferred stock be paid before a dividend may be paid on the common stock.
Cumulative translation adjustment (CTA): An equity account under FAS #52 that accumulates gains or losses caused by translation accounting adjustments.
Cumulative voting: A method of electing corporate directors, where each common share held carries as many votes as there are directors to be elected and each shareholder may accumulate these votes and cast them in any fashion for one or more particular directors.
Currency arbitrage: Taking advantage of divergences in exchange rates in different money markets by buying a currency in one market and selling it in another.
Currency area: A group of countries that share a common currency. Originally it is defined as a group that has fixed exchange rates among their national currencies.
Currency basket: A group of two or more currencies that may be used as a unit of account, or to which another currency may be pegged.
Currency bloc:
1. A group of countries that share a common currency; a currency area.
2. A group of countries that peg their different national currencies to a single currency.
Currency board: An extreme form of pegged exchange rate in which management of both the exchange rate and the money supply are taken away from the central bank and given to an agency with instructions to back every unit of circulating domestic currency with a specified amount of foreign currency. It operates similar to the gold standard.
Currency call option: A financial contract that gives the buyer the right, but not the obligation, to buy a specified number of units of foreign currency from the option seller at a fixed dollar price, up to the option’s expiration date.
Currency collar: A contract that provides protection against currency moves outside an agreed-upon range. It can be created by simultaneously buying an out-of-the-money put option and selling an out-of-the-money call option of the same size. In effect, the purchase of the put option is financed by the sale of the call option.
Currency controls: Exchange controls.
Currency coupon swap: A fixed-for-floating rate nonamortizing currency swap traded primarily through international commercial banks.
Currency crisis: The crisis that occurs when participants in an exchange market come to perceive that an attempt to maintain a pegged exchange rate is about to fail, causing speculation against the peg that hastens the failure and forces a devaluation.
Currency cross-hedge: A hedge of currency risk using a currency that is correlated with the currency in which the underlying exposure is denominated.
Currency factor: The portion of a rate of return that is due to the currency in which the asset is denominated. The currency factor can be nonzero either because of currency risk or because of expected appreciation or depreciation.
Currency foreign exchange risk: The risk of unexpected changes in foreign currency exchange rates.
Currency futures contract: Contract for future delivery of a specific quantity of a given currency, with the exchange rate fixed at the time the contract is entered. Futures contracts are similar to forward contracts except that they are traded on organized futures except that they are traded on organized futures exchanges and the gains and losses on the contracts are settled each day.
Currency in circulation: The amount of a country's currency that is in the hands of the public (households, firms, banks, etc), as opposed to sitting in the vaults of the central bank.
Currency of denomination: Currency in which a transaction is stated. Currency whose value determines a given price.
Currency of reference: The currency that is being bought or sold. It is most convenient to place the currency of reference in the denominator of a foreign exchange quote.
Currency option: A financial contract that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a specified number of foreign currency units to the option seller at a fixed dollar price, up to the option’s expiration date. A contract that gives the holder the right to buy (call) or sell (put) a specific amount of a foreign currency at some specified price until a certain (expiration) date. A contract giving the option holder the right to buy or sell an underlying currency at a specified price and on a specified date. The option writer (i.e. seller) holds the obligation to fulfill the other side of the contract.
Currency put option: A financial contract that gives the buyer the right, but not the obligation, to sell a specified number of foreign currency units to the option seller at a fixed dollar price, up to the option’s expiration date.
Currency realignment: A change in the par value of a pegged exchange rate.
Currency risk sharing: An agreement by the parties to a transaction to share the currency risk associated with the transaction. The arrangement involves a customized hedge contract imbedded in the underlying transaction.
Currency risk: Uncertainty about the future value of a currency.
Currency speculation: To buy or sell a currency in anticipation of its appreciation or depreciation respectively, the intent being to make a profit or avoid a loss.
Currency spread: An options position created by buying an option at one strike price and selling a similar option at a different strike price. It allows speculators to bet on the direction of a currency at a lower cost than buying a put or a call option alone but at the cost of limiting the position’s upside potential.
Currency swap: A contractual agreement to exchange a principal amount of two different currencies and, after a prearranged length of time, to give back the original principal. Interest payments in each currency are also typically swapped during the life of the agreement. It is a simultaneous borrowing and lending operation whereby two parties exchange specific amounts of two currencies at the outset at the spot rate. They also exchange interest rate payments in the two currencies. The parties undertake to reverse the exchange after a fixed term at a fixed exchange rate.
Currency union: A group of countries that agree to peg their exchange rates and to coordinate their monetary policies so as to avoid the need for currency realignments.
1. The money used by a country; e.g., the national currency of Japan is the yen.
2. The physical embodiment of money, in the forms of paper bills or notes, and metal coins.
Current account: A measure of a country’s international trade in goods and services. Net flow of goods, services, and unilateral transactions (gifts) between countries. A broad measure of import-export activity that includes services, travel and tourism, transportation, investment income and interest, gifts, and grants along with the trade balance on goods. A country's international transactions arising from current flows, as opposed to changes in stocks which are part of the capital account. Includes trade in goods and services, including payments of interest and dividends on capital, plus inflows and outflows of transfers.
Current assets: Short-term assets, including cash, marketable securities, accounts receivable, and inventory.
Current Exchange Rate: Exchange in effect today.
Current Liabilities: Short-term liabilities, such as accounts payable and loans expected to be repaid within one year.
Current prices: Refers to prices in the present, rather than in some base year; e.g., GDP at current prices means GDP as measured, in contrast to real GDP, or GDP at XXXX prices, where the latter is measured in the prices of year XXXX.
Current rate method: Under this currency translation, all foreign currency balance-sheet and income items are translated at the current exchange rate. A translation accounting method, such as FAS #52 in the United States, that translates monetary and real assets and monetary liabilities at current exchange rates. FSA #52 places any imbalance into an equity account called the cumulative translation adjustment.
Current ratio: Current assets divided by current liabilities. It shows a firm's ability to cover its current liabilities with its current assets.
Current/Noncurrent Method: Under this currency translation method, all of a foreign subsidiary’s current assets and liabilities are translated into home currency at the current exchange rate while noncurrent assets and liabilities are translated at the historical exchange rate (that is, at the rate in effect at the time the asset was acquired or the liability incurred).
Custom union: A form of regional economic integration group that eliminates tariffs among member nations and establishes common external tariffs.
Customhouse broker: A person or firm obtains the license from the treasury department of its Country when required, and help clients (i.e. importers) to enter and declare goods through customs.
Customs area: A geographic area that is responsible for levying its own customs duties at its border.
Customs classification:
1. The category defining the tariff to be applied to an imported good.
2. The act of determining this category, which may be subject to various rules and/or to the discretion of the customs officer.
Customs Cooperation Council Nomenclature (CCCN) : An international system of classification of goods for specifying tariffs, called the Brussels Tariff Nomenclature prior to 1976, and later superceded by the Harmonized System of Tariff Nomenclature
Customs duty: An import tariff.
Customs officer: The government official who monitors goods moving across a national border and levies tariffs.
Customs procedure: The practices used by customs officers to clear goods into a country and levy tariffs. Includes clearance procedures such as documentation and inspection, methods of determining a good's classification, and methods of assigning its value as the base for an ad valorem tariff. Any of these can impede trade and constitute a NTB (Nontariff barrier).
Customs station: An office through which imported goods must pass in order to be monitored and taxed by customs officers.
Customs union: A group of countries that adopt free trade (zero tariffs and no other restrictions on trade) on trade among themselves, and that also, on each product, agree to levy the same tariff on imports from outside the group. Equivalent to an FTA plus a common external tariff.
Customs valuation: The method by which a customs officer determines the value of an imported good for the purpose of levying an ad valorem tariff. When this method is biased against importing, it becomes an NTB (Nontariff barrier).
Customs: The authorities designated to collect duties levied by a country on imports and exports.
Cyclical unemployment: The portion of unemployment that is due to the business cycle and thus rises in recessions but then disappears eventually after the recession ends.
Cylinder: The payoff profile of a currency collar created through a combined put purchase and call sale.

Deadweight loss: The net loss in economic welfare that is caused by a tariff or other source of distortion, defined as the total losses to those who lose, minus the total gains to those who gain. Usually identified in a supply-and-demand diagram in terms of change in consumer and producer surplus together with government revenue. The net of these appears as one or two welfare triangles.
Dealing desk (trading desk): The desk at an international bank that trades spot and forward foreign exchange.
Debase: To reduce the value of. Classically, a currency is debased if its value in terms of gold or other precious metal is reduced.
Debenture: A long-term, unsecured debt instrument.
1. A debt that is not backed by collateral, but only by the credit and good faith of the borrower.
2. A certificate issued by customs authorities entitling an exporter of imported goods to be paid back duties that have been paid when they were imported. Such a refund is called a drawback.
Debit: Recorded as negative (-) in the balance of payments, any transaction that gives rise to a payment out of the country, such as an import, the purchase of an asset (including official reserves), or lending to foreigners. Opposite of credit.
Debt burden: The debt of a country, when large enough that servicing it has become difficult.
Debt cancellation: The most extreme form of debt relief, in which a country's debts are completely forgiven, so that no repayment of interest or principal is required.
Debt capacity: The amount of debt that a firm chooses to borrow to support a project. The maximum amount of debt (and other fixed-charge financing) that a firm can adequately service.
Debt crisis: A situation in which a country, usually an LDC, finds itself unable to service its debts.
Debt overhang: A situation in which the external debt of a country is larger than it will be able to repay. Often due to having borrowed in foreign currency and then had its own currency depreciate.
Debt ratios: Ratios that show the extent to which the firm is financed by debt.
Debt relief: Any arrangement intended to reduce the burden of debt on a country, usually including forgiveness of part or all of what is owed to creditors who may include private banks and other entities, government, or international financial institutions. Reducing the principal and/or interest payments on LDC loans.
Debt service: The payments made by a borrower on their debt, usually including both interest payments and partial repayment of principal.
Debt sustainability: The ability of a debtor country to service its debt on a continuing basis and not go into default. After a debt crisis, sustainability may be restored through debt rescheduling.
Debt Swap: A set of transactions (also called a debt-equity swap) in which a firm buys a country’s dollar bank debt at a discount and swaps this debt with the central bank for local currency that it can use to acquire local equity.
Debt/equity swap: An exchange of debt for equity, in which a lender is given a share of ownership to replace a loan. It is used as a method of resolving debt crises.
Debt: The amount that is owed, as a result of previous borrowing. A country's debt may refer to the debt of its government or to the country as a whole.
Debt-for-equity swap: A swap agreement to exchange equity (debt) returns for debt (equity) returns over a prearranged length of time.
Debtor nation: A country whose assets owned abroad are worth less than the assets within the country that are owned by foreigners. It contrasts with creditor nation.
Debt-service burden: Cash required during a specific period, usually a year, to meet interest expenses and principal payments. Also called simply debt service.
Decile: One of ten segments of a distribution that has been divided into tenths. For example, the second-from-the-bottom decile of an income distribution is those whose income exceeds the incomes of from 10% to 20% of the population.
Decision trees: A graphical analysis of sequential decisions and the likely outcomes of those decisions.
Declaration date: The date that the board of directors announces the amount and date of the next dividend.
Declining-balance depreciation: Methods of depreciation calling for an annual charge based on a fixed percentage of the asset's depreciated book value at the beginning of the year for which the depreciation charge applies.
Decouple: Refers to the provision of support to an enterprise, usually a farm, in a manner that does not provide an incentive to increase production. Farm subsidies that are decoupled are included in the green box and are therefore permitted by the WTO.
Decreasing cost: Average cost that declines as output increases, due to increasing returns to scale.
Decreasing returns to scale: A property of a production function such that changing all inputs by the same proportion changes output less than in proportion. Example: a function homogeneous of degree less than one. Also called simply decreasing returns. Not to be confused with diminishing returns this refers to increasing some inputs while holding other inputs fixed. It contrasts with increasing returns and constant returns.
Deep integration: Refers to economic integration that goes well beyond removal of formal barriers to trade and includes various ways of reducing the international burden of differing national regulations, such as mutual recognition and harmonization. It contrasts with shallow integration.
Default: Failure to repay a loan. International loans by governments and private agents lack mechanisms to deal with default, comparable to the legal mechanisms that exist within countries. The failure to meet the terms of a contract, such as failure to make interest or principal payments when due on a loan.
Deferred payment credit: A type of letter of credit which provides for payment some time after presentation of the shipping documents by the exporter.
Deferred taxes: A liability that represents the accumulated difference between the income tax expense reported on the firm's books and the income tax actually paid. It arises principally because depreciation is calculated differently for financial reporting than for tax reporting.
Deficiency Payment: Payment to a producer of an amount equal to the difference between a guaranteed price and the market price, with the latter often determined on the world market. A form of subsidy to production.
Deficit financing:
1. The method used by a government to finance its budget deficit, that is, to cover the difference between its tax receipts and its expenditures. The main choices are to issue bonds or to print money.
2. The assumption that a change in government spending or taxes will be financed by a change in the government budget deficit, rather than by an accommodating additional change in spending or taxes to keep the budget balanced. Example: a "deficit-financed increase in government purchases."
1. In the balance of payments, or in any category of international transactions within it, the deficit is the sum of debits minus the sum of credits, or the negative of the surplus.
2. In the government budget, the deficit is the excess of government expenditures over receipts from taxes.
Deflation: A fall in the general level of prices. Unlikely unless the rate of inflation is already low, it may then be due either to a surge in productivity or, less favorably, to a recession.
Deflator: The ratio of a nominal magnitude to its real counterpart. Usually refers, as with the GDP deflator, when the real magnitude has been constructed from underlying data and not by simply deflating the nominal magnitude by a corresponding price index, in which case the deflator itself may be used as though it were a price index.
Degree of financial leverage (DFL): The percentage change in a firm's earnings per share (EPS) resulting from a 1 percent change in operating profit (EBIT).
Degree of operating leverage (DOL): The percentage change in a firm's operating profit (EBIT) resulting from a 1 percent change in output (sales).
Degree of total leverage (DTL): The percentage change in a firm's earnings per share (EPS) resulting from a 1 percent change in output (sales). This is also equal to a firm's degree of operating leverage (DOL) Verdana its degree of financial leverage (DFL) at a particular level of output (sales).
Degressive: Declining with income or over time. A degressive income tax takes a smaller fraction of higher incomes. Degressivity in trade policy might be a tariff the ad valoren size of which is scheduled to decline over time, or a quota that is scheduled to expand faster than demand for imports.
De-industrialization: A decline over time in the share of the manufacturing in an economy, usually accompanied by growth in the share of services. Typically accompanied by an increase in manufactured imports, it may raise concern that the country is losing valuable economic activity to others.
Deliverable instrument: The asset underlying a derivative security. For a currency option, the deliverable instrument is determined by the options exchange and is either spot currency or an equivalent value in futures contracts.
Delta-cross-hedge: A futures hedge that has both currency and maturity mismatches with the underlying exposure.
Delta-hedge: A futures hedge using a currency that matches the underlying exposure and a maturity date that is different from, but preferably close to, the maturity of the underlying exposure.
Demand curve: The graph of quantity demanded as a function of price, normally downward sloping, straight or curved, and drawn with quantity on the horizontal axis and price on the vertical axis. Demand curves for imports and for foreign exchange usually have the same qualitative properties as demand curves for goods, but for somewhat different reasons.
Demand deposit: A bank deposit that can be withdrawn "on demand." The term usually refers only to checking accounts, even though depositors in many other kinds of accounts may be able to write checks and regard their deposits as readily available.
Demand elasticity: Normally the price elasticity of demand. References to other elasticity’s of demand, such as the income elasticity are normally explicit.
Demand function: The mathematical function explaining the quantity demanded in terms of its various determinants, including income and price; thus the algebraic representation of the demand curve.
Demand management: A business process with the intention to coordinate and influence all sources of demand for a firm’s products.
Demand price: The price at which a given quantity is demanded; the demand curve viewed from the perspective of price as a function of quantity.
Demand schedule: A list of prices and corresponding quantities demanded, or the graph of that information. Therefore, a demand curve.
1. The act of offering to buy a product.
2. The quantity offered to buy.
3. The quantities offered to buy at various prices; the demand curve.
Demographic transition: The change that typically takes place, as a country develops, in the birth and death rates of its population, both of which tend eventually to fall as per capita income rises.
Dependency Theory: The theory that less developed countries are poor because they allow themselves to be exploited by the developed countries through international trade and investment.
Dependent (or contingent) project: A project whose acceptance depends on the acceptance of one or more other projects.
Deposit: An amount of money placed with a bank for safekeeping, convenience, and/or to earn interest.
Depository receipt: A derivative security issued by a foreign borrower through a domestic trustee representing ownership in the deposit of foreign shares held by the trustee.
Depository transfer check (DTC): A non-negotiable check payable to a single company account at a concentration bank.
Depreciable basis: In tax accounting, the fully installed cost of an asset. This is the amount that, by law, may be written off over time for tax purposes.
Depreciation Tax Shield: The value of the tax write-off on depreciation of plant and equipment.
Depreciation: A decrease in a currency value relative to another currency in a floating exchange rate system. Devaluation. The systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both.
1. A fall in the value of a country's currency on the exchange market, relative either to a particular other currency or to a weighted average of other currencies. The currency is said to depreciate. Opposite of "appreciation."
2. The decline in value or usefulness of a piece of capital over time, and/or with use.
Deregulation: The lessening or complete removal of government regulations on an industry, especially concerning the price that firms are allowed to charge and leaving price to be determined by market forces.
Derivative security: A financial security whose price is derived from the price of another asset. A financial contract whose value derives in part from the value and characteristics of one or more underlying assets (e.g., securities, commodities), interest rates, exchange rates, or indices.
Derivatives: Contracts that derive their value from some underlying asset (such as a stock, bond, or currency), reference rate (such as a 90-day Treasury bill rate), or index (such as the S & P 500 stock index). Popular derivatives include swaps, forwards, futures, and options.
Derived demand: Demand that arises or is defined indirectly from some other demand or underlying behavior; e.g., demand for foreign currency is derived from demand for foreign goods, bonds, etc., while demand for import of a homogeneous good is derived from domestic demand and supply.
Derogation: As used in the trade literature, this seems to mean a departure from the established rules, as when a country's policies are said to constitute a derogation from the GATT.
Destabilizing speculation: Speculation that increases the movements of the price in the market where the speculation occurs. Movement may be defined by amplitude, frequency, or some other measure.
Destination principle: The principle in international taxation that value added taxes be kept only by the country where the taxed product is being sold. Under the destination principle, value added taxes are collected on imports and rebated on exports. It contrasts with the origin principle.
Devaluation: A decrease in the spot value of a currency. A decrease in a currency value relative to another currency in a fixed exchange rate system. The official lowering of the value of one country's currency in terms of one or more foreign currencies.
1. Depreciation.
2. A fall in the value of a currency that has been pegged, either because of an announced reduction in the par value of the currency with the peg continuing, or because the pegged rate is abandoned and the floating rate declines.
3. A fall in the value of a currency in terms of gold or silver, meaningful only under some form of gold standard or silver standard.
Develop: To experience a sustained and substantial increase in per capita income; thus to undergo economic development.
Developed countries: The richer, more industrialized countries in the world. A country whose per capita income is high by world standards. A country that is in the process of becoming industrialized. A country whose per capita income is low by world standards. Same as LDC. As usually used, it does not necessarily connote that the country's income is rising.
Development bank: A multilateral institution that provides financing for development needs of a regional group of countries. Examples include the African, Asian, and Inter-American Development Banks.
Development finance: Provision of credit to a developing country to permit it to undertake development projects that it could not otherwise afford.
Development project: A project intended to increase a developing country's ability to produce in the future. Such projects are most commonly additions to the country's capital stock, but they may involve improvements in infrastructure, educational facilities, discovery or development of natural resources, etc.
DFID: Department for International Development (UK)
Difference check: The difference in interest payments that is exchanged between two swap counterparties.
Differentiated product:
1. A firm's product that is not identical to products of other firms in the same industry. It contrasts with homogeneous product.
2. Sometimes applied to products produced by a country, even though there are many firms within the country whose products are the same, if buyers distinguish products based on country of origin.
Digital divide: The digital divide refers to the widening technological gap between the richer and the poorer countries of the world.
Dillon Round: The fifth round of multilateral trade negotiations that was held under GATT auspices, commencing 1960 and completed 1961. It was the first to be given a name, after C. Douglas Dillon, U.S. Undersecretary of State under Eisenhower and Treasury Secretary under Kennedy.
Dilution: A decrease in the proportional claim on earnings and assets of a share of common stock because of the issuance of additional shares.
Diminishing returns: The fall in the marginal product of a factor or factors that eventually occurs as input of that factor rises, holding the input of at least one other factor fixed, according to the Law of Diminishing Returns.
Direct costs of financial distress: Costs of financial distress that are directly incurred during bankruptcy or liquidation proceedings.
Direct exporting: Marketer takes direct responsibility for its products abroad by selling them directly to foreign customers or through local representatives in foreign markets.
Direct factor content: A measure of factor content that includes only the factors used in the last stage of production, ignoring factors used in producing intermediate inputs. It contrasts with direct-plus-indirect factor content.
Direct Financing: Lease A non-leveraged lease by a lessor in which the lease meets any of the definitional criteria of a capital lease, plus certain additional criteria.
Direct product profitability: Measuring the direct costs associated with handling a product from the warehouse until a customer buys from the retail store.
Direct Quotation: A quote that gives the home currency price of a foreign currency.
Direct terms: The price of a unit of foreign currency in domestic currency terms, such as $.6548/DM for a U.S. resident. Contrast with indirect quote.
Direction of trade: Refers to the particular countries and kinds of countries toward which a country's exports are sent, and from which its imports are brought, in contrast to the commodity composition of its exports and imports. Therefore, the pattern of its bilateral trade.
Directly Unproductive Profit-Seeking Activities: Activities that have no direct productive purpose (neither increasing consumer utility nor contributing to production of a good or service that would increase utility) and are motivated by the desire to make profit, typically from market distortions created by government policies. Examples are rent seeking and revenue seeking.
Direct-plus-indirect factor content: A measure of factor content that includes factors used in producing intermediate inputs, factors used in producing intermediate inputs to the intermediate inputs, and so forth. That is, it includes all primary factors that contributed however indirectly to production of the good. Contrasts with direct factor content.
Dirigiste: Centrally planned; that is, under the direction of a central authority, normally the government. It contrasts with decentralized, or a system in which economic decisions are determined by market forces in a market economy.
Disarticulation: The absence of linkage among sectors of an economy, so that growth in some does not spill over into improved productivity and well being in others.
Disbursement float: Total time between the mailing of a check by a firm and the check's clearing the firm's checking account.
Discount Basis: Means of quoting the interest rate on a loan under which the bank deducts the interest in advance.
Discount rate (capitalization rate): Interest rate used to convert future values to present values.
Discount rate:
1. The rate, per year, at which future values are diminished to make them comparable to values in the present. Can be either subjective (reflecting personal time preference) or objective (a market interest rate).
2. The interest rate that the Fed charges commercial banks for very short-term loans of reserves. One of the tools of monetary policy.
Discount: If a bond is selling below its face value, it is said to sell at a discount.
1. Any reduction in price or value, especially when below a stated or normal price.
2. To buy or sell commercial paper at a price below face value to account for interest to accrue before maturity.
Discounted cash flow (DCF): Any method of investment project evaluation and selection that adjusts cash flows over time for the time value of money. A valuation methodology that discounts expected future cash flows at a discount rate appropriate for the risk, currency, and maturity of the cash flows.
Discounted payback period rule: An investment decision rule in which the cash flows are discounted at an interest rate and the payback rule is applied on these discounted cash flows.
Discounted payback: The length of time needed to recoup the present value of an investment; sometimes used when investing in locations with high country risk.
Discounting: Calculating the present value of a future amount. The process is the opposite of compounding. A means of borrowing against a trade or other draft. The exporter or other borrower places the draft with a bank or other financial institution and, in turn, receives the face value of the draft less interest and commissions.
Discretionary reserves: Balance sheet accounts that are used in some countries to temporarily store earnings from the current year or the recent past.
Discriminatory pricing: The practice that selling a product or service at different prices that do not reflect a proportional difference in costs.
Discriminatory tariff: A higher tariff against one source of imports than against another. Except in special circumstances, such as anti-dumping duties, this is a violation of MFN and is prohibited by the WTO against other members.
1. Inequality of supply and demand.
2. An untenable state of an economic system, from which it may be expected to change.
1. To allow a stock of capital to become smaller over time, either by selling parts of it or by allowing it to depreciate without replacing it.
2. To reduce inventories, either absolutely or by more than any increase in plant and equipment.
3. To sell off all or a portion of a portfolio of financial assets.
Dispatch: An amount paid by a vessel's operator to a charter if loading or unloading is completed in less time than stipulated in the charter party.
Disposable income: Income minus taxes. More accurately, income minus direct taxes plus transfer payments; that is, the income available to be spent (including on imports) and saved.
Dissipate rent: To use up, in real resources, the full value of the economic rents that are being sought by rent seeking.
Distortion: Any departure from the ideal of perfect competition that interferes with economic agents maximizing social welfare when they maximize their own. Includes taxes and subsidies, tariffs and NTBs (Nontariff barrier), externalities, incomplete information, and imperfect competition.
1. The productive activity of getting produced goods from the factory into the hands of consumers.
2. The amounts of income or wealth in the hands of different portions of a population.
Distributor: A foreign agent who sells for a supplier directly and maintains an inventory of the supplier’s product.
Diversifiable (unique) (unsystematic) risk: A risk that specifically affects a single asset or a small group of assets, also called the unique or unsystematic risk.
Diversification cone: For given prices in the Heckscher-Ohlin Model, a set of factor endowment combinations that are consistent with producing the same set of goods and having the same factor prices. Such a set has the form of a cone.
Diversified portfolio: A portfolio that includes a variety of assets whose prices are not likely all to change together. In international economics, this usually means holding assets denominated in different currencies.
Dividend: The amount paid each quarter by a corporation to its stockholders for each share of stock.
Diversify: To produce more than one thing. In the Heckscher-Ohlin Model with two goods, it means to produce both of them. With more than two goods, it may mean to produce two, or it may mean to produce all of the goods that are possible.
Divestiture: The divestment of a portion of the enterprise or the firm as a whole.
Dividend reinvestment plan (DRIP): An optional plan allowing shareholders to automatically reinvest dividend payments in additional shares of the company's stock.
Dividend yield: Anticipated annual dividend divided by the market price of the stock.
Dividend-payout ratio: Annual cash dividends divided by annual earnings; or alternatively, dividends per share divided by earnings per share. The ratio indicates the percentage of a company's earnings that is paid out to shareholders in cash.
Division of labor: Splitting a production process across multiple workers, each performing a different task repeatedly rather than having a single worker perform all tasks. Adam Smith (1776) pointed out the increased productivity that can result, as well as the potential for gains from trade when division of labor takes place across countries.
DOC: Department of Commerce (USA)
Dock receipt: A receipt issued by an ocean carrier to acknowledge receipt of a shipment at the carrier's dock or warehouse.
Dock Statement: A receipt issued by an ocean carrier to acknowledge the receipt of a shipment at the carrier's dock or warehouse facilities.
Doctrine of Sovereign Immunity: Doctrine that says a nation may not be tried in the courts of another country without its consent.
Documentary Draft: A draft accompanied by documents that are to be delivered to the drawee on payment or acceptance of the draft. Typically, these documents include the bill of lading in negotiable form, the commercial invoice, the consular invoice where required, and an insurance certificate.
Dollar standard: An international financial system in which the U.S. dollar is used by most countries as the primary reserve asset, in contrast to the gold standard in which gold played this role.
Dollarization: The official adoption by a country other than the United States of the U.S. dollar as its local currency.
Domestic bonds: Bonds issued and traded within the internal market of a single country and denominated in the currency of that country.
Domestic content protection: Use of trade policies such as domestic content requirements to increase the portion of a product's value that is provided by domestic factors of production, either in direct production or through produced inputs. Domestic content requirement A requirement that goods sold in a country contain a certain minimum of domestic value added.
Domestic credit: Credit extended by a country's central bank to domestic borrowers, including the government and commercial banks. In the United States, the largest component by far is the Fed's holdings of U.S. government bonds, but it also makes some short-term loans to banks to use as their reserves.
Domestic International Sales Corporation (DISC): A domestic U.S. corporation that receives a tax incentive for export activities. In the U.S. tax code, a specialized sales corporation whose income is lumped into the same income basket as a foreign sales corporation.
Domestic law: The laws and legal system of a country, which may be constrained by international obligations such as WTO membership. Sometimes a domestic law is inconsistent with such obligations and must be changed. This may be seen as a threat to the country's sovereignty.
Domestic Liquidity: The aggregate of money supply, quasi-money or savings and time deposits, and deposit substitutes.
Domestic market: The market within a country's own borders. Dumping, for example, may be defined by comparing the price charged for export with the price charged on the domestic market, i.e., to buyers within the exporting country.
Domestic resource cost: A measure, in terms of real resources, of the opportunity cost of producing or saving foreign exchange. It is an ex ante measure of comparative advantage, used to evaluate projects and policies.
Domestic support: An policy that assists domestic industry, including a subsidy to production, payment not to produce, price support, and other means of increasing the income of producers.
Domestic trade: Commerce within a country; wholesale and retail trade.
Domestic: From or in one's own country. A domestic producer is one that produces inside the home country. A domestic price is the price inside the home country. It is the opposite of foreign or world.
Dot-com: A company with a strong Internet presence that conducts much or all of its business through its web site. The name itself refers to the period (dot) followed by the abbreviation of the commercial domain (.com) at the end of an e-mail or Web address; also called dotcom or
Double Dip Lease: A cross-border lease in which the disparate rules of the lessor’s and lessee’s countries let both parties be treated as the owner of the leased equipment for tax purposes.
Double taxation: Taxation of the same income twice. A classic example is taxation of income at the corporate level and again as dividend income when received by the shareholder.
Down-and-In Option: An option that comes into existence if and only if the currency weakens enough to cross a preset barrier.
Down-and-Out Call: A knockout option that has a positive payoff to the option holder if the underlying currency strengthens but is canceled if it weakens sufficiently to hit the outstrike.
Down-and-Out Put: A knockout option that has a positive payoff if the currency weakens but is canceled if it weakens beyond the outstrike.
Downstream dumping: The export of a good whose cost is reduced by access to a domestically produced intermediate input that is sold below cost. This is not (yet) eligible under any anti-dumping statute for an anti-dumping duty.
Draft (trade bill, bill of exchange) : A means of payment whereby a drawer (the importer) instructs a drawee (either the importer or its commercial bank) to pay the payee (the exporter).
Draft: A signed, written order by which the first party (drawer) instructs a second party (drawee) to pay a specified amount of money to a third party (payee). An unconditional order in writing-signed by a person, usually the exporter, and addressed to the importer or the importer’s agent to pay, on demand (sight draft) or at a fixed future date (time draft), the amount specified on its face. Accepting a draft means writing accepted across its face, followed by an authorized person’s signature and the date. The party accepting a draft incurs the obligation to pay it at maturity.
Dragon Bond: Debt denominated in a foreign currency, usually dollars, but launched, priced, and traded in Asia.
Drawback: Rebate of import duties when the imported good is re-exported or used as input to the production of an exported good.
Drawdown: The period over which the borrower may take down the loan.
DSB: Dispute Settlement Body
DSP: Dispute Settlement Panel
DSU: Dispute Settlement Understanding
Dual Currency Bond: Bond that has the issue’s proceeds and interest payments stated in foreign currency and the principal repayment stated in dollars.
Dual pricing: The practice of selling identical products in different markets for different prices.
Dual Syndicate Equity Offering: An international equity placement where the offering is split into two tranches-domestic and foreign-and cash tranche is handled by a separate lead manager.
Dual-class common stock Two classes of common stock, usually designated Class A and Class B. Class A is usually the weaker voting or nonvoting class, and Class B is usually the stronger.:
Dummy: In a regression analysis, a dummy (or dummy variable) is used to capture an explanatory variable that is either on (with a value of one) or off (zero). For example, in a gravity equation, the coefficient on a common-language dummy would measure the effect on trade flow between two countries of their sharing a common language.
Dumping margin: In a case of dumping, the difference between the "fair price" and the price charged for export. Used as the basis for setting anti-dumping duties.
Dumping: Selling merchandise in another country at a price below the price at which the same merchandise is sold in the home market or selling such merchandise below the costs incurred in production and shipment. Dumping is an illegal trade practice. Export price that is "unfairly low," defined as either below the home market price (normal value) (hence price discrimination) or below cost. With the rare exception of successful predatory dumping, dumping is economically beneficial to the importing country as a whole (though harmful to competing producers) and often represents normal business practice.
Duopoly: An oligopoly with two firms.
Durable good: A good that can continue to be used over an extended period of time.
Dutch auction: A procedure for buying (selling) securities named for a system used for flower auctions in Holland. A buyer (seller) seeks bids within a specified price range, usually for a large block of stock or bonds. After evaluating the range of bid prices received, the buyer (seller) accepts the lowest price that will allow it to acquire (dispose of) the entire block.
Dutiable imports: Imports on which a positive duty, or tariff, is levied. (The term seems like it ought to include imports on which the duty is zero but which a government is somehow free or able, to levy a positive duty. That does not seem to be the way the term is used, however.)
Duty Tax: That is, an import duty is a tariff. <
Duty: A tax imposed on imports by the customs authority of a country.
Duty-free: Without tariff, usually applied to imports on which normally a tariff would be charged, but that for some reason are exempt. Travelers, for example, may be permitted to import a certain amount duty-free.
Dynamic comparative advantage: A changing pattern of comparative advantage over time due to changes in factor endowments or technology.
Dynamic economies of scale: A form of increasing returns to scale in which average cost declines over time as producers accumulate experience, so that average product rises with total output of the firm or industry accumulated over time.
Dynamic effects: Refers to certain poorly understood effects of trade and trade liberalization, including both multilateral and preferential trade agreements, that extend beyond the static gains from trade. Such dynamic effects are thought to make the gains from trade substantially larger than in the static model.
Dynamic gains from trade: The hoped-for benefits from trade that accrue over time, in addition to the conventional static gains from trade of trade theory. Sources of these gains are not well understood or documented, although there exist a variety of possible theoretical reasons for them and some empirical evidence that countries have benefited more than the static gains alone would suggest.
Dynamic model: Any model with an explicit time dimension. To be meaningfully dynamic, however, it should include variables and behavior that, at one time, depend on variables or behavior at another time. Models may be formulated in discrete time or in continuous time. It contrasts with a static model.

EAFE Index: The Morgan Stanley Capital International Europe, Australia, Far East Index, which reflects the performance of all major stock markets outside of North America.
Early harvest: A term, in trade negotiations, for agreeing to accept the results of a portion of the negotiations before the rest of the negotiations are completed.
Earnings per share (EPS): Earnings after taxes (EAT) divided by the number of common shares outstanding.
Earnings response coefficient: The relation of stock returns to earnings surprises around the time of corporate earnings announcements.
Earnings: The total amount earned, usually by a worker as wages or by a firm as profits.
EBITDA: Earnings before interest, taxes, depreciation, and amortization of a firm. Sometimes used as an optimistic indicator of potential profitability.
EBIT-EPS break-even analysis: Analysis of the effect of financing alternatives on earnings per share. The break-even point is the EBIT level where EPS is the same for two (or more) alternatives.
Eclectic paradigm: A theory of the multinational firm that posits three types of advantage benefiting the multinational corporation: ownership-specific, location-specific, and market internalization advantages.
Econometrics: The application of statistical methods to the empirical estimation of economic relationships. Econometric analysis is used extensively in international economics to estimate the causes and effects of international trade, exchange rates, and international capital movements.
Economic and Monetary Union: A currency area formed in 1999 as a result of the Maastricht Treaty. Members of the EMU share the common currency, the euro.
Economic contraction: The downward phase of the business cycle, in which GDP is falling and unemployment is rising over time.
Economic development: Sustained increase in the economic standard of living of a country's population, normally accomplished by increasing its stocks of physical and human capital and improving its technology.
Economic efficiency: The extent to which a given set of resources is being allocated across uses or activities in a manner that maximizes whatever value they are intended to produce, such as output, market value, or utility. Contrasts with engineering efficiency, which focuses within a single activity on the output it produces per unit input.
Economic expansion: The upward phase of the business cycle, in which GDP is rising and unemployment is falling over time.
Economic exposure: Change in the value of a corporation’s assets or liabilities as a result of changes in currency values. Same as exchange rate exposure. The extent to which the value of the firm will change due to an exchange rate change.
Economic freedom: Economic freedom occurs when individuals and businesses make most of the economic decisions in an economy.
Economic freedom: Freedom to engage in economic transactions, without government interference but with government support of the institutions necessary for that freedom, including rule of law, sound money, and open markets.
Economic growth: The increase over time in the capacity of an economy to produce goods and services and (ideally) to improve the well-being of its citizens.
Economic indicator: A variable that is measured and publicly reported and that is considered meaningful not only for itself but as a sign of how rapidly the larger economy is expanding or contracting.
Economic integration: The integration of commercial and financial activities among countries through the abolishment of economic discrimination.
Economic interdependence: The extent to which economic performance (GDP, inflation, unemployment, etc.) in one country depends positively or negatively on performance in other countries.
Economic justice:
1. Fairness and equity in economic affairs, presumably by having laws, governments, and institutions that treat people equally and avoid favoring particular individuals or groups.
2. As most often used, the term carries a connotation that economic justice can only be achieved by lessening the power and changing the practices of international financial institutions, transnational corporations, and rich-country governments.
Economic order quantity (EOQ): The quantity of an inventory item to order so that total inventory costs are minimized over the firm's planning period.
Economic profit: Revenue from an activity minus the opportunity cost of the resources used in that activity.
Economic rate of return: The net benefits to all members of society, as a percentage of cost, taking into account externalities and other market imperfections.
Economic sanction: The use of an economic policy as a sanction.
Economic union: A group that combines the economic characteristics of a common market with some degree of harmonization of monetary and fiscal policies. A common market with the added feature that additional policies -- monetary, fiscal, welfare -- are also harmonized across the member countries.
Economic value added (EVA): A measure of business performance. It is a type of economic profit that is equal to a company's after-tax net operating profit minus a dollar cost of capital charge, and possibly including some adjustments. A method of performance evaluation that adjusts accounting performance with a charge reflecting investors’ required return on investment.
Economies of scale: Achieving lower average cost per unit through a larger scale of production. The benefits of size in which the average unit cost falls as volume increases. Increasing returns to scale. Situation in which increasing production leads to a less-than-proportionate increase in cost.
Economies of scope: The property that a firm's average cost falls as it produces a larger number of different products. Scope economies exist whenever the same investment can support multiple profitable activities less expensively in combination than separately.
Economies of vertical integration: Achieving lower operating costs by bringing the entire production chain within the firm rather than contracting through the marketplace.
ECU: European Currency Unit
Edge Act Corporation: A subsidiary, located in the United States, of a U.S. bank that is permitted to carry on international banking and investment activities.
Edgeworth Production Box: A variation of the consumption Edgeworth Box that instead represents the allocations of 2 factors to 2 industries for use in production functions. Efficient allocations now appear as tangencies between isoquants, while the contract curve becomes the efficiency locus.
Edgeworth-Bowley Box: A geometric device showing allocations of 2 goods to 2 consumers in a rectangle with dimensions equal to the quantities of the goods. Preferences enter as indifference curves relative to opposite corners of the box, tangencies defining efficient allocations and the contract curve.
Effect of trade: This term normally refers, often only implicitly, to the effect of a change in some policy or other exogenous variable that will increase the quantity of trade. Since in trade models, trade itself is endogenous, the effects associated with a change in trade depend on what caused it.
Effective annual interest rate: The interest rate as if it were compounded once per time period rather than several times per period. The actual rate of interest earned (paid) after adjusting the nominal rate for factors such as the number of compounding periods per year.
Effective exchange rate: An index of a currency's value relative to a group (or basket) of other currencies, where the currencies in the basket are given weights based on the amount of trade between the countries that use the currencies. It is also called a trade-weighted exchange rate.
Effective Interest Rate: The true cost of a loan; it equals the annual interest paid divided by the funds received.
Effective protection: The concept that the protection provided to an industry depends on the tariffs and other trade barriers on both its inputs and its outputs, since a tariff on inputs raises cost. Measured by the effective rate of protection.
Effective protective rate: Same as effective rate of protection.
Effective tariff: Effective rate of protection.
Efficient allocation: An allocation that it is impossible unambiguously to improve upon, in the sense of producing more of one good without producing less of another.
Efficient financial market: A financial market in which current prices fully reflect all available relevant information.
Efficient frontier: The mean-variance efficient portion of the investment opportunity set. The set of portfolios that has the smallest possible standard deviation for its level of expected return and has the maximum expected return for a given level of risk.
Efficient market: A market in which prices reflect all relevant information. A market in which, at a minimum, current price changes are independent of past price changes, or, more strongly, price reflects all (publicly) available information. Some believe foreign exchange markets to be efficient, which in turn implies that future exchange rates cannot profitably be predicted. One in which new information is readily incorporated in the prices of traded securities.
Elastic offer curve: An offer curve along which import demand is always elastic. It is therefore not backward bending. Contrasts with inelastic offer curve.
Elastic: Having an elasticity greater than one. For a price elasticity of demand, this means that expenditure rises as price falls. For income elasticity it means that expenditure share rises with income, a superior good. It contrasts with inelastic and unit elastic. Elastic demand for either exports or imports is sufficient to satisfy the Marshall-Lerner condition.
Elasticities approach:
1. The method of analyzing the determination of the balance of trade, especially due to devaluation, that focuses on the price elasticities of exports and imports. According to this approach, the effect depends critically on the Marshall-Lerner Condition.
2. The explanation of exchange rates using supply and demand curves.
Elasticity of demand for exports: This is normally the price elasticity of demand for exports of a country, either for a single industry or for the aggregate of all imports. It equals the rest of world's elasticity of demand for imports, which therefore also enters the Marshall-Lerner condition.
Elasticity of demand for imports: This is normally the price elasticity of demand for imports of a country, either for a single industry or for the aggregate of all imports. The latter plays a critical role in determining how the country's balance of trade responds to the exchange rate.
Elasticity of substitution: The elasticity of the ratio of two inputs to a production (or utility) function with respect to the ratio of their marginal products (or utilities). With competitive demands, this is also the elasticity with respect to their price ratio.
Elasticity of transformation: The elasticity of an economy's output of one good with respect to its output of another (holding other outputs, if there are any, constant).
Electronic commerce (EC): The exchange of business information in an electronic (nonpaper) format, including over the Internet.
Electronic data interchange (EDI): The movement of business data electronically in a structured, computer readable format.
Electronic funds transfer (EFT): The electronic movements of information between two depository institutions resulting in a value (money) transfer.
Electronic lockbox: A collection service provided by a firm's bank that receives electronic payments and accompanying remittance data and communicates this information to the company in a specified format.
Electronic Trading System: A system used in the foreign exchange market that offers automated matching. Traders can enter buy and sell orders directly into their terminals on an anonymous basis, and these prices will be visible to all market participants. Another trader, anywhere in the world, can execute a trade by simply hitting two buttons.
Embargo: A type of economic sanction that totally disallows the imports of a specific product or all products from a specific country. The prohibition of some category of trade. May apply to exports and/or imports, of particular products or of all trade, vis a vis the world or a particular country or countries.
Emerging economy:
1. Originally this term was applied to countries that had recently ceased to be part of the Soviet Union and its satellites, and thus emerging from centrally planned communist economies. The term drew attention to their transition to becoming market economies.
2. Rather quickly, perhaps acknowledging the importance of central planning and the failure of markets in many other countries, the term has expanded to encompass also developing countries, not necessarily ever communist, as they expanded the role of markets.
Emerging market: An emerging market has a very high growth rate, which yields enormous market potential. It is distinguished by the recent progress it has made in economic liberalization. A term that encompasses the stock market in all of South and Central America; all of the Far East with the exception of Japan, Australia, and New Zealand; all of Africa; and parts of Southern Europe, as well as Eastern Europe and countries of the former Soviet Union.
Emerging stock markets: The stock markets of emerging economies. These markets typically have higher expected returns than established markets but also higher risk.
Empirical finding: Something that is observed from real-world observation or data, in contrast to something that is deduced from theory.
Employment argument for protection: The use of a tariff or other trade restriction to promote employment, either in the economy at large or in a particular industry. This is a second best argument, since other policies -- such as a fiscal stimulus or a production subsidy -- could achieve the same effect at lower economic cost.
Employment Rate: The ratio, in percent, of the number of employed persons to total labor force.
Enabling Clause: The decision of the GATT in 1979 to give developing countries special and differential treatment.
Endogenous growth: Economic growth whose long-run rate depends on behavior and/or policy.
Endogenous protection: Protection that is explained as the outcome of economic and/or political forces.
Endogenous uncertainty: Price or input cost uncertainty that is within the control of the firm, such as when the act of investing reveals information about price or input cost.
Endogenous variable: An economic variable that is determined within a model. It is therefore not subject to direct manipulation by the modeler, since that would override the model. In trade models, the quantity of trade itself is almost always endogenous. It contrasts with exogenous variable.
Endowment: The amount of something that a person or country simply has, rather than their having somehow to acquire it.
Engagement: The assumption of payment responsibility in respect of a letter of credit, e.g.
Engine of growth: Term sometimes used to describe the role that exports may have played in economic development, both of some of the regions of recent settlement in the nineteenth century and of today's NICs.
Entrepôt trade: The import and then export of a good without further processing, usually passing through an entrepôt which is a storage facility from which goods are distributed.
Entrepreneur: A person who starts a business.
Entry barrier: A natural or artificial impediment to a firm beginning to operate in an industry. Entry barriers give a first mover advantage to firms already in an industry, and these are often national firms in competition with potential foreign entrants.
Envelope: The outermost points traced out by a moving curve.
Environmental dumping: Export of a good from a country with weak or poorly enforced environmental regulations, reflecting the idea that the exporter's cost of production is below the true cost to society, providing an unfair advantage in international trade. It is also called eco-dumping.
Environmental Kuznets Curve: An inverse U-shaped relationship hypothesized between per capita income and environmental degradation.
Environmental protection argument for a trade intervention: The view that trade should be restricted in order to help the environment. Examples include embargos on imports made from endangered species, limits on imports produced by methods harmful to the atmosphere, and restrictions on investment into locations with lax environmental standards. This is usually a second-best argument.
Environmental subsidy: A subsidy intended for environmental purposes. A subsidy for adapting existing facilities to new environmental laws or regulations is non-actionable under WTO rules.
Equilibrium level: The value taken on by an economic variable in equilibrium, as opposed either to some other value, or to its rate of change.
Equilibrium position: Same as equilibrium level, though perhaps of several variables at once, perhaps as displayed in a graph.
1. A state of balance between offsetting forces for change, so that no change occurs.
2. In competitive markets, equality of supply and demand.
Equipment trust certificate: An intermediate- to long-term security, usually issued by a transportation company, such as a railroad or airline, that is used to finance new equipment.
Equity carve-out: The public sale of stock in a subsidiary in which the parent usually retains majority control.
Equity Warrants: Securities that give their holder the right to buy a specified number of shares of common stock at a specific price during a designated time period.
Equity: Share in the ownership of a corporation; more commonly called a stock, as in the stock market.
Equity-linked Eurobonds: A Eurobond with a convertibility option or warrant attached. Eurobonds: Fixed rate Eurocurrency deposits and loans and Eurocurrencies with longer maturities than five years.
Equity-Related Bonds: Bonds that combine features of the underlying bond and common stock. The two principal types of equity-related bonds are convertible bonds and bonds with equity warrants.
Equivalent quota: The quota that sets the same level of imports that is entering a country under a tariff, or perhaps under some other NTB (Nontariff barrier).
Equivalent variation: The amount of money that, paid to a person, group, or whole economy, would make them as well off as a specified change in the economy. It provides a monetary measure of the welfare effect of that change that is similar to, but not in general the same as, compensating variation.
Erosion: Cash-flow amount transferred to a new project from customers and sales of other products of the firm.
1. Regarding the structure of tariffs, such as tariff escalation.
2. In the context of a trade war, escalation refers to the increase in tariffs that occurs as countries retaliate again and again.
Escape clause:
1. The portion of a legal text that permits departure from its provisions in the event of specified adverse circumstances.
2. The U.S. statute (section 201, 1974 trade act) that permits imports to be restricted, for a limited time and on a nondiscriminatory basis, if they have caused injury to U.S. firms or workers. The escape clause accords with the Safeguards Clause of the GATT.
Ethical trade: As used by the Ethical Trading Initiative, this term refers primarily to trade that conforms with high levels of labor standards, including the avoidance of child labor, forced labor, sweatshops, adverse health and safety conditions, and violations of labor rights.
Ethical Trading Initiative: An alliance of multinational companies, nongovernmental organizations, and labor unions seeking to promote and identify ethical trade.
Euro (EUR): The name given to the single European currency. Its official abbreviation is EUR. Like the dollar ($) and the British pound (£), the euro (a) has a distinctive symbol, which looks similar to a "C” with a "=” through it. The common currency of a subset of the countries of the EU, adopted January 1, 1999, with paper notes and coins put into circulation January 1, 2002.
Euro medium-term note (Euro MTN): An MTN issue sold internationally outside the country in whose currency the MTN is denominated.
Euro Zone: The countries of the EMU. That is, the group of European countries, members of the EU, that adopted the common currency, the Euro.
Eurobank: A bank that accepts and makes loans in Eurocurrencies.
Eurobond Market: Market in which Eurobonds are issued and traded.
Eurobond: A bond that is issued outside of the jurisdiction of any single country, denominated in a Eurocurrency. A bond that is denominated in a currency other than that of the country of issue. A bond issue sold internationally outside the country in whose currency the bond is denominated. A bond sold outside the country in whose currency it is denominated.
Euro-Commercial Paper (Euro-CP): Euronotes that are not underwritten.
Eurocurrencies: Deposits and loans denominated in one currency and traded in a market outside the borders of the country issuing that currency (e.g., Eurodollars).
Eurocurrency market: A money market for currencies held in the form of deposits in countries other than that where the currency is issued. The set of banks that accept deposits and make loans in Eurocurrencies.
Eurocurrency: A currency deposited outside its country of origin. A currency deposited in a bank outside the country of its origin.
Eurodad: A European network of NGOs working to reduce poverty and empower the poor in developing countries through improved economic and financial policies.
Eurodollar Future: A cash-settled futures contract on a three-month, $1,000,000 Eurodollar deposit that pays LIBOR.
Eurodollar: Originally referred to U.S. dollar-denominated deposits in commercial banks located in Europe. Over time, the term came to include deposits in a commercial bank in any country denominated in any currency other than that of the country. It is sometimes called Eurocurrencies. A U.S. dollar on deposit outside the United States. A US dollar-denominated deposit – generally in a bank located outside the United States – not subject to US banking regulations. Dollar-denominated deposits held in a country other than the United States.
Euroequity Issue: A syndicated equity offering placed throughout Europe and handled by one lead manager.
Euro-Medium Term Note (Euro-MTN): A non-under-written Euronote issued directly to the market. Euro-MTNs are offered continuously rather than all at once like a bond issue. Most Euro-MTN maturities are under five years.
Euronote: A short-term note issued outside the country of the currency it is denominated in.
Europe, Australia, Far East (EAFE) Index: An index put out by Morgan Stanley Capital International which tracks the performance of the 20 major stock markets outside of North America.
European Bank for Reconstruction and Development (EBRD): One of four major regional development banks currently operating in the global economy.
European Bank for Reconstruction and Development (EBRD): A development bank supposed to finance the privatization of Eastern Europe.
European Central Bank: The central bank for the European Monetary Union. It has the sole power to issue a single European currency called the euro.
European currency unit (ECU): A trade-weighted basket of currencies in the European Exchange Rate Mechanism (ERM) of the European Union. A composite currency, consisting of fixed amounts of 12 European currencies. A composite currency that is a basket of most of the currencies of countries in the European Union. Conceived in 1979, it has been used as a unit of account of the European Monetary System.
European Economic Area: The group of countries comprised of the EU together with EFTA. The two groups have agreed to deepen their economic integration.
European Economic Community: A customs union formed in 1958 by the Treaty of Rome among six countries of Europe: Belgium, France, Germany, Italy, Luxembourg, and Netherlands; predecessor to the EC in 1967 and the EU in 1992.
European exchange rate mechanism (ERM): The exchange rate system used by countries in the European Union in which exchange rates are pegged within bands around an ERM central value.
European Investment Bank (EIB): A development bank that offers funds for certain public and private projects in European and other nations associated with the European Community.
European Monetary Agreement: An intergovernmental organization administered by the OECD that facilitated settlement of balance of payments accounts among its member states from 1958 to 1972. It replaced the EPU, and its functions were taken over by the IMF in 1972.
European Monetary System (EMS): An exchange rate system based on cooperation between European Union central banks. Monetary system found by the major European countries under which the members agree to maintain their exchange rates within a specific margin around agreed-upon, fixed central exchange rates. These central exchange rates are denominated in currency units per ECU. A currency union formed by some of the members of the EEC in 1979 that continued, with changing membership, until replaced by the EMU and the euro in 1999.
European Monetary Union: Eleven members of the European Community who have joined together to establish a single central bank (the European Central Bank) that issues a common European currency (usually referred to as the Euro).
European option: An option that can be exercised only at expiration. That is, an option that can be exercised only at maturity. It contrast with American option.
European Payments Union: An international arrangement for settling payments among member countries in Europe during a period in which many of the countries' currencies were not convertible. The EPU functioned from 1950 to 1958, after which it was replaced by the EMA.
European terms: A foreign exchange quotation that states the foreign currency price of one U.S. dollar. Contrast with American terms. Method of quoting currencies; it is expressed as the number of foreign currency units per U.S. dollar.
European Union (EU): An intergovernmental organization which coordinates foreign, economic, and judicial policy among its 25 member nations. A group of European countries that have chosen to integrate many of their economic activities, including forming a customs union and harmonizing many of their rules and regulations. Preceded by EEC and EC. As of May 1, 2004, the EU had 25 member countries. Organization of 25 European nations whose purpose is to promote economic harmonization and tear down barriers to trade and commerce within Europe.
Even case: In international trade models with multiple goods and factors, this is the special case of an equal number of goods and factors. It is convenient for analysis, because the matrix of factor input requirements is square and therefore potentially invertible.
Event risk: The risk that existing debt will suffer a decline in creditworthiness because of the issuance of additional debt securities, usually in connection with corporate restructurings.
Everything But Arms: The name given by the EU to its decision in 2001 to eliminate quotas and tariffs on all products except arms from the world's 48 poorest countries.
Ex ante analysis: Analysis of the effects of a policy, such as trade liberalization or formation of a PTA, based only on information available before the policy is undertaken. Also prospective analysis.
Ex post analysis: Analysis of the effects of a policy, such as trade liberalization or formation of a PTA, based on information available after the policy has been implemented and its performance observed. Also retrospective analysis.
Ex post tariff: Implicit tariff.
Excess demand: Demand minus supply. Thus a country's demand for imports of a homogeneous good is its excess demand for that good.
Excess profit: Profit of a firm over and above what provides its owners with a normal (market equilibrium) return to capital.
Excess supply: Supply minus demand. Thus a country's supply of exports of a homogeneous good is its excess supply of that good.
Exchange controls: Rationing of foreign exchange, typically used when the exchange rate is fixed and the central bank is unable or unwilling to enforce the rate by exchange-market intervention. Restrictions placed on the transfer of a currency from one nation to another.
Exchange equalization fund: The unit within a government or central bank that manages a pegged exchange rate. It manages reserves of foreign currencies, which it uses to buy and sell domestic currency as needed to keep the exchange rate within specified bounds.
Exchange market:
1. The market on which national currencies are exchanged for one another.
2. The actual exchange market, which exists primarily among large international banks. Others who wish to exchange currencies do it through these banks.
3. The theoretical representation of the exchange market as either the interaction of supply and demand arising from exchange-market transactions or as asset market equilibrium between currencies.
Exchange rate determination: The process by which a country's exchange rate comes to be what it is. With a floating exchange rate, this may be modeled in various ways, including the elasticities approach, the monetary approach, the portfolio approach, and the asset approach.
Exchange rate exposure: The extent to which the stock-market value of a firm varies with changes in exchange rates. Also called economic exposure.
Exchange Rate Mechanism (ERM): Arrangement at the heart of the European Monetary System which allows each member of the EMS to determine a mutually agreed-on central exchange rate for its currency; each rate is denominated in currency units per ECU. A system that was operated by some central banks within the European Union, which intervened in exchange markets to limit the fluctuations of their currencies relative to one another, while letting all of them collectively float.
Exchange rate overshooting: The response of an exchange rate to a shock by first moving beyond where it will ultimately settle. It might help explaining exchange rate volatility.
Exchange rate protection: The manipulation of the exchange rate so as to increase the domestic prices of, and demand for, domestically produced goods. Since an undervalued currency stimulates demand for all domestically produced tradable goods, this form of protection, unlike tariff protection, can only be provided to the tradable sector as a whole, not to individual industries.
Exchange rate regime: The rules under which a country's exchange rate is determined, especially the way the monetary or other government authorities do or do not intervene in the exchange market. Regimes include floating exchange rates, pegged exchange rate, managed float, crawling peg, currency board, and exchange controls.
Exchange rate stability: Lack of movement over time in the exchange rate of a country.
Exchange rate: The price at which one country's currency trades for another, typically on the exchange market. The price of one currency in terms of another, i.e. the number of units of one currency that may be exchanged for one unit of another currency. The number of units of one currency that may be purchased with one unit of another currency.
Exchange risk: The risk that losses may result from the changes in the relative values of different currencies. Uncertainty about the value of an asset, liability, or commitment due to uncertainty about the future value of an exchange rate. Unless they cover themselves in the forward market, traders with commitments to pay or receive foreign currency in the future bear exchange risk. So do holders of assets and liabilities denominated in foreign currency. The variability of a firm’s (or asset’s) value that is due to uncertain exchange rate changes.
Exchange stabilization fund: A government institution sometimes used to handle exchange market intervention, charged with the explicit function of smoothing exchange rate fluctuations.
1. To engage in trade, either within a country or internationally.
2. Foreign exchange.
Exchangeable bond: A bond that allows the holder to exchange the security for common stock of another company – generally, one in which the bond issuer has an ownership interest.
Exchange-market intervention: Usually done by a country's central bank, this is the purchase and sale of the country's currency on the exchange market in order to influence or fully determine its price. These transactions, unless they are sterilized, change the monetary base of the country and thus its money supply.
Excise tax: A tax on consumption of a particular good
Ex-dividend date: The first date on which a stock purchaser is no longer entitled to the recently declared dividend.
Exercise price: The price at which an option can be exercised (also called the striking price). The price at which the common stock associated with a warrant or call option can be purchased over a specified period. The price at which an option is exercised. Also known as strike price.
Exhaustion: In intellectual property regimes, the transaction at which rights terminate. Under national exhaustion, rights end with first sale in a country, preventing parallel imports. Under international exhaustion, rights end with first sale anywhere, permitting parallel imports.
EXIMBANK: Export-Import Bank of the United States. Provides guarantees of working capital loans for U.S. exporters, guarantees the repayment of loans or makes loans to foreign purchasers of U.S. goods and services, and provides credit insurance against non-payment by foreign buyers for political or commercial risk. Currently, the Bank is focusing on critical areas such as emphasizing exports to developing countries, aggressively countering trade subsidies of other governments, stimulating small business transactions, promoting the export of environmentally beneficial goods and services, and expanding project finance capabilities. Ex-Im Bank is not an aid or development agency, but a government held corporation, managed by a Board of Directors.
Exogenous growth: Economic growth that occurs without being the result of deliberate policy or behavior. The term arises because neoclassical growth models converge to a steady state in which per capita income is constant over time. Growth, then, requires exogenous technical progress.
Exogenous uncertainty: Price or input cost uncertainty that is outside the control of the firm.
Exogenous variable: A variable that is taken as given by an economic model. It therefore is subject to direct manipulation by the modeler. In most models, policy variables such as tariffs and par values of pegged exchange rates are exogenous. It contrasts with endogenous variable.
Exogenous: Coming from outside, usually in the context of an economic model, in which it means only that it is not explained within the model.
Expansionary: Tending to cause aggregate output (GDP) and/or the price level to rise. Term is typically applied to monetary policy (an increase in the money supply or a decrease in interest rates) and to fiscal policy (an increase in government spending or a tax cut), but may also apply to other macroeconomic shocks.
Expectation: The expectation of a variable is the same as its expected value, and is also used with both meanings.
Expected return: The weighted average of possible returns, with the weights being the probabilities of occurrence.
Expected value: The weighted average of possible outcomes, with the weights being the probabilities of occurrence.
2. What people think a variable is going to be. In general, the expectation in this second sense may be more important than the first for determining behavior on a market, such as the exchange market.
Experience good: A product whose value can be better known after having consumed it. Producers of experience goods may temporarily charge a price lower than marginal cost to induce buyers to try the product. Done with an export, this would be legally considered dumping.
Expiry date: The date when a letter of credit is no longer valid - i.e. the date beyond which it cannot be used.
Explicit tax: A tax that is explicitly collected by a government; includes income, withholding, property, sales, and value-added taxes and tariffs.
Export Administration Regulations (EAR): It stands for Export Administrative Regulations which carry both civil and criminal penalties. The EAR are available by subscription from the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20401.
Export bias: Any bias in favor of exporting. Most often applied to growth that is based disproportionately on accumulation of the factor used intensively in the export industry and/or technological progress favoring that industry.
Export broker: An individual or firm that helps to locate and introduce buyers and seller in international business for a commission but does not take part in actual sales transaction.
Export cartel: A cartel of exporting countries or firms.
Export credit insurance: A program to guarantee payment to exporting firms who extend export credits.
Export credit: A loan to the buyer of an export, extended by the exporting firm when shipping the good prior to payment, or by a facility of the exporting country's government. In the latter case, by setting a low interest rate on such loans, a country can indirectly subsidize exports.
Export facilitation: Anything intended to make it easier to export, but usually refers to government services or programs with this objective.
Export financing interest: In the U.S. tax code, interest income derived from goods manufactured in the United States and sold outside the United States as long as not more than 50 percent of the value is imported into the United States.
Export led growth: Growth of an economy over time that is thought to be caused by expansion of the country's exports.
Export License: A general export license covers the exportation of goods not restricted under the terms of a validated export license. No formal application or written authorization is needed to ship exports under a general export license.
Export limitation: Any policy that restricts exports.
Export management company: A foreign or domestic company that acts as a sales agent and distributor for domestic exporters in international markets. A private firm that transacts export business on behalf of its client companies in return for a commission, salary, or retainer.
Export multiplier: The multiplier for a change in exports; that is, the increase in GDP caused by a one-unit increase in exports.
Export pessimism: The view that efforts to expand exports by LDCs will lead to a decline in their terms of trade because of an inability (due to weak demand) or unwillingness (expressed via protection) of developed countries to absorb these exports.
Export platform FDI: Foreign direct investment from a source country into a host country for the purpose of exporting to a third country. he use of a country or region as a place to produce for export to another country. Used especially when a preferential trade arrangement provides easier access to the destination country.
Export price index: Price index of the goods that a country exports.
Export processing zone: A designated area or a country in which firms can import duty-free so long as the imports are used as inputs to production of exports.
Export promotion: A strategy for economic development that stresses expanding exports, often through policies to assist them such as export subsidies. The rationale is to exploit a country's comparative advantage, especially in the common circumstance where an over-valued currency would otherwise create bias against exports. It casts with import substitution.
Export quota: A quantitative restriction on exports, often the means of implementing a VER.
Export requirement: A requirement by the government of the host country for FDI that the investor export a certain amount or percentage of its output.
Export Restraints: Quantitative restrictions imposed by exporting countries to limit exports to specified foreign markets, usually as a follow-up to formal or informal agreements reached with importing countries.
Export Subsidies: Any form of government payment that helps an exporter or manufacturing concern to lower its export costs.
Export subsidy:
1. A subsidy to exports; that is, a payment to exporters of a good per unit of the good exported.
2. Sometimes applied to any payments to producers that lead to an increase in exports.
Export tariff: A tax on exports, more commonly called an export tax.
Export Trading Company (ETC): A company that facilitates the export of goods and services. An ETC can either act as the export department for producers or take title to the product and export for its own account.
Export: Any resource, intermediate good, or final good or service that producers in one country sell to buyers in another country.
1. A good that crosses out of a country's border for commercial purposes.
2. A product, which might be a service that is provided to foreigners by a domestic producer.
3. To cause a good or service to be an export under definitions 1 and/or 2.
Export-Import Bank (Eximbank): U.S. government agency dedicated to facilitating U.S. exports, primarily through subsidized export financing.
Export-import company: A firm whose business consists mainly of international trade: buying goods in one country and selling them in another, thus both exporting and importing. It is same as an import-export company.
Exposure Netting: Offsetting exposures in one currency with exposures in the same or another currency, where exchange rates are expected to move in such a way that losses (gains) on the first exposed position should be offset by gains (losses) on the second currency exposure.
Expropriation: A specific type of political risk in which a government seizes foreign assets. The taking of foreign property, with or without compensation, by a government.
Ex-rights date: The first date on which a stock purchaser no longer receives the right to subscribe to additional shares through the recently announced rights offering.
External balance:
1. Balance of payments equilibrium.
2. Any target value for the balance on current account, balance on capital account, or balance of payments.
External debt: The amount that a country owes to foreigners, including the debts of both the country's government and its private sector.
External diseconomy: Negative externality.
External economies of scale: A form of increasing returns to scale in which productivity and thus costs of individual firms depend on the output of their entire industry, rather than just their own. Unlike more conventional (internal) scale economies, these are consistent with perfect competition.
External market: A market for financial securities that are placed outside the borders of the country issuing that currency.
Externalities argument for protection: The (second best) argument that an industry should be protected because it generates positive externalities for other industries or consumers.
Externality: An effect of one economic agent's actions on another, such that one agent's decisions make another better or worse off by changing their utility or cost. Beneficial effects are positive external factors harmful ones are negative external factors.
Extra dividend: A nonrecurring dividend paid to shareholders in addition to the regular dividend. It is brought about by special circumstances.
Extraterritoriality: A government practice which applies its laws outside its territorial boundaries.

Face value: The value of a bond that appears on its face, also referred to as par value or principal.
Facilitating payment: As permitted under the U.S. Foreign Corrupt Practices Act, a facilitating payment is a payment for "routine governmental action," such as obtaining permits, processing papers, providing normal government services, etc. It is, in fact, a bribe, but a small one that does not induce any illegal or exceptional behavior.
Factor abundance: The abundance or scarcity of a primary factor of production. Because, in the short run at least, the supplies of primary factors are more or less fixed, this can be taken as given for determining much about a country's trade and other economic variables.
Factor accumulation: An increase in the quantity of a factor, usually capital or sometimes human capital.
Factor content pattern of trade: The trade pattern of a country or the world, focusing on factor content of the goods and services that are traded, as opposed to the commodity pattern of trade.
Factor content: The amounts of primary factors used in the production of a good or service, or a vector of quantities of goods and services, such as the factor content of trade of the factor content of consumption. It can be either direct or direct-plus-indirect.
Factor cost: The cost of the factors used in production. The term is used especially when the value of economic activity in a sector or an economy can be measured or valued either at "factor cost," adding up payments to factors, or at "market value," adding up revenues from goods sold.
Factor endowment: The quantity of a primary factor present in a country.
Factor intensity reversal: A property of the technologies for two industries such that their ordering of relative factor intensities is different at different factor prices. For example, one industry may be relatively capital intensive compared to the other at high relative wages and labor intensive at low relative wages
Factor intensity: The relative importance of one factor versus others in production in an industry, usually compared across industries. Most commonly defined in by ratios of factor quantities employed at common factor prices, but sometimes by factor shares or by marginal rates of substitution between factors.
Factor market: The market for a factor of production, such as labor or capital, in which supply and demand interact to determine the equilibrium price of the factor.
Factor mobility: The degree to which a factor of production, such as labor or capital, is able to move, either among industries or between countries, in response to differences in its factor price, thus tending to eliminate such differences.
Factor model: A model that assumes a linear relation between an asset’s expected return and one or more systematic risk factors.
Factor Price Equalization Theorem: One of the major theoretical results of the Heckscher-Ohlin Model with at least as many goods as factors, showing that free and frictionless trade will cause FPE between two countries if they have identical, linearly homogeneous technologies and their factor endowments are sufficiently similar to be in the same diversification cone.
Factor price equalization: The tendency for trade to cause factor prices in different countries to become identical. Trade would bring factor prices closer together. Samuelson showed formally the circumstances under which they would actually become equal.
Factor price frontier: A curve in factor space showing the minimum combinations of factor prices consistent with absence of profit in producing one or more goods, given their prices. Since, with perfect competition, profit implies disequilibrium, this shows a lower bound on equilibrium factor prices.
Factor price: The price paid for the services of a unit of a primary factor of production per unit time. Includes the wage or salary of labor and the rental prices of land and capital. Does not normally refer to the price of acquiring ownership of the factor itself, which might be called the "purchase price."
Factor proportions:
1. The ratios of factors employed in different industries.
2. The ratios of factors with which different countries are endowed.
Factor share: The fraction of payments to value added in an industry that goes to a particular primary factor.
Factor space: A graph in which the axes measure quantities of factors.
Factor: Specialized buyer, at a discount, of company receivables.
1. primary factor.
2. Sometimes refers to any input to production.
3. Anything that helps to cause something, as a "contributing factor."
Factoring: Sale of an accounts receivable balance to buyers (factors) that are willing and able to bear the costs and risks of credit and collections.
Factor-price space: A graph with factor prices on the axes.
Factor-saving: Biased in favor of using less of a particular factor.
Factor-using: Biased in favor of using more of a particular factor.
Fair price: In anti-dumping cases, the price to which the export price is compared, which is either the price charged in the exporter's own domestic market or some measure of their cost, both adjusted to include any transportation cost and tariff needed to enter the importing country's market.
Fairness argument for protection: The view that it is unfair to force domestic firms to compete with foreign firms that have an advantage, either in terms of low wages or due to foreign government policies. This misinterprets economic activity as a game, the purpose of which is to win, rather than as a means of using limited resources to satisfy human needs.
FASB No. 133: Statement of Financial Accounting Standard No. 133.
FASB No. 52: Statement of Financial Accounting Standards No. 52.
FASB No. 8: Statement of Financial Accounting Standards No. 8.
Fast Track Negotiating: Authority provided by the U.S. Congress to the Executive Branch to negotiate amendment-proof trade agreements.
Favorable exchange rate: An exchange rate different from the market or official rate, provided by the government on a transaction as an indirect way of providing a subsidy.
FDA (Food and Drug Administration): A United States agency which has power to set standards for food, drugs, cosmetics, and devices. Before new drugs can be approved by the FDA and be released to the market, they must undergo extensive laboratory testing within the pharmaceutical company. The company must then file a formal and thorough application for approval with the FDA.
Fed: The Federal Reserve System of the United States.
Federal funds rate: The interest rate on very short-term loans from one commercial bank to another in the United States. This rate is used as a target for monetary policy by the Fed.
Federal Reserve System: The central bank of the United States.
Fiat money: A money whose usefulness results, not from any intrinsic value or guarantee that it can be converted into gold or another currency, but only from a government's order (fiat) that it must be accepted as a means of payment.
FedWire: The Federal Reserve network of transferring fed funds.
Fiat Money: Nonconvertible paper money.
Final good: A good that requires no further processing or transformation to be ready for use by consumers, investors, or government. It contrasts with intermediate good.
Financial (capital) structure: The proportion of debt and equity and the particular forms of debt and equity chosen to finance the assets of the firm.
Financial account: This is the term used in the balance of payments statistics, since sometime in the 1990s, for what used to be called the "capital account."
Financial Accounting Standards Board: Organization in the United States that sets the rules that govern the presentation of financial statements and resolves other accounting issues.
Financial asset: An asset whose value arises not from its physical embodiment (as would a building or a piece of land or capital equipment) but from a contractual relationship: stocks, bonds, bank deposits, currency, etc.
Financial capital: The value of financial assets, as opposed to real assets such as buildings and capital equipment.
Financial Channels: The various ways in which funds, allocated profits, or both are transferred within the multinational corporation.
Financial contagion: The spread of a financial crisis from one country or region to other countries or regions.
Financial crisis: A loss of confidence in a country's currency or other financial assets causing international investors to withdraw their funds from the country.
Financial Deregulation: The dismantling of various regulations that restrict the nature of financial contracts that consenting parties, such as borrowers and lenders, could enter into.
Financial Economics: A discipline that emphasizes the use of economic analysis to understand the basic workings of financial markets, particularly the measurement and pricing of risk and the intertemporal allocation of funds.
Financial engineering: The process of innovation by which new financial products are created.
Financial innovation: The process of designing new financial products, such as exotic currency options and swaps. The process of segmenting, transferring, and diversifying risk to lower the cost of capital as well as creating new securities that avoid various tax and regulatory costs.
Financial instrument: A document, real or virtual, having legal force and embodying or conveying monetary value.
Financial intermediary: An institution that provides indirect means for funds from those who wish to save or lend to be channeled to those who wish to invest or borrow. Examples include banks and other depository institutions, mutual funds, and some government programs.
Financial market integration: Freedom of participants in the financial markets of two countries to transact on markets in both countries, thereby causing returns on comparable assets in the two countries to be equalized through arbitrage.
Financial market: A market for a financial instrument, in which buyers and sellers find each other and create or exchange financial assets. Sometimes these are organized in a particular place and/or institution, but often they exist more broadly through communication among dispersed buyers and sellers, including banks, over long distances. Markets for financial assets and liabilities.
Financial policy: The corporation’s choices regarding the debt-equity mix, currencies of denomination, maturity structure, method of financing investment projects, and hedging decisions with a goal of maximizing the value of the firm to some set of stakeholders.
Financial price risk: The risk of unexpected changes in a financial price, including currency (foreign exchange) risk, interest rate risk, and commodity price risk.
Financial risk Financial: risk refers to unexpected events in a country’s financial, economic, or business life.
Financial service income: In the U.S. tax code, income derived from financial services such as banking, insurance, leasing, financial service management fees, and swap income.
Financial stability: The avoidance of financial crisis.
Financial strategy: The way in which the firm pursues its financial objectives.
First mover advantage: The advantage that a firm or country may derive from being the first to enter a market, or from being the first to use a new technology, advertising technique, etc.
First order condition: One of the mathematical necessary conditions for maximization, used routinely in solving economic models. Typically, it consists of setting equal to zero the derivative of the function being maximized (or its Lagrangian) with respect to a variable that can be controlled.
First theorem of welfare economics: The proposition of welfare economics that a competitive general equilibrium is Pareto optimal. A corollary is that free trade is Pareto optimal among countries.
First-to-market advantage, (i.e. first-mover advantage) : The idea of first-mover advantage is that the initial occupant of a strategic position or niche (market segment) gains access to resources and capabilities that a follower cannot match.
Fiscal deficit: A deficit in the government budget of a country.
Fiscal policy: Any macroeconomic policy involving the levels of government purchases, transfers, or taxes, usually implicitly focused on domestic goods, residents, or firms. A fiscal stimulus is an increase in purchases or transfers or a cut in taxes.
Fisher Effect: The theory that a change in the expected rate of inflation will lead to an equal change in the nominal interest rate, thus keeping the real interest rate unchanged. States that the nominal interest differential between two countries should equal the inflation differential between those countries.
Fixed cost: A cost that is fixed in total for a given period of time and for given volume levels. It is not dependent on the amount of goods or services produced during the period. The cost that a firm bears if it produces at all and that is independent of its output. The presence of a fixed cost tends to imply increasing returns to scale. It contrasts with variable cost.
Fixed exchange rate system: An exchange rate system in which governments stand ready to buy and sell currency at official exchange rates.
Fixed exchange rate: Usually synonymous with a pegged exchange rate. Although "fixed" seems to imply less likelihood of change, in practice countries seldom if ever achieve a truly fixed rate. An exchange rate whose value is fixed by the governments involved.
Fixed forward contract: Currency is bought or sold at a given future date.
Fixed-Rate Bonds: Bonds that have a fixed coupon, set maturity date, and full repayment of the principal amount at maturity.
Flexible exchange rate: Same as floating exchange rate.
Floating currency system: An exchange rate system under which a government is not obligated to declare that its currency is convertible into a fixed amount of another currency.
Floating currency: A currency whose value is set by market forces.
Floating exchange rate: An exchange rate system in which currency values are allowed to fluctuate according to supply and demand forces in the market without direct interference by government authorities. A regime in which a country's exchange rate is allowed to fluctuate freely and be determined without intervention in the exchange market by the government or central bank. An exchange rate whose value is determined in the foreign exchange market.
Floating-rate bond: A bond whose interest rate is reset every three to six months or so, at a fixed margin above a mutually agreed-upon interest rate "index” such as LIBOR for Eurodollar deposits, the corresponding Treasury bill rate, or the prime rate.
FOB endorsement: Used with FOB, FAS, C&F, or CFR (but not CIF) quotations, FOB sales endorsement to an open marine policy can cover transit risk from the point of origin until title transfers. In these instances, the exporter relies on the importer to insure.
FOB: The price of a traded good excluding transport cost. It stands for "free on board," but is used only as these initials (usually lower case: f.o.b.). It means the price after loading onto a ship but before shipping, thus not including transportation, insurance, and other costs needed to get a good from one country to another. It contrasts with CIF and FAS.
FOGS Negotiations: In the Uruguay Round, this portion of the negotiations dealt with the Functioning of the GATT System and resulted ultimately in the formation of the WTO and its dispute settlement mechanism.
Food and Agriculture Organization of the United Nations: A UN body whose purpose is to "defeat hunger" throughout the world mostly by sharing information and expertise.
Food security:
1. The reliable availability of a sufficient quantity and quality of nutritious food for a population.
2. As used by some NGOs, the term also requires that localities or regions be self sufficient, in apparent ignorance of the impossibility of combining this with the first definition.
Footloose factor: A factor that can move easily across national borders, in contrast to one that, due to inclination or constraints, cannot. Footloose factors are sometimes thought to have an advantage in a globalize economy.
Footloose industry: An industry that is not tied to any particular location or country, and can relocate across national borders in response to changing economic conditions. Many manufacturing industries seem to have this characteristic.
Force Majeure: The title of a standard clause in marine contracts exempting the parties for non-fulfillment of their obligations as a result of conditions beyond their control, such as Acts of God, war.
Forced labor: The use of labor that is compelled to work, subject to physical punishment if it does not.
Foreign aid: A grant of money, technical assistance, capital equipment, or other assistance typically extended by richer nations to poorer nations.
Foreign asset position: The amount of assets that residents of a country own abroad. It is also used to mean the net foreign asset position.
Foreign Bank Market: That portion of domestic bank loans supplied to foreigners for use abroad.
Foreign base company income: In the U.S. tax code, a category of Subpart F income that includes foreign holding company income and foreign base company sales and service income.
Foreign Bond Market: That portion of the domestic bond market that represents issues floated by foreign companies or governments.
Foreign bonds: Bonds that are issued in a domestic market by a foreign borrower, denominated in domestic currency, marketed to domestic residents, and regulated by the domestic authorities.
Foreign branch: A foreign affiliate that is legally a part of the parent firm. In the U.S. tax code, foreign branch income is taxed as it is earned in the foreign country.
Foreign Corrupt Practices Act: U.S. law, enacted 1977, that prohibits U.S. firms from bribing foreign officials to obtain or retain business. The law permits, however, facilitating payments.
Foreign Credit Insurance Association: The FCIA is a cooperative effort of Eximbank and a group of approximately 50 of the leading marine, casualty, and property insurance companies that administers the U.S. government’s export-credit insurance program. FCIA insurance offers protection from political and commercial risks to U.S. exporters: The private insurers cover commercial risks, and the Eximbank covers political risks.
Foreign debt: Money owed by a nation to foreign investors, banks, or governments. The amount a country owes to foreigners. More precisely, the negative of the net foreign asset position.
Foreign direct investment (FDI): The act of building productive capacity directly in a foreign country. Acquisition or construction of physical capital by a firm from one (source) country in another (host) country. The acquisition abroad of physical assets such as plant and equipment, with operating control residing in the parent corporation.
Foreign Equity Market: That portion of the domestic equity market that represents issues floated by foreign companies.
Foreign Equity Requirements: Investment rules that limit foreign ownership to a minority holding is a company.
Foreign exchange (currency) risk: The risk of unexpected changes in foreign currency exchange rates.
Foreign exchange broker: Brokers serving as matchmakers in the foreign exchange market that do not put their own money at risk. Specialists in matching net supplier and demander banks in the foreign exchange market.
Foreign exchange dealer: A financial institution making a market in foreign exchange.
Foreign Exchange Market Intervention: Official purchases and sales of foreign exchange that nations undertake through their central banks to influence their currencies.
Foreign exchange markets: Networks of commercial banks, investment banks, and other financial institutions that convert, buy, and sell currencies in the global economy.
Foreign Exchange Risk: Exchange risk.
Foreign exchange: Currency of another country, or a financial instrument that facilitates payment from one currency to another. Foreign currency; any currency other than a country's own.
Foreign investment argument for protection: The use of protection to attract FDI from abroad. It does work, since much FDI has been motivated by firms trying to get behind a tariff wall to sell their products. In an otherwise no distorted economy, however, the cost in terms of more expensive goods is higher than the benefit from additional capital.
Foreign Market Beta: A measure of foreign market risk that is derived from the capital asset pricing model and is calculated relative top the U.S. market in the same way that individual asset betas are calculated.
Foreign portfolio investment: Portfolio investment across national borders and/or across currencies.
Foreign repercussion: The feedback effect on a domestic economy when its macroeconomic changes cause large enough changes abroad for those in turn to cause further changes at home. Most commonly, a rise in income stimulates imports, causing an expansion abroad that in turn raises demand for the home country's exports.
Foreign reserves crisis: The financial crisis that results from (or causes) a central bank coming close to running out of international reserves.
Foreign sales corporation (FSC): In the U.S. tax code, a specialized sales corporation whose income is lumped into the same income basket as that of a domestic international sales corporation. A special type of corporation created by the Tax Reform Act of 1986 that is designed to provide a tax incentive for exporting U.S.-produced goods. Refers to a provision of the U.S. tax code that grants income-tax rebates to American exporters if they form what may be a largely artificial foreign subsidiary called an FSC. This has been the subject of a trade dispute with the EU which complained to the WTO that this constitutes an illegal export subsidy.
Foreign tax credit (FTC): In the U.S. tax code, a credit against domestic U.S. income taxes up to the amount of foreign taxes paid on foreign-source income. Home country credit against domestic income tax for foreign taxes already paid on foreign-source earnings.
Foreign trade zone: A physical area in which the government allows firms to delay or avoid paying tariffs on imports. An area within a country where imported goods can be stored or processed without being subject to import duty. Also called a "free zone," "free port," or "bonded warehouse."
Foreign-source income: Income earned from foreign operations.
Forfaiting: A form of factoring in which large, medium- to long-term receivables are sold to buyers (forfaiters) that are willing and able to bear the costs and risks of credit and collections.
Forfaiting: The discounting-at a fixed rate without recourse-of medium-term export receivables denominated in fully convertible currencies (e.g., U.S. dollar, Swiss franc, Deutsche mark).
Formula approach: A procedure for organizing multilateral trade negotiations using a formula for tariff reductions as a starting point.
Forward contract: A commitment to exchange a specified amount of one currency for a specified amount of another currency on a specified future date. Agreement between a bank and a customer (which could be another bank) that calls for delivery, at a fixed future date, of a specified amount of one currency against dollar payment; the exchange rate is fixed at the time the contract is entered into.
Forward curve: In a forward market, the pattern of forward rates, or forward premia, over various time horizons.
Forward Differential: The forward discount or premium on a currency expressed as an annualized percentage of the spot rate.
Forward discount: A currency whose nominal value in the forward market is lower than in the spot market. Contrast with forward premium. A situation that pertains when the forward rate expressed in dollars is below the spot rate.
Forward Forward: A contract that fixes an interest rate today on a future loan or deposit.
Forward integration: Acquisition by a firm of a larger part of its distribution chain, moving it closer to selling directly to its ultimate customers.
Forward linkage: The provision by one firm or industry of produced inputs to another firm or industry.
Forward Market Hedge: The use of forward contracts to fix the home currency value of future foreign currency cash flows. Specifically, a company that is long a foreign currency will sell the foreign currency forward, whereas a company that is short a foreign currency will buy the currency forward.
Forward market: A market for forward contracts in which trades are made for future delivery according to an agreed-upon delivery date, exchange rate, and amount. A market for exchange of currencies in the future. Participants in a forward market enter into a contract to exchange currencies, not today, but at a specified date in the future, typically 30, 60, or 90 days from now, and at a price (forward exchange rate) that is agreed upon today.
Forward parity: When the forward rate is an unbiased predictor of future spot exchange rates.
Forward premium: A currency whose nominal value in the forward market is higher than in the spot market. Contrast with forward discount. The difference between a forward exchange rate and the spot exchange rate, expressed as an annualized percentage return on buying foreign currency spot and selling it forward. A situation that pertains when the forward rate expressed in dollars is above the spot rate.
Forward price: In any forward market, the price of the item being traded for delivery at a future date; in exchange markets, the forward rate.
Forward Rate Agreement (FRA): A cash-settled, over-the-counter forward contract that allows a company to fix an interest rate to be applied to a specified future interest period on a notional principal amount.
Forward rate: Also called the forward exchange rate, this is the exchange rate on a forward market transaction. The rate today for delivery at a fixed future date of a specified amount of one currency against dollar payment.
Four Tigers: The four Asian economies that were the first to show rapid economic development after the success of Japan: Hong Kong, South Korea, Singapore, and Taiwan.
FPE: Factor price equalization.
Fragmentation: The splitting of production processes into separate parts that can be done in different locations, including in different countries.
Franchise agreement: An agreement in which a domestic company (the franchisor) licenses its trade name and/or business system to an independent company (the franchisee) in a foreign market.
Franchising: A parent company grants another independent entity the privilege to do business in a pre-specified manner, including manufacturing, selling products, marketing technology and other business approach.
Free Alongside Ship (FAS): Same as FOB but without the cost of loading onto a ship.
Free capital markets: This is not a standard term, but it seems to be used, variously, to describe the absence of government regulation of international capital flows, the absence of government or central bank intervention in exchange markets, and the absence of interference with national financial and development policies by international financial institutions.
Free cash flow: Cash flow after all positive-NPV projects have been exhausted in the firm’s main line of business.
Free enterprise: A system in which economic agents are free to own property and engage in commercial transactions.
Free entry: The assumption that new firms are permitted to enter an industry and can do so costless. Together with free exit, it implies that profit must be zero in equilibrium.
Free exit: The assumption that firms are permitted to leave an industry and can do so costless.
Free Float: An exchange rate system characterized by the absence of government intervention. It is also known as a clean float.
Free list: A list of goods that a country has designated as able to be imported without being subject to tariff or import licensing.
Free On Board (FOB): The price of a traded good excluding transport cost. It stands for "free on board," but is used only as these initials (usually lower case: f.o.b.). It means the price after loading onto a ship but before shipping, thus not including transportation, insurance, and other costs needed to get a good from one country to another. It contrasts with CIF and FAS.
Free port: An area such as a port city into which merchandise may legally be moved without payment of duties.
Free rider: Someone who enjoys the benefits of a public good without bearing the cost. An example, in trade policy, is that trade liberalization benefits the majority of consumers without their lobbying for it. This may tip policy in the direction of protection, for which there are fewer free riders.
Free Trade Area of the Americas (FTAA): A proposed hemispheric trade zone that would cover all of the countries in North, South, and Latin America. The FTAA is highly controversial.
Free trade area: A group of countries that adopt free trade (zero tariffs and no other restrictions on trade) on trade among themselves, while not necessarily changing the barriers that each member country has on trade with the countries outside the group.
Free trade zone: An area designated by the government to which goods may be imported for processing and subsequent export on duty-free basis. Merchandise may be stored, used or manufactured in the zone and reexported without duties being paid.
Free trade: A situation in which there are no artificial barriers to trade, such as tariffs and NTBs (Nontariff barrier). Usually used, often only implicitly, with frictionless trade, so that it implies that there are no barriers to trade of any kind. For a traded homogeneous product, it follows that domestic and world price must be equal.
Freely floating exchange rate system: An exchange rate system in which currency values are allowed to fluctuate according to supply and demand forces in the market without direct interference by government authorities.
Freight forwarder: An independent business that handles export shipment on behalf of the shipper without vested interest in the products. A freight forwarder is a good source of information and assistance on export regulations and documentation, shipping methods, and foreign import regulations.
Freight shippers (freight forwarders): Agents used to coordinate the logistics of transportation.
Frequency: The speed of the up and down movements of a fluctuating economic variable; that is, the number of times per unit of time that the variable completes a cycle of up and down movement.
Frictionless trade: The absence of natural barriers to trade, such as transport costs.
Friedman rule: The rule for the optimal conduct of monetary policy that it should generate a rate of deflation that makes the nominal interest rate equal to zero.
Full Payout Lease: A lease in which the lessor recovers, through the lease payments, all costs incurred in the lease plus an acceptable rate of return, without any reliance upon the leased equipment's future residual value.
Functional Currency: As defined in FASB-52, an affiliate’s functional currency isd the currency of the primary economic environment in which the affiliate generates and expends cash.
Functional distribution of income: How the income of an economy is divided among the owners of different factors of production, into wages, rents, etc.
Fundamental analysis: A method of predicting exchange rates using the relationships of exchange rates to fundamental economic variables such as GNP growth, money supply, and trade balances. An approach to forecasting asset prices that relies on painstaking examination of the macroeconomic variables and policies that are likely to influence the assets prospects.
Funds Adjustment: A hedging technique designed to reduce a firm’s local currency accounting exposure by altering either the amounts or the currencies (or both) of the planned cash flows of the parent or its subsidiaries.
Future value: Value of a sum after investing it over one or more periods, also called compound value.
Futures commission merchant: A brokerage house that is authorized by a futures exchange to trade with retail clients.
Futures contract: A commitment to exchange a specified amount of one currency for a specified amount of another currency at a specified time in the future. Futures contracts are periodically marked-to-market, so that changes in value are settled throughout the life of the contract. Exchange-traded currency futures are marked-to-market on a daily basis. Standardized contracts that trade on organized futures markets for specific delivery dates only.
Futures market: A market for exchange (of currencies, in the case of the exchange market) in the future. That is, participants contract to exchange currencies, not today, but at a specified calendar date in the future, and at a price (exchange rate) that is agreed upon today.
Futures Option: An option contract calling for delivery of a standardized IMM futures contract in the currency rather than the currency itself.

G-5: The United States, France, Japan, Great Britian, and Germany.
G-7: The G-5 nations plus Italy and Canada..
G-8: The G-7 plus Russia, which have met as a full economic and political summit since 1998.
G-20:1. An international forum of finance ministers and central bank governors from 19 countries and the EU, plus the IMF and World Bank. Created in 1999 by the finance ministers of the G-7, it meets annually to discuss financial and economic concerns among industrial economies and emerging markets.
2. A group of developing countries established Aug. 20, 2003 that joined together in the Cancún Ministerial of the WTO's Doha Round in order to negotiate collectively with the U.S. and E.U., especially seeking the elimination of developed-country agricultural subsidies. Membership in the group has fluctuated, but the name G-20 now seems to have stuck. The group has been led by Brazil, other important members including Argentina, China, India, and South Africa.
Gains from trade: The net benefits that country's experience as a result of lowering import tariffs and otherwise liberalizing trade.
Gains from trade theorem: The theoretical proposition that (in the absence of distortions) there will be gains from trade for any economy that moves from autarky to free trade, as well as for a small open economy and for the world as a whole if tariffs are reduced appropriately.
Game theory: The modeling of strategic interactions among agents, used in economic models where the numbers of interacting agents (firms, governments, etc.) is small enough that each has a perceptible influence on the others.
Game: A theoretical construct in game theory in which players select actions and the payoffs depend on the actions of all players.
Gastarbeiter: Guest worker.
GDP deflator: The deflator for Gross domestic product (GDP), thus the ratio of nominal GDP to real GDP (usually multiplied, as with a price index, by 100).
General Agreement on Tariffs and Trade (GATT): A post-World War II agreement designed to promote freer international trade among the nations of the world. The GATT was replaced by the World Trade Organization (WTO) in 1994. A multilateral treaty entered into in 1948 by the intended members of the International Trade Organization, the purpose of which was to implement many of the rules and negotiated tariff reductions that would be overseen by the ITO. With the failure of the ITO to be approved, the GATT became the principal institution regulating trade policy until it was subsumed within the WTO in 1995.
General Agreement on Trade in Services: The agreement, negotiated in the Uruguay Round that brings international trade in services into the WTO. It provides for countries to provide national treatment to the Foreign Service providers and for them to select and negotiate the service sectors to be covered under GATS. General equilibrium Equality of supply and demand in all markets of an economy simultaneously. The number of markets does not have to be large. The simplest Ricardian model has markets only for two goods and one factor, labor, but this is a general equilibrium model. It contrasts with partial equilibrium.
General partner: Member of a partnership with unlimited liability for the debts of the partnership.
Generalized autoregressive conditional heteroskedasticity: A time series model in which returns at each instant of time are normally distributed but volatility is a function of recent history of the series.
Generalized System of Preferences: Tariff preferences for developing countries, by which developed countries let certain manufactured and semi-manufactured imports from developing countries enter at lower tariffs than the same products from developed countries.
Generally Accepted Accounting Principles (GAAP): A common set of accounting concepts, standards, and procedures by which financial statements are prepared.
Genetically modified organism: Plants or animals (or products thereof) whose genetic makeup has been determined or altered by genetic engineering. Trade in GMOs has been the source of disagreement and controversy between the US and the EU.
Geocentric multinational: A multinational in which the subsidiaries are neither satellites nor independent city states, but parts of a whole whose focus is on worldwide objectives as well as local objectives, each part making its unique contribution with its unique competence.
Giffen good: A good that is so inferior and so heavily consumed at low incomes that the demand for it rises when its price rises. The reason is that the price increase lowers income sufficiently that the positive income effect (because it is inferior) outweighs the negative substitution effect.
Gini Coefficient: A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income. It is defined as the area between the Lorenz Curve and the diagonal, divided by the total area under the diagonal.
Global bond: A bond that trades in the Eurobond market as well as in one or more national bond markets.
Global Capital Asset Pricing Model (Global CAPM): Implementation of the CAPM in which the base portfolio against which beta is estimated is the global market portfolio and the market risk premium is based on the expected return on the global market portfolio. This model is appropriate if capital markets are globally integrated.
Global economy: The international network of individuals, businesses, governments, and multilateral organizations which collectively make production and consumption decisions.
Global Fund: A mutual fund that can invest anywhere in the world, including the United States.
Global quota: An import quota that specifies the permitted quantity of imports from all sources combined. This may be without regard to country of origin, and thus available on a first-come-first-served basis, or it may be allocated to specific suppliers.
Global Standard: A system of setting currency values whereby the participating countries commit to fix the prices of their domestic currencies in terms of a specified amount of gold.
Globalization: A global movement to increase the flow of goods, services, people, real capital, and money across national borders in order to create a more integrated and interdependent world economy.
1. The increasing world-wide integration of markets for goods, services and capital that attracted special attention in the late 1990s.
2. Also used to encompass a variety of other changes that were perceived to occur at about the same time, such as an increased role for large corporations (MNCs) in the world economy and increased intervention into domestic policies and affairs by international institutions such as the IMF, WTO, and World Bank.
3. Among countries outside the United States, especially developing countries, the term sometimes refers to the domination of world economic affairs and commerce by the United States.
GNP: Gross national product.
Going private: Making a public company private through the repurchase of stock by current management and/or outside private investors.
Going-concern value: The amount a firm could be sold for as a continuing operating business.
Gold exchange standard: An exchange rate system used from 1925 to 1931 in which the United States and England were allowed to hold only gold reserves while other nations could hold gold, U.S. dollars, or pounds sterling as reserves. A monetary system that sought to restore features of the Gold Standard in the 1920s and again in the Bretton Woods System, while economizing on gold. Instead of money being backed directly by gold, central banks issued liabilities against foreign currency assets (mostly U.S. dollars under Bretton Woods) that were in turn backed by gold.
Gold standard: An exchange rate system used prior to 1914 in which gold was used to settle national trade balances. Also called the classical gold standard. A monetary system in which both the value of a unit of the currency and the quantity of it in circulation are specified in terms of gold. If two currencies are both on the gold standard, then the exchange rate between them is approximately determined by their two prices in terms of gold.
Good Funds: Funds that are available for use.
Good: A product that can be produced, bought, and sold, and that has a physical identity. Sometimes said, inaccurately, to be anything that "can be dropped on your foot" or, also inaccurately, to be "visible." It contrasts with service. Trade in goods is much easier to measure than trade in services, and thus much more thoroughly documented and analyzed.
Goodwill: The accounting treatment of an intangible asset such as the takeover premium in a merger or acquisition. The intangible assets of the acquired firm arising from the acquiring firm paying more for them than their book value. Goodwill must be tested at least once a year for impairment (or decline).
Government Budget Deficit: A closely watched figure that equals government spending minus taxes.
Government debt: The amount that a country's government has borrowed as a result of budget deficits, usually by issuing government bonds or, in developing countries, from international financial institutions. It is often called the national debt.
Government procurement practice: The methods by which units of government and state-owned enterprises determine from whom to purchase goods and services. When these methods include a preference for domestic firms, they constitute an NTB (Nontariff barrier).
Government procurement: Purchase of goods and services by government and by state-owned enterprises. Transparency in government procurement is one of the Singapore Issues.
Gradualism: A steady and calculated approach to transforming an economy from communism to capitalism.
Graduation: Termination of a country's eligibility for GSP tariff preferences on the grounds that it has progressed sufficiently, in terms of per capita income or another measure, that it is no longer in need to special and differential treatment.
Grandfather clause: A provision in an agreement, including the GATT but not the WTO, that allows signatories to keep certain of their previously existing laws that otherwise would violate the agreement.
Gray area measure: A measure whose conformity with existing rules in unclear, such as a VER under the GATT prior to the WTO.
Gray market: Refers to goods that are sold for a price lower than, or through a distributor different than, that intended by the manufacturer. Most commonly, goods that are intended by their manufacturer for one national market that are bought there, exported, and sold in another national market.
Gray-market imports: Gray-market imports are parallel distribution of genuine goods by intermediaries other than authorized channel members.
Green box: Category of subsidies permitted under the WTO Agriculture Agreement; includes those not directed at particular products, direct income support for farmers unrelated to production or prices, subsidies for environmental protection and regional development.
Green exchange rate: An exchange rate used within the EU's Common Agricultural Policy to convert subsidy and support payments into local currencies, avoiding the variability of the rate set in the exchange market.
Green field investment: FDI that involves construction of a new plant, rather then the purchase of an existing plant or firm. It contrasts with brown field investment.
Green room group: A group of GATT/WTO member countries -- including the larger members and selected smaller and less developed ones -- that have met together during negotiations (originally in a green room at WTO Geneva headquarters) to agree among themselves, before taking decisions to the full membership for the required consensus.
Greenfield: A form of investment in which the firm designs and builds a new factory from scratch, starting with nothing but a
Greenmail: Buying shares on the open market in the hope that the target’s business partners will buy back the shares at inflated prices.
Gross domestic product: The total value of new goods and services produced in a given year within the borders of a country, regardless of by whom. It is "gross" in the sense that it does not deduct depreciation of previously produced capital, in contrast to NDP. A measure of the market value of goods and services produced by a nation. Unlike Gross National Product, GDP excludes profits made by domestic firms overseas, as well as the share of reinvested earning in domestic firms' foreign-based operations.
Gross international reserves: International reserves, without any deduction for the fact that some of them may have been borrowed. It contrasts with net international reserves.
Gross national income: National income plus capital consumption allowance.
Gross national product: The total value of new goods and services produced in a given year by a country's domestically owned factors of production, regardless of where. It is "gross" in the sense that, in contrast to NNP, it does not deduct depreciation of previously produced capital.
Gross output: The total output of a firm, industry, or economy without deducting intermediate inputs. For a firm or industry, this is larger than its value added which is net of its own intermediate inputs. For an economy, gross output is greater than net output, which deducts the amount of the good itself used as an intermediate input.
Gross substitutes: Two goods are gross substitutes if a rise in the price of one causes and increase in demand for the other.
Gross working capital: The firm's investment in current assets (such as cash and marketable securities, receivables, and inventory).
Group of Ten: A group of ten countries, members of the IMF, that together with Switzerland agreed to make resources available outside their IMF quotas. Since 1963 the governors of the G10 central banks have meet on the occasion of the bimonthly BIS meetings.
Growing perpetuity: A constant stream of cash flows without end that is expected to rise indefinitely. For example, cash flows to the landlord of an apartment building might be expected to rise a certain percentage each year.
Growth accounting: Decomposition of the sources of economic growth into the contributions from increases in capital, labor, and other factors. What remains, called the Solow residual, and is usually attributed to technology.
Growth options: The positive-NPV opportunities in which the firm has not yet invested. The value of growth options reflects the time value of the firm’s current investment in real assets as well as the option value of the firm’s potential future investments. The opportunities a company may have to invest capital so as to increase the profitability of its existing product lines and benefit from expanding into new products or markets.
Growth stocks: Stocks with high price/book or price/earnings ratios. Historically, growth stocks have had lower average returns than value stocks (stocks with low price/book or PE ratios) in a variety of countries.
Guest worker: A foreign worker who is permitted to enter a country temporarily in order to take a job for which there is shortage of domestic labor.
Guideline Lease: A lease written under criteria established by the IRS to determine the availability of tax benefits to the lessor.

Harberger triangle: The triangular area, or areas, in a supply and demand diagram that measures the net welfare loss, or dead-weight loss due to a market distortion or policy, such as a tariff.
Harberger-Laursen-Metzler Effect: The conjecture or result that a terms of trade deterioration will cause a decrease in savings due to the decrease in real income, and therefore that a real depreciation will cause an increase in real expenditure.
Hard currency: A currency that is widely accepted around the world, usually because it is the currency of a country with a large and stable market. Examples today include the U.S. dollar and the euro. A currency expected to maintain its value or appreciate.
Hard peg: A pegged exchange rate with a credible commitment never to change the par value, thus subordinating monetary policy to the needs of the exchange market and denying access to devaluation as a policy tool. In practice, the effects of a hard peg are achieved only through a currency board or by adopting another country's currency, e.g. dollarization.
1. The changing of government regulations and practices, as a result of an international agreement, to make those of different countries the same or more compatible.
2. In the case of tariffs, this means making tariff rates more similar across industries and/or across countries.
Harmonized System: An international system for classifying goods in international trade and for specifying the tariffs on those goods. It was adopted at the beginning of 1989, replacing the previously used schedules in over 50 countries, including the Brussels Tariff Nomenclature.
Harmonized tariff schedule (HTS): A method of classification used by many countries to determine tariffs on imports.
Harrod neutral: A particular specification of technological change or technological difference that is labor augmenting.
Havana Charter: The charter for the never-implemented International Trade Organization. The draft was completed at a conference in Havana, Cuba, in 1948.
Headquarters services: The activities of a firm that typically occur at its main location and that contribute in a broad sense to its productivity at all of its locations and plants. These may include management, accounting, marketing, and R&D.
Heavily Indebted Poor Countries (HIPC) Initiative: The HIPC Initiative is a major international response to the burdensome external debt held by the world's poorest, most indebted countries. It originated in 1996 as a joint undertaking of the World Bank and the International Monetary Fund (IMF). The name given to those poor countries with large debts, the target of initiatives to forgive that debt as a means of assisting development.
Heckscher-Ohlin Model: A model of international trade in which comparative advantage derives from differences in relative factor endowments across countries and differences in relative factor intensities across industries. Sometimes refers only to the textbook or 2x2x2 model, but more generally includes models with any numbers of factors, goods, and countries.
Heckscher-Ohlin Theorem: The proposition of the Heckscher-Ohlin Model that countries will export the goods that use relatively intensively their relatively abundant factors.
Heckscher-Ohlin-Samuelson Model: Usually synonymous with the Heckscher-Ohlin Model, although sometimes the term is used to distinguish the more formalized, mathematical version that Samuelson used from the more general but less well-defined conceptual treatment of Heckscher and Ohlin.
Heckscher-Ohlin-Vanek Model: The Heckscher-Ohlin Model for the case of identical techniques of production (due either to FPE or Leontief technologies, used to derive the strong prediction about the factor content of trade known as the Heckscher-Ohlin-Vanek Theorem.
Hedge funds: Private investment partnerships with a general manager and a small number of limited partners.
Hedge portfolio: The country-specific hedge portfolio in the International Asset.
Hedge quality: Measured by the r-square in a regression of spot rate changes on futures price changes.
Hedge ratio: The ratio of derivatives contracts to the underlying risk exposure.
Hedge: Something that reduces the risk of future price movements. A position or operation that offsets an underlying exposure. For example, a forward currency hedge uses a forward currency contract to offset the exposure of an underlying position in a foreign currency. Hedges reduce the total variability of the combined position. To offset risk. In the foreign exchange market, hedgers use the forward market to cover a transaction or open position and thereby reduce exchange risk. The term applies most commonly to trade. To enter into a forward contract in order to protect the home currency value of foreign-currency-denominated assets or liabilities.
Hedging (maturity matching) approach: A method of financing where each asset would be offset with a financing instrument of the same approximate maturity.
Hedging Reducing: the risk of a cash position by using the futures instruments to offset the price movement of the cash asset.
Hedonic pricing: The use of statistical techniques such as regression analysis to determine, from the prices of goods with different measurable characteristics, the prices that are associated with those characteristics. The latter can then be used to construct what the comparable price of a good would be from its characteristics.
Herfindahl index: A standard measure of industry concentration, defined as the sum of the squares of the market shares (in percentages) of the firms in the industry.
Herstatt Risk: Named after a German bank that went bankrupt, this is the risk that a bank will deliver currency on one side of a foreign exchange deal only to find that its counterparty has not sent any money in return. It is also known as settlement risk.
High dimension: In trade theory, this refers to having more than two goods, factors, and/or countries, or to having arbitrary numbers of these. It contrasts with the two-ness of the 2x2x2 Model.
High powered money: Same as monetary base, in the sense of currency plus commercial bank reserves.
High-withholding-tax interest income: In the U.S. tax code, interest income that has been subject to a foreign gross withholding tax of 5 percent or more.
Historical Exchange Rate: In accounting terminology, it refers to the rate in effect at the time a foreign currency asset was acquired or a liability incurred.
Historical volatility: Volatility estimated from a historical time series.
Holding-period return: The rate of return over a given period.
Home asset bias: The tendency of investors to over-invest in assets based in their own country.
Home bias: A preference, by consumers or other demanders, for products produced in their own country compared to otherwise identical imports. This was proposed by Trefler (1995) as a possible explanation for the mystery of the missing trade. The tendency of investors to hold domestic assets in their investment portfolios.
Homogeneous expectations: Idea that all individuals have the same beliefs concerning future investments, profits, and dividends.
Homogeneous good: A good all units of which are the same; a homogeneous product.
Homogeneous product: The product of an industry in which the outputs of different firms are indistinguishable. It contrasts with differentiated product.
1. Having the property that all constituent elements are the same, as a homogeneous good.
2. Possessing a certain form of uniformity, as a homogeneous function.
Homohypallagic: Having a constant elasticity of substitution.
Homothetic demand: Demand functions derived from homothetic preferences. The demand functions are not themselves literally homothetic.
Homothetic preferences: Together with identical preferences, this assumption is used for many propositions in trade theory, in order to assure that consumers with different incomes but facing the same prices will demand goods in the same proportions.
Homothetic tastes: Homothetic preferences.
Homothetic: A function of two or more arguments is homothetic if all ratios of its first partial derivatives depend only on the ratios of the arguments, not their levels. For competitive consumers or producers optimizing subject to homothetic utility or production functions, this means that ratios of goods demanded depend only on relative prices, not on income or scale.
Horizontal discipline: The use of a rule, as in the regulations of trade policies under the GATT or GATS, that applies across the board to all sectors of the economy.
Horizontal integration: Production of different varieties of the same product, or different products at the same level of processing, within a single firm. This may, but need not, take place in subsidiaries in different countries.
Horizontal intra-industry trade: Intra-industry trade in which the exports and imports are at the same stage of processing. It is likely due to product differentiation. It contrasts with vertical IIT.
Host country: The country into which a foreign direct investment is made.
Hot money: Holdings of very liquid assets, which may be sold or cashed on short notice and then removed from a country, often in response to expectations of devaluation or other financial crisis.
Hub and spoke integration: A pattern of economic integration in which one country (the "hub") forms preferential trading arrangements with two or more other countries (the "spokes") that do not form such arrangements with each other.
Human capital:
1. The stock of knowledge and skill, embodied in an individual as a result of education, training, and experience, that makes them more productive.
2. The stock of knowledge and skill embodied in the population of an economy.
Hurdle rate: The minimum required rate of return on an investment in a discounted cash flow analysis; the rate at which a project is acceptable.
Hyperinflation: An extremely high rate of inflation, often exceeding several hundred or several thousand percent, that causes a country's money to become practically worthless.
Hyperinflationary Country: Defined in FASB No. 52 as one that has cumulative inflation of approximately 100% or more over a three-year period.
Hysteresis: The behavior of firms that fail to enter markets that appear attractive and, once invested, persist in operating at a loss. This behavior is characteristic of situations with high entry and exit costs along with high uncertainty. Pricing Model serves as a store of value (like the risk-free asset in the CAPM) as well as a hedge against the currency risk of the market portfolio.
1. The failure of an economic variable to return to its initial equilibrium after a temporary shock. For example, an industry or trade flow might disappear due to an exchange rate change, then not reappear after the change is reversed.
2. A time lag between a cause and an effect.

Iceberg transport cost: A cost of transporting a good that uses up only some fraction of the good itself, rather than using any other resources. Based on the idea of floating an iceberg, which is costless except for the amount of the iceberg itself that melts. It is a very tractable way of modeling transport costs since it impacts no other market.
Identical preferences: The assumption that individuals -- either within a country or in different countries -- have the same preferences. To be useful, since individuals' and countries' incomes may differ, the assumption is often used together with homothetic preferences.
IFC Emerging Markets Index: An index of developing country stock markets published by the International Finance Corporation.
1. It is any departure from equality.
2. In the balance of payments, it is any surplus or deficit.
IMF Quota: The amount of money that each IMF member country is required to contribute to the institution, partly in their own currency and partly in U.S. dollars, gold, or other member-country currencies. A country's quota is based upon the country's GDP. Countries have voting power in the IMF in proportion to their IMF quotas.
Immiserizing growth: Economic growth that makes the country worse off. Bhagwati (1958) coined the term for growth that expands exports and worsens the terms of trade sufficiently that its real income falls. Johnson (1955) had shown that a market distorted by a tariff could lose from growth and had also, independently, worked out conditions for Bhagwati's result.
Imperfect capital mobility: Any departure from perfect capital mobility, permitting interest rates or returns to capital to differ between countries.
Imperfect competition: Any departure from perfect competition. However, imperfect competition usually refers to one of the market structures other than perfect competition. It refers to an economic agent (firm or consumer), group of agents (industry), model, or analysis that is characterized by imperfect competition. It contrasts with perfectly competitive.
Implicit price deflator: A broad measure of prices derived from separate estimates of real and nominal expenditures for GDP or a subcategory of GDP. Without qualification the term refers to the GDP deflator and is thus an index of prices for everything that a country produces, unlike the CPI, which is restricted to consumption and includes prices of imports.
Implicit tariff:
1. Tariff revenue on a good or group of goods, divided by the corresponding value of imports. Often lower than the official or statutory tariff, due both to PTAs and due to failures in customs collection.
2. The difference between the price just inside a border and the price just outside it, especially in the case of a good protected by an import quota.
Implicit tax: Lower (higher) before-tax required returns on assets that are subject to lower (higher) tax rates.
Implied volatility: The volatility that is implied by an option value given the other determinants of option value. The volatility that, when substituted in the Black-Scholes option pricing formula, yields the market price of the option.
Import authorization: The requirement that imports be authorized by a special agency before entering a country, similar to import licensing.
Import bias:
1. Any bias in favor of importing.
2. Applied to growth, it tends to mean a bias against importing, and against trading more generally. Thus growth that is based disproportionately on accumulation of the factor used intensively in the import-competing industry and/or technological progress favoring that industry.
Import demand elasticity: The elasticity of demand for imports with respect to price.
Import license: A document required and issued by some national government authorizing the importation of goods into their individual countries. The license to import under an import quota or under exchange controls. Licenses required by some countries to bring in a foreign-made good. In many cases, import licenses are also used by the issuing country to control the quantity of imported items.
Import parity price: A price charged for a domestically produced good that is set equal to the domestic price of an equivalent imported good -- thus the world price plus transport cost plus tariff.
Import penetration: A measure of the importance of imports in the domestic economy, either by sector or overall, usually defined as the value of imports divided by the value of apparent consumption.
Import price index: Price index of the goods that a country imports.
Import promotion: Any policy that encourages imports. A policy of export promotion generally has the side effect of stimulating imports as well. Today the term is more commonly used for policies used by developed countries intended to assist developing countries in exporting to them.
Import propensity: The marginal propensity to import (or sometimes the average propensity, if they are different).
Import relief: Usually refers to some form of restraint of imports in a particular sector in order to assist domestic producers, and with the connotation that these producers have been suffering from the competition with imports. If done formally under existing statutes, it is administered protection, but it may also be done informally using a VER.
Import substitute: A good produced on the domestic market that competes with imports, either as a perfect substitute or as a differentiated product.
Import substituting industrialization: A strategy for economic development based on replacing imports with domestic production.
Import substitution (ISI) : A strategy for economic development that replaces imports with domestic production. It may be motivated by the infant industry argument, or simply by the desire to mimic the industrial structure of advanced countries.
Import surcharge: A tax levied uniformly on most or all imports, in addition to already-existing tariffs.
Import surveillance: The monitoring of imports, usually by means of automatic licensing.
Any resource, intermediate good, or final good or service that buyers in one country purchase from sellers in another country.
1. A good that crosses into a country, across its border, for commercial purposes.
2. A product, which might be a service that is provided to domestic residents by a foreign producer.
3. To cause a good or service to be an import under definitions 1 and/or 2.
Import-competing: Refers to an industry that competes with imports. That is, in a two-good model with trade, one good is the export good and the other is the import-competing goods.
Import-export company: A firm whose business consists mainly of international trade: buying goods in one country and selling them in another, thus both exporting and importing. Same as export-import company.
Imports: The quantity or value of all that is imported into a country.
Import-Substitution Development Strategy: A development strategy followed by many Latin American countries and other LDCs that emphasized import substitution-accomplished through protectionism-as the route to economic growth.
Impossible trinity: The impossibility of combining all three of the following: monetary independence, exchange rate stability, and full financial market integration.
Impost: A tax or tariff. (This is not a commonly used word.)
Improve the terms of trade: To increase the terms of trade; that is, to increase the relative price of exports compared to imports. Because it represents an increase in what the country gets in return for what it gives up, this is associated with an improvement in the country's welfare, although whether that actually occurs depends on the reason prices changed.
Improve the trade balance: This conventionally refers to an increase in exports relative to imports, which thus causes the balance of trade to become larger if positive or smaller if negative. The terminology ignores that exports drain resources while imports satisfy domestic needs, and reflects instead the association of exports with either accumulation of wealth or jobs.
In kind: Referring to a payment made with goods instead of money.
Income baskets: In the U.S. tax code, income is allocated to one of a number of separate income categories. Losses in one basket may not be used to offset gains in another basket.
Income bond: A bond where the payment of interest is contingent on sufficient earnings of the firm.
Income disparity: Inequality of income, usually referring to differences in average per capita incomes across countries.
Income distribution: A description of the fractions of a population that are at various levels of income. The larger are the differences in income, the "worse" the income distribution is usually said to be, the smaller the "better." International trade and factor movements can alter countries' income distributions by changing prices of low- and high-paid factors.
Income effect: That portion of the effect of price on quantity demanded that reflects the change in real income due to the price change. It contrasts with substitution effect.
Income elastic: Having an income elasticity greater than one.
Income elasticity: Normally the income elasticity of demand; that is, the elasticity of demand with respect to income.
Income inelastic: Having an income elasticity less than one.
Income redistribution argument for a tariff: The argument that tariffs should be used in order to redistribute income towards the poor. In a rich country, where unskilled labor is the scarce factor, this can make sense as explained in the Stolper-Samuelson Theorem, but it is a second-best argument.
Income statement: Financial report that summarizes a firm's performance over a specified time period. A summary of a firm's revenues and expenses over a specified period, ending with net income or loss for the period.
1. The amount of money (nominal or real) received by a person, household, or other economic unit per unit time in return for services provided or goods sold.
2. National income.
3. The return earned on an asset per unit time.
Incomplete specialization: Production of goods that compete with imports.
INCOTERMS: International commercial terms; that is, the language of international commerce.
Increasing opportunity cost: The characteristic of an economy that the opportunity cost of a good rises as it produces more of it, resulting in a transformation curve that is concave to the origin. In the HO Model, this happens even with CRTS if sectors have different factor intensities.
Increasing returns to scale: A property of a production function such that changing all inputs by the same proportion changes output more than in proportion. Common forms include homogeneous of degree greater than one and production with constant marginal cost but positive fixed cost. It is also called economies of scale, scale economies, and simply increasing returns. It contrasts with decreasing returns and constant returns.
Incremental capital output ratio: The amount of additional capital that a developing country requires to increase its output by one unit; thus the reciprocal of the marginal product of capital. Used as an (inverse) indicator of how efficiently a country is using the scarce capital it acquires.
Incremental IRR: IRR on the incremental investment from choosing a large project instead of a smaller project.
Indebtedness: The amount that is owed; thus amount of an entity's (individual, firm, or government's) financial obligations to creditors.
Indemnity Clause: A clause in which the one party indemnifies the other. In leasing, generally a clause whereby the lessee indemnifies the lessor from loss of tax benefits.
Indenture: The legal agreement, also called the deed of trust, between the corporation issuing bonds and the bondholders, establishing the terms of the bond issue and naming the trustee.
Independent project: A project whose acceptance or rejection is independent of the acceptance or rejection of other projects. project whose acceptance (or rejection) does not prevent the acceptance of other projects under consideration.
Index analysis: An analysis of percentage financial statements where all balance sheet or income statement figures for a base year equal 100.0 (percent) and subsequent financial statement items are expressed as percentages of their values in the base year.
Index futures: A futures contract that allows investors to buy or sell an index (such as a foreign stock index) in the futures market.
Index number problem: A question the answer to which depends on a choice of weights. E.g., the effect of trade on the real wage of labor in the specific factors model is an index number problem, depending on how much workers consume of (lower-priced) imported and (higher-priced) exported goods.
Index number: A numerical index, usually indicating, by comparison with a base value of 100, the size of the index relative to a base year or other benchmark for comparison. Thus, for example, a CPI of 115 in 2004 with a base year of 1999 means that the index has risen 15% from 1999 to 2004.
Index options: A call or put option contract on an index (such as a foreign stock market index).
Index swap: A swap of a market index for some other asset (such as a stock-for-stock or debt-for-stock swap).
Index: A quantitative measure, usually of something the measurement of which is not straightforward, such as an average of many diverse prices, or a concept such as economic development or human rights.
Indexed Bond: Bond that pays interest tied to the inflation rate. The intent is to fix the real interest rate on the bond.
Indication pricing schedule: A schedule of rates for an interest rate or currency swap.
Indifference curve: A line representing all combinations of expected return and risk that provide an investor with an equal amount of satisfaction. A means of representing the preferences and well being of consumers. Formally, it is a curve representing the combinations of arguments in a utility function that yield a given level of utility.
Indifference point (EBIT-EPS indifference point): The level of EBIT that produces the same level of EPS for two (or more) alternative capital structures.
Indirect costs of financial distress: Costs of financial distress that are indirectly incurred prior to formal bankruptcy or liquidation.
Indirect customers: The end-users (e.g., consumers) of the products and services purchased from the wholesalers, retailers, and consignees -- the direct customers of the seller.
Indirect diversification benefits: Diversification benefits provided by the multinational corporation that are not available to investors through their portfolio investment.
Indirect exchange rate: The foreign-currency price of a unit of domestic currency. (This definition appears in several places, but it is a mystery to me why this is any less direct than its reciprocal.)
Industrial concentration: : The extent to which a small number of firms dominates an industry, often measured by a concentration ratio or by a Herfindahl index. Concentration is, in effect, the opposite of competition, though in an open economy imports complicate the relationship.
Indirect exporting: Export products to foreign markets by using an intermediary, usually export trading company based in the exporter’s country.
Indirect Quotation: A quote that gives the foreign currency price of the home currency.
Indirect terms: The price of a unit of domestic currency in foreign currency terms such as BP 0.57/$ for a U.S. resident. Contrast with direct terms.
Industrial policy: Government policy to influence which industries expand and, perhaps implicitly, which contract, via subsidies, tax breaks, and other aids for favored industries. The purpose, aside from political favor, may be to foster competitive advantage where there are beneficial externalities and/or scale economies.
Industrialization: The establishment and subsequent growth of industrial production in a country, usually meaning heavy manufacturing.
Inelastic offer curve: An offer curve with inelastic demand for imports. That inelasticity implies that exports decline as imports increase, and it therefore means that the offer curve is backward bending. Strictly speaking, the natural definition of an offer curve's elasticity would be negative in this case, not just less than one, but that definition is seldom used.
Inelastic: Having an elasticity less than one. For a price elasticity of demand, this means that expenditure falls as price falls. For income elasticity it means that expenditure share falls with income. It casts with elastic and unit elastic.
Inequality: Differences in per capita income or household income across populations within a country or across countries.
Infant industry argument: The theoretical rationale for infant industry protection.
Infant industry protection: Protection of a newly established domestic industry that is less productive than foreign producers. If productivity will rise with experience enough to pass Mill's and Bastable's tests, there is a second-best argument for protection.
Inferior good: A good the demand for which falls as income rises. The income elasticity of demand is therefore negative.
Inflation Rate: The general increase in the price level herein measured by the growth rate in the GNP Implicit Price Index or the general price deflator. The percentage increase in the price level per year.
Inflation Risk: Refers to the divergence between actual and expected inflation.
Inflation: Increase in the overall price level of an economy, usually as measured by the CPI or by the implicit price deflator. A rise in the average level of prices of goods and services. Change in the general level of prices.
Informational efficiency: Whether or not market prices reflect information and thus the true (or intrinsic) value of the underlying asset.
Infrastructure: The facilities that must be in place in order for a country or area to function as an economy and as a state, including the capital needed for transportation, communication, and provision of water and power, and the institutions needed for security, health, and education.
Initial public offering (IPO: A company's first offering of common stock to the general public.
Injury: Harm to an industry's owners and/or workers. Import protection under the safeguards, AD, and CVD provisions of the GATT require a finding of serious (for safeguards) or material (for AD/CVD) injury (as determined by, in the U.S., the ITC). Known as the injury test.
Innovation: The creation or introduction of something new, especially a new product or a new way of producing something.
Input-output table: A table of all inputs and outputs of an economy's industries, including intermediate transactions, primary inputs, and sales to final users. As developed by Wassily Leontief, the table can be used to calculate gross outputs and primary factor inputs needed to produce specified net outputs. Leontief used this to find the factor content of U.S. trade, generating the Leontief Paradox.
Input-output: Refers to the structure of intermediate transactions among industries, in which one industry's output is an input to another, or even to itself.
Instability: The property of not being stable; thus, moving around over time, and/or uncertain in its movement over time.
1. An economic variable that is controlled by policy makers and can be used to influence other variables, called targets. Examples are monetary and fiscal policies used to achieve external and internal balance.
2. Financial instrument.
Integrated financial market: A market in which there are no barriers to financial flows and purchasing power parity holds across equivalent assets.
Integrated World Economy: A hypothetical, theoretical benchmark in which both goods and factors move costless between countries. The IWE is associated with a rectangular diagram depicting allocation of factors to countries, showing conditions for FPE.
Integration: Economic integration refers to reducing barriers among countries to transactions and to movements of goods, capital, and labor, including harmonization of laws, regulations, and standards. Common forms include FTAs, customs unions, and common markets. It is Sometimes classified as shallow integration vs. deep integration.
Intellectual property protection: Laws that establish and maintain ownership rights to intellectual property. The principal forms of IP protection are patents, trademarks, and copyrights.
Intellectual property right: The right to control and derive the benefits from something one has invented, discovered, or created. Patents, copyrights, and proprietary technologies and processes that are the basis of the multinational corporation’s competitive advantage over local firms. Material or communicable result in forms of discoveries, inventions, designs and literary and art works of scientific, humanistic, literary, and artistic endeavor. It includes, but is not limited to, works in the form of scientific discoveries and inventions, designs, patents, trademarks, books, monographs, papers, paintings, drawings and sculpture, performances, computer software, and lecture and conference presentations. Products of the mind, such as inventions, works of art, music, writing, film, etc.
Intensive: Of production, using a relatively large input of an input.
Inter-American Development Bank (IADB): A source of long-term capital in Latin America. A regional development bank designed to promote sustainable economic development in the Western Hemisphere. Its headquarters are located in Washington, D.C.
Interbank Market: The wholesale foreign exchange market in which major banks trade currencies with each other.
Interbank rate: The rate of interest charged by a bank on a loan to another bank.
Interbank spread: The difference between a bank’s offer and bid rates for deposits in the Eurocurrency market.
Intercompany Loan: Loan made by one unit of a corporation to another unit of the same corporation.
Intercompany Transaction: Transaction, such as a loan, carried out between two units of the same corporation.
Interest bearing account: An account in a bank or other financial institution that pays interest to the depositor.
Interest coverage ratio: Earnings before interest and taxes divided by interest charges. It indicates a firm's ability to cover interest charges. It is also called Verdana interest earned.
Interest equalization tax: A tax levied between 1963 and 1974 by the United States of 15% on interest received from foreign borrowers, intended to discourage capital outflows.
Interest parity: Equality of returns on otherwise identical financial assets denominated in different currencies. May be uncovered, with returns including expected changes in exchange rates, or covered, with returns including the forward premium or discount. It is also called interest rate parity.
Interest Rate Parity: A condition whereby the interest differential between two currencies is (approximately) equal to the forward differential between two currencies.
Interest rate risk: The risk of unexpected changes in an interest rate.
Interest Rate Swap: An agreement between two parties to exchange interest payments for a specific maturity on an agreed upon principal amount. The most common interest rate swap involves exchanging fixed interest payments for floating interest payments. An agreement to exchange interest payments for a specific period of time on a given principal amount. The most common interest rate swap is a fixed-for-floating coupon swap. The notional principal is typically not exchanged. Swap that combines the features of both a currency swap and an interest rate swap. It converts a liability in one currency with a stipulated type of interest payment into one denominated in another currency with a different type of interest payment.
Interest rate: The rate of return on bonds, loans, or deposits. When one speaks of "the" interest rate, it is usually in a model where there is only one.
Interest Tax Shield: The value of the tax write-off on interest payments (analogous to the depreciation tax shield).
Interest: The amount paid by a borrower to a lender above the amount (the principal) that has been borrowed. Money paid (earned) for the use of money.
Interest-rate (or yield) risk: The variability in the market price of a security caused by changes in interest rates.
Interindustry trade: Trade in which a country's exports and imports are in different industries. Typical of models of comparative advantage, such as the Ricardian Model and Heckscher-Ohlin Model. It contrasts with intraindustry trade.
Intermediate good: Same as intermediate input.
Intermediate input: An input to production that has itself been produced and that, unlike capital, is used up in production. As an input it is in contrast to a primary input and as an output it is in contrast to a final good. A very large portion of international trade is in intermediate inputs.
Intermediate transaction: The sale of a product by one firm to another, presumably to be used as an intermediate input.
Intermediated market: A financial market in which a financial institution (usually a commercial bank) stands between borrowers and savers.
Intermittent dumping: Dumping that occurs for short periods of time, presumably to dispose of temporary surpluses of goods and not intended to eliminate competition. It is same as sporadic dumping.
Intermodal: The use of two or more modes of transportation to complete a cargo move; truck/rail/ship, or truck/air, for example.
Intermodalism: The use of more than one form (mode) of transportation, as when a shipment travels by both sea and rail.
Internal balance: A target level for domestic aggregate economic activity, such as a level of GDP that minimizes unemployment without being inflationary.
Internal debt: The amount owed by a country to, in effect, itself. It includes, for example, the portion of the government debt that is denominated in the country's own currency and held by domestic residents.
Internal economies of scale: Economies of scale that are internal to a firm; that is, the firm's average costs fall as its own output rises. Likely to be inconsistent with perfect competition. It contrasts with external economies of scale.
Internal market: Term used for a target of European integration, which would remove all barriers between national markets so that they would become, in effect, a single European market. A market for financial securities denominated in the currency of a host country and placed within that country.
Internal rate of return (IRR): A discount rate at which the net present value of an investment is zero. The IRR is a method of evaluating capital expenditure proposals. The discount rate that equates the present value of the future net cash flows from an investment project with the project's initial cash outflow.
Internalization: One of the three pillars of the OLI paradigm for understanding FDI and the formation of multinational enterprises, this refers to the advantage that a firm derives from keeping multiple activities within the same organization.
Internalize: To cause, usually by a tax or subsidy, an external cost or benefit of someone's actions to be experienced by them directly, so that they will take it into account in their decisions.
International adjustment process:
1. Any mechanism for change in international markets.
2. The mechanism by which payments imbalances diminish under pegged exchange rates and non-sterilization. Similar to the specie flow mechanism, exchange-market intervention causes money supplies of surplus countries to expand and vice versa, leading to price and interest rate changes that correct the current and capital account imbalances.
International Asset Pricing Model (IAPM): The international version of the CAPM in which investors in each country share the same consumption basket and purchasing power parity holds.
International Bank for Reconstruction & Development: The largest of the five institutions that comprise the World Bank Group, IBRD provides loans and development assistance to middle-income countries and creditworthy poorer countries. An international organization created at Breton Woods in 1944 to help in the reconstruction and development of its member nations. Known as the World Bank, the IBRD is owned by its member nations and makes loans at nearly conventional terms to countries for projects of high economic priority.
International Banking Facility (IBF): A bookkeeping entity of a U.S. financial institution that is permitted to conduct international banking business (such as receiving foreign deposits and making foreign loans) largely exempt from domestic regulatory constraints.
International bonds: Bonds that are traded outside the country of the issuer. International bonds are either foreign bonds trading in a foreign national market or Eurobonds trading in the international market.
International Centre for Settlement of Investment Disputes: One of the five institutions that comprise the World Bank Group, ICSID provides facilities for the settlement - by conciliation or arbitration - of investment disputes between foreign investors and their host countries.
International Chamber of Commerce: International non-governmental body concerned with promotion of trade and harmonization of trading practice. It is responsible for drafting and publishing.
International commodity agreement: An agreement among producing and consuming countries to improve the functioning of the global market for a commodity. May be administrative, providing information, or economic, influencing world price, usually using a buffer stock to stabilize it. ICAs are overseen by UNCTAD.
International Comparison Program: A program currently coordinated by the World Bank to gather extensive information about prices in many countries so as to ascertain the purchasing power of their currencies and thus permit international comparisons of real incomes.
International Development Association: One of the five institutions that comprise the World Bank Group, IDA provides interest free loans and other services to the poorest countries.
International Diversification: The attempt to reduce risk by investing in more than one nation. By diversifying across nations whose economic cycles are not perfectly in phase, investors can typically reduce the variability of their returns.
International economics: The study of economic interactions among countries -- including trade, investment, financial transactions, and movement of people -- and the policies and institutions that influence them.
International factor movement: The international movement of any factor of production, including primarily labor and capital. Thus includes migration and foreign direct investment. Also may include the movement of financial capital in the form of international borrowing and lending.
International Finance Corporation: One of the five institutions that comprise the World Bank Group, IFC promotes growth in the developing world by financing private sector investments and providing technical assistance and advice to governments and businesses.
International Finance Subsidiary: A subsidiary incorporated in the United States (usually in Delaware) whose sole purpose was to issue debentures overseas and invest the proceeds in foreign operations, with the interest paid to foreign bondholders not subject to U.S. withholding tax. The elimination of the corporate withholding tax has ended the need for this type of subsidiary.
International finance: The monetary side of international economics, in contrast to the real side, or real trade. Often called also international monetary economics or international macroeconomics, each term has a slightly different meaning, and none seems entirely right for the entire field. "International finance" is best for the study of international financial markets including exchange rates.
International financial institution: Usually refers to intergovernmental organizations dealing with financial issues, most often the IMF and/or the World Bank.
International Fisher Effect: The theory that exchange-rate changes will match, or be expected to match, international differences in nominal interest rates. It follows from the (domestic) Fisher Effect together with purchasing power parity. States that the interest differential between two countries should be an unbiased predictor of the future change in the spot rate.
International Fund: A mutual fund that can invest only outside the United States.
International institution: An organization established by multiple national governments, usually to administer a program or pursue a purpose that the governments have agreed upon.
International investment:
1. International capital movements.
2. Foreign direct investment.
International Labor Organization: A United Nations specialized agency that establishes and monitors compliance with international standards for human and labor rights.
International Liquidity: Refers to the adequacy of a country's international reserves.
International macroeconomics: Same as international finance, but with more emphasis on the international determination of macroeconomic variables such as national income and the price level.
International monetary economics: Same as international finance, but with more emphasis on the role of money and less on other financial assets.
International Monetary Fund (IMF)): An organization formed originally to help countries to stabilize exchange rates, but today pursuing a broader agenda of financial stability and assistance. As of July 2000, it had 182 member countries. It is designed to promote global economic stability and development. It compiles statistics on cross-border transactions and publishes a monthly summary of each country’s balance of payments. It was created at Bretton Woods, N.H., in 1944 to promote exchange rate stability, including the provision of temporary assistance to member nations trying to defend their currencies against transitory phenomena.
International Monetary Market (IMM): The IMM is a market created by the Chicago Mercantile Exchange for the purpose of trading currency futures.
International monetary system: The global network of governmental and commercial institutions within which currency exchange rates are determined. The set of policies, institutions, practices, regulations, and mechanisms that determine the rate at which one currency is exchanged for another.
International Organization for Migration: International organization assisting migrants and the management of migration.
International parity conditions: Refers collectively to purchasing power parity and interest parity.
International political economy: A field of study within social science, especially political science, that addresses the interrelationships between international economics and political forces and institutions.
International reserves: The assets denominated in foreign currency, plus gold, held by a central bank, sometimes for the purpose of intervening in the exchange market to influence or peg the exchange rate. Usually includes foreign currencies themselves (especially US dollars), other assets denominated in foreign currencies, gold, and a small amount of SDRs.
International Trade Administration: A part of the United States Department of Commerce, the ITA acts on behalf of U.S. businesses in its global competition. In trade policy, its Import Administration has the duty of determining whether imports are dumped or subsidized.
International Trade Commission: An independent, quasi-judicial federal agency of the U.S. government that provides information and expertise to the legislative and executive branches of government and directs actions against unfair trade practices. In trade policy, its commissioners assess injury in cases filed under the escape clause, anti-dumping, and countervailing duty statutes.
International Trade Organization: Conceived as a complement to the Bretton Woods institutions -- the IMF and World Bank -- the ITO was to provide international discipline in the uses of trade policies. The Havana Charter for the ITO was not approved by the United States Congress, however, and the initiative died, replaced by the continuing and growing importance of the GATT.
Interpolate: Estimate an unknown number that lies somewhere between two known numbers.
Intertemporal trade: Trade across time, as when a country imports in one time period paying for the imports with exports in a different time period, earlier or later. And imbalance in the balance of trade is presumed to reflect intertemporal trade.
Intertemporal: Occurring across time, or across different periods of time.
Intervention currency: A currency that is commonly used by central banks for exchange market intervention.
In-the-money option: An option that has value if exercised immediately.
In-the-Money: An option that would be profitable to exercise at the current price.
Intraindustry trade: Trade in which a country exports and imports in the same industry, in contrast to interindustry trade. Ubiquitous in the data, much IIT is due to aggregation. It can be horizontal or vertical.
Intra-mediate trade: Another term for fragmentation.
Intra-product specialization: Another term for fragmentation.
Intrinsic value of an option: The value of an option if exercised immediately.
Intrinsic value: The price a security "ought to have” based on all factors bearing on valuation. The value of an option that is attributable to its being in-the-money. An out-of-the money option has no intrinsic value.
Inventories: The amount of goods being kept on hand for future use in production or future sale.
Inverse Floaters: Floating-rate notes with coupons that move opposite to the reference rate.
Invertible: Said of a matrix if its inverse exists. That is, a matrix A is invertible if there exists another matrix B such that BA=I, where I is the identity matrix.
Investment agreement: An agreement specifying the rights and responsibilities of a host government and a corporation in the structure and operation of an investment project
Investment banker: A financial institution that underwrites (purchases at a fixed price on a fixed date) new securities for resale. A financing specialist who assists organizations in designing and marketing security issues.
Investment opportunity set: The set of possible investments available to an individual or corporation.
Investment philosophy: The investment approach-active or passive-pursued by an investment fund and its managers.
1. Addition to the stock of capital of a firm or country.
2. Purchase of an asset, real or financial.
3. The use of resources today for the purpose of increasing productivity or income in the future.
Invisible: In referring to international trade, used as a synonym for "service." "Invisibles trade" is trade in services. It contrasts with visible.
Invoice: Bill prepared by a seller of goods or services and submitted to the purchaser. It lists the items bought, prices, and terms of sale.
IPO roll-up: An initial public offering (IPO) of independent companies in the same industry that merge into a single company concurrent with the stock offering. The funds from the IPO are used to finance the acquisition of the combining companies. The itemized bill for a transaction, stating the nature of the transaction and its cost. In international trade, the invoice price is often the preferred basis for levying an ad valorem tariff.
Irrevocable Letter of Credit: An L/C that cannot be revoked without the specific permission of all parties concerned, including the exporter.
IS-Curve: In the IS-LM model, the curve representing the combinations of national income and interest rate at which aggregate demand equals supply for all goods. It is normally downward sloping because a rise in income increases output by more than aggregate demand (through consumption), while a rise in the interest rate reduces aggregate demand through investment.
IS-LM Model: A Keynesian macroeconomic model, popular especially in the 1960s, in which national income and the interest rate were determined by the intersection of two curves, the IS-curve and the LM-curve.
IS-LM-BP Model: A particular version of the Mundell-Fleming Model that extends the IS-LM model by including in the diagram a third curve, the BP-curve, representing the balance of payments and/or the exchange market.
Isocost line: A line along with the cost of something -- usually a combination of two factors of production -- is constant. Since these are usually drawn for given prices, which are therefore constant along the line, an isocost line is usually a straight line, with slope equal to the ratio of the (factor) prices.
Iso-price curve: A curve along which price is (or prices are) constant, most commonly in factor-price space where it shows the combinations of prices of factors consistent with zero profit in producing a good at a specified price of the good.
Isoquant: A curve representing the combinations of factor inputs that yield a given level of output in a production function.

J-curve: The dynamic path followed by the balance of trade in response to a devaluation, which typically causes the trade balance to worsen before it improves, tracing a path that looks like a letter "J". J-Curve Theory that says a country’s trade deficit will initially worsen after its currency depreciates because higher prices on foreign imports will more than offset the reduced volume of imports in the short run.
Joint venture: A business venture jointly owned and controlled by two or more independent firms. Each venture partner continues to exist as a separate firm, and the joint venture represents a new business enterprise. An undertaking by two parties for a specific purpose and duration, taking any of several legal forms. Two corporations, for example, perhaps from two different countries, may undertake to provide a product or service that is distinct, in kind or location from what the companies do on their own.
Jones Act: A U.S. law that prohibits foreign ships from transporting goods or people between one U.S. location and another. Such a restriction on sabotage is an example of a barrier to trade in a service.
Junk bond: A high-risk, high-yield (often unsecured) bond rated below investment grade.
Just-in-time (JIT): An approach to inventory management and control in which inventories are acquired and inserted in production at the exact Verdana they are needed.

Kaldor-Hicks Criterion: The criterion that, for a change in policy or policy regime to be viewed as beneficial, the gainers should be able to compensate the losers and still be better off. The criterion does not require that the compensation actually be paid, which, if it did, would make this the same as the Pareto criterion.
Keiretsu: The large industrial groupings-often with a major bank at the centers-that form the backbone of corporate Japan.
Kemp-Wan Theorem: The proposition, due to Kemp and Wan (1976), that any group of countries can form a customs union that is Pareto-improving for the world, so long as nondistorting lump-sum transfers within the union are possible. This is accomplished by setting the vector of common external tariffs so as to leave world prices unchanged.
Keynesian: Referring to models of the aggregate economy based on ideas stemming from Keynes. Keynesian models depart from neoclassical assumptions primarily by allowing for disequilibrium in labor markets, with aggregate employment and output being determined instead by aggregate demand.
Knockout Option: An option that is similar to a standard option except that it is canceled-that is, knocked out-if the exchange rate crosses, even briefly, a pre-defined level called the outstrike. If the exchange rate breaches this barrier, the holder cannot exercise this option, even if it ends up in-the-money. It is also known as barrier options.
Kuznets Curve: An inverse U-shaped relationship between per capita income and inequality, suggesting that inequality is low in very poor countries, rises as they develop, and then ultimately falls as income rises still further.

Labeling: A requirement to label imported goods with information about how they were produced. This is often suggested as an alternative to trade restrictions as a means to pursue particular trade-related objectives involving, for example, environment or labor standards.
Labor abundant: A country is labor abundant if its endowment of labor is large compared to other countries. Relative labor abundance can be defined by either the quantity definition or the price definition.
Labor augmenting: Said of a technological change or technological difference if one production function produces the same as if it were the other, but with a larger quantity of labor. Same as factor augmenting with labor the augmented factor. Also called Harrod neutral.
Labor force: The number of available workers in a country, defined as the sum of those who are employed and those who are classed as unemployed.
Labor intensive: Describing an industry or sector of the economy that relies relatively heavily on inputs of labor, usually relative to capital but sometimes to human capital or skilled labor, compared to other industries or sectors.
Labor productivity: The value of output per unit of labor input. The reciprocal of the unit labor requirement.
Labor scarce: A country is labor scarce if its endowment of labor is small compared to other countries. Relative labor scarcity can be defined by either the quantity definition or the price definition.
Labor standard: Any of many conditions of workers in the workplace that are viewed as important for their well being, and minimum levels of which are advocated by labor rights activists and have been agreed to by many of the countries that are members of the ILO.
Labor standards argument for protection: The view that trade restrictions (trade sanctions) should be used as a tool to improve labor standards, limiting imports, for example, from countries that do not enforce such labor rights as freedom of association and collective bargaining. The view that trade restrictions (trade sanctions) should be used as a tool to improve labor standards, limiting imports, for example, from countries that do not enforce such labor rights as freedom of association and collective bargaining.
Labor theory of value: The theory that the value of any produced good or service is equal to the amount of labor used, directly and indirectly, to produce it. Sometimes said to underlie the Ricardian Model of international trade.
Labor-saving: A technological change or technological difference that is biased in favor of using less labor, compared to some definition of neutrality.
Labor-using: A technological change or technological difference that is biased in favor of using more labor, compared to some definition of neutrality.
Laffer Curve: An inverse-U-shaped curve representing tax revenue as a function of the tax rate. Although the idea that a rise in tax rate can reduce tax revenue is mostly based on induced reduction of work effort, for some types of taxes -- especially corporate -- movement of activity to another tax jurisdiction or country can have the same effect.
Lagging indicator: A measurable economic variable that varies over the business cycle, reaching peaks and troughs somewhat later than other macroeconomic variables such as GDP and unemployment. Contrasts with leading indicator.
Lagrangian: A function constructed in solving economic models that include maximization of a function (the "objective function") subject to constraints. It equals the objective function minus, for each constraint, a variable "Lagrange multiplier" times the amount by which the constraint is violated.
Land reform: The process of changing the pattern of ownership of land in a country, usually by breaking up large holdings and distributing smaller parcels of land to a larger portion of the population. This can be done in various ways, including with or without compensation of the previous owners.
Landed cost: The quoted or invoiced cost of a commodity, plus any inbound transportation charges.
Large country: A country that is large enough for its international transactions to affect economic variables abroad, usually for its trade to matter for world prices. Contrasts with a small open economy.
Law of Comparative Advantage: The principle that, given the freedom to respond to market forces, countries will tend to export goods for which they have comparative advantage and import goods for which they have comparative disadvantage, and that they will experience gains from trade by doing so.
Law of Demand: The observation that when price rises, quantity demanded falls. This is not necessary in theory, but it is very rarely violated in practice, including in demands for imports and exports, as well as demand for foreign exchange (barring effects on expectations).
Law of Diminishing Returns: The principle that, in any production function, as the input of one factor rises holding other factors fixed, the marginal product of that factor must eventually decline.
Law of one price (purchasing power parity): The principle that equivalent assets sell for the same price. The law of one price is enforced in the currency markets by financial market arbitrage.
Law of One Price: The principle that identical goods should sell for the same price throughout the world if trade were free and frictionless.
Law of One Price: The theory that exchange-adjusted prices on identical tradeable goods and financial assets must be within transaction costs of equality worldwide.
LDC Debit-Equality Swap: debt swap.
LDC Debt Swap: debt swap.
Lead manager: The lead investment bank in a syndicate selling a public securities offering.
Lead time: The length of time between the placement of an order for an inventory item and when the item is received in inventory.
Leading and lagging: Reduction of transaction exposure through timing of cash flows within the corporation.
Leading and Lagging: A means of shifting liquidity by accelerating (leading) and delaying (lagging) international payments by modifying credit terms, normally on trade between affiliates.
Leading indicator: A measurable economic variable that varies over the business cycle, reaching peaks and troughs somewhat earlier than other macroeconomic variables such as GDP and unemployment, and therefore useful for forecasting them. Contrasts with lagging indicator.
Lean Production: Ultra-efficient manufacturing techniques pioneered by Japanese industry that gave it a formidable competitive edge over U.S. rivals.
Learning by doing: Refers to the improvement in technology that takes place in some industries, early in their history, as they learn by experience so that average cost falls as accumulated output rises.
Learning curve: A relationship representing either average cost or average product as a function of the accumulated output produced. Usually reflecting learning by doing, the learning curve shows cost falling, or average product rising.
Lease Rate: The periodic rental payment to a lessor for the use of assets. Others may define lease rate as the implicit interest rate in minimum lease payments.
Lease: A contract in which one party conveys the use of an asset to another party for a specific period of time at a predetermined rate.
Lease: A contract under which one party, the lessor (owner) of an asset, agrees to grant the use of that asset to another, the lessee, in exchange for periodic rental payments.
Least Developed Country: A country designated by the UN as least developed based on criteria of low per capita GDP, weak human resources (life expectancy, calorie intake, etc.), and a low level of economic diversification (share of manufacturing and other measures). As of 2002 there are 49 LDCs.
Least-developed countries (LDCs): The poorest of the developing countries. They are characterized by a low gross national product per capita, a reliance on subsistence agriculture, rapid population growth, inadequate infrastructure, a weak safety net of social programs, and a low quality of life.
Lender of Last Resort: An institution that has the capacity and willingness to make loans when no one else can. Within a country, the central bank may play that role, since it can create money. Some have argued that the IMF or other institution should play that role internationally, to avert financial crises.
Lender of Last Resort: Official institution that lends funds to countries or banks that get into financial trouble. It is designed to avert the threat of a financial panic.
Leontief composite: A composite of two or more goods or factors that includes them in fixed proportions, analogous to the Leontief technology.
Leontief Paradox: The finding of Leontief (1954) that U.S. imports embodied a higher ratio of capital to labor than U.S. exports. This was surprising because it was thought that the U.S. was capital abundant, and the Heckscher-Ohlin Theorem would then predict that U.S. exports would be relatively capital intensive.
Leontief technology: A production function in which no substitution between inputs is possible: F(V) = mini(Vi/ai), where V is a vector of inputs Vi, and ai are the constant per unit input requirements. Isoquants are L-shaped.
Lerner paradox: The possibility that a tariff might worsen a country's terms of trade. This can happen only if the country spends a disproportionately large fraction of the tariff revenue on the imported good, and it does not happen (from a stable equilibrium) if the tariff revenue is redistributed.
Lerner Symmetry Theorem: The proposition that a tax on all imports has the same effect as an equal tax on all exports, if the revenue is spent in the same way. The result depends critically on balanced trade, as in a real model, so that a change in imports leads to an equal change in the value of exports.
Lerner-Pearce Diagram: This name is sometimes given (for years, by me at least) to the Lerner Diagram. In fact, Pearce's (1952) diagram uses unit isoquants rather than unit value isoquants and is much more cumbersome.
Less Developed Country: Refers to any country whose per capita income is low by world standards. Same as developing country.
Letter of credit (L/C): A letter issued by an importer’s bank guaranteeing payment upon presentation of specified trade documents (invoice, bill of lading, inspection and insurance certificates, etc.).
Letter of credit (L/C): A promise from a third party (usually a bank) for payment in the event that certain conditions are met. It is frequently used to guarantee payment of an obligation.
Letter of credit: A common means of payment in international trade, this is a written commitment by a bank to make payment to an exporter on behalf of an importer, under specified conditions.
Letter of Credit: A letter addressed to the seller, written and signed by a bank acting on behalf of the buyer, in which the bank promises to honor drafts drawn on itself if the seller conforms to the specific conditions contained in the letter.
Letter stock: Privately placed common stock that cannot be immediately resold.
Level playing field: The objective of those who advocate protection on the grounds the foreign firms have an unfair advantage. A level playing field would remove such advantages, although it is not usually clear what sorts of advantage (including comparative advantage) would be permitted to remain.
Leverage: The use of fixed costs in an attempt to increase (or lever up) profitability.
Leveraged buyout (LBO): A primarily debt-financed purchase of all the stock or assets of a company, subsidiary, or division by an investor group.
Leveraged Lease: The lessor provides an equity portion (usually 20 to 40 percent) of the equipment cost and lenders provide the balance on a nonrecourse debt basis.
Leveraged leasing: A lease arrangement in which the lessor provides an equity portion (usually 20 to 40 percent) of the leased asset's cost and third-party lenders provide the balance of the financing.
1. To impose and collect a tax or tariff.
2. A tax or tariff.
Liability: An amount that is owed, in contrast to an asset. A liability may result from borrowing, from obligation to pay for a product or service received, etc.
Liberal trade: Free trade, or something approximating that. Thus a trade regime in which tariffs are low or zero and in which nontariff barriers are largely absent.
Liberal: Associated with freedom and/or generosity. Thus in England to be liberal (or to be a liberal) is to favor free markets, including free trade. But in the U.S. it tends to mean favoring a generous, active government pursuing social and redistributive policies, with no implication for views on free trade.
Liberalization: The process by which certain business activities become more market driven.
1. The process of making policies less constraining of economic activity.
2. Reduction of tariffs and/or removal of nontariff barriers.
License agreement: A sales agreement in which a domestic company (the licensor) allows a foreign company (the licensee) to market its products in a foreign country in return for royalties, fees, or other forms of compensation.
Licensing: One firm gives another firm a permission, which allows the latter to engage in an activity otherwise legally forbidden to it. Such activities usually involve the transfer of intellectual and proprietary knowledge in return for royalty as revenue.
1. The requirement that importers and/or exporters get government approval prior to importing or exporting. Licensing may be automatic, or it may be discretionary, based on a quota, a performance requirement, or some other criterion.
2. Granting of permission, in return for a licensing fee, to use a technology. When done by firms in one country to firms in another, it is a form of technology transfer.
Lien: A legal claim on certain assets. A lien can be used to secure a loan.
Life expectancy: The expected value of the number of year a person has to live at a given age or, if age is unspecified, at birth, based on the distribution of actual deaths in the population to which the person belongs. Life expectancy in a country is an important indicator of its level of development and well-being.
Light manufacturing: Sectors of the economy that produce manufactured goods without large amounts of physical capital, thus likely to be labor intensive.
Limit pricing: The act of setting a selling price just below the level at which other sellers would find it profitable to enter a market.
Limited flexibility exchange rate system: The International Monetary Fund’s name for an exchange rate system with a managed float.
Limited liability company (LLC): A business form that provides its owners (called "members”) with corporate-style limited personal liability and the federal-tax treatment of a partnership.
Limited partner: Member of a limited partnership not personally liable for the debts of the partnership.
Linder Hypothesis: The theory that a country's ability to export depends on domestic demand, so that countries that demand similar goods will trade more with each other than will countries with dissimilar demands.
Line of credit (with a bank): An informal arrangement between a bank and its customer specifying the maximum amount of credit the bank will permit the firm to owe at any one time.
Line of credit: A limit to the amount of credit extended to an account. Purchaser can buy on credit up to that limit. An informal agreement that permits a company to borrow up to a stated maximum amount from a bank. The firm can draw down its line of credit when it requires funds and pay back the loan balance when it has excess cash.
Linear regression model: A linear relationship between a dependent variable and one or more independent variables plus a stochastic disturbance: Yi=b0+b1X1i+...+bnXni+ui.
Linearly homogeneous: Homogeneous of degree 1. Sometimes called linear homogeneous.
Link Financing: back-to-back loan.
Linking scheme: A requirement that, in order to get an import license, the importer must buy a certain amount of the same product from local producers.
Liquid assets: The assets in a portfolio that possess liquidity, or the total value of those assets.
Liquid market: A market in which traders can buy or sell large quantities of an asset when they want and with low transactions costs.
Liquidation value: The amount of money that could be realized if an asset or a group of assets (e.g., a firm) is sold separately from its operating organization.
Liquidation: The sale of assets of a firm, either voluntarily or in bankruptcy.
Liquidity crisis: A financial crisis that occurs due to lack of liquidity. In international finance, it usually means that a government of central bank runs short of international reserves needed to peg its exchange rate and/or to service its foreign loans.
Liquidity ratios: Ratios that measure a firm's ability to meet short-term obligations.
Liquidity trap: A situation in which expansionary monetary policy fails to stimulate the economy. As used by Keynes (1936), this meant interest rates so low that expectations of their increase made people unwilling to hold bonds. Today it usually means a nominal interest rate so near zero that lowering it further is impossible or ineffective.
Liquidity: The ability of an asset to be converted into cash without a significant price concession. The capacity to turn assets into cash, or the amount of assets in a portfolio that have that capacity. Cash itself (i.e., money) is the most liquid asset. The ability to readily exchange an asset for goods or other assets at a known price, thereby facilitating economic transactions. It is usually measured by the difference between the rates at which the dealers can buy and sell that asset. The ease with which an asset can be exchanged for another asset of equal value.
Listed Options: Option contracts with prespecified terms (amount, strike price, expiration date, fixed maturity) that are traded on an organized exchange.
Listing: Admission of a security for trading on an organized exchange. A security so admitted is referred to as a listed security.
Living wage: A real wage that is high enough for the worker and family to survive and remain healthy and comfortable, sometimes called meeting basic needs. Term is used in calling for higher wages in both developed and developing countries, where concepts of basic needs may be very different.
LM-Curve: In the IS-LM model, the curve representing combinations of income and interest rate at which demand for money equals the money supply in the domestic money market. It is normally upward sloping because an increase in income increases demand for money while an increase in the interest rate reduces demand for money.
Loan agreement: A legal agreement specifying the terms of a loan and the obligations of the borrower.
Loan Syndication: Group of banks sharing a loan.
Loan: An amount, usually of money, conveyed by one to another in the expectation that it will be returned, perhaps with specified interest, at a later date. When the lender and borrower are in different countries with separate monetary and legal systems, loans bear extra risk.
Loanable funds: The pool of funds from which borrowers can attract capital; typically categorized by currency and maturity.
Locational advantage: Any reason for a firm to locate production, or a stage of production, in a particular place, such as availability of a natural resource, transport cost, or barriers to trade. May explain why a country's firms succeed in trade, or why a multinational firm locates there.
Location-specific advantages: Advantages (natural and created) that are available only or primarily in a single location.
Lock Box: A postal box in a company’s name to which customers remit their required payments.
Lockbox: A post office box maintained by a firm's bank that is used as a receiving point for customer remittances. Retail lockbox systems cater to the receipt and processing of low- to moderate-dollar, high-volume remittances, whereas wholesale lockbox systems are designed to handle high-dollar, low-volume remittances.
Locomotive effect: The effect that economic expansion in one large country can have on other parts of the world economy, causing them to expand as well, as the large country demands more of their exports.
A particular mathematical transformation often used to express economic variables. Advantages:
1. If a variable grows at a constant percentage rate over time, the graph of its logarithm is a straight line.
2. The change in the logarithm of a variable is approximately its percentage change.
Logrolling: The exchange of political favors, especially among legislators who agree to support each others' initiatives. Logrolling contributed importantly to the Smoot-Hawley Tariff.
London Interbank Bid Rate (LIBID): The bid rate that a Euromarket bank is willing to pay to attract a deposit from another Euromarket bank in London. The rate paid by one bank top another for deposit.
London Interbank Offer Rate (LIBOR): The offer rate that a Euromarket bank demands in order to place a deposit at (or, equivalently, make a loan to) another. The deposit rate on interbank transactions in the Eurocurrency market. The interest rate that world-class banks in London pay each other for Eurodollars. The interest rate that the largest international banks charge each other for loans, usually of Eurodollars. In fact, LIBOR includes rates quoted each day for many currencies, excluding the euro, but it is the rate for dollar loans that is used as a benchmark for other transactions.
Long position: A position in which a particular asset (such as a spot or forward currency) has been purchased. In the foreign exchange market, it means that one has more assets in a particular currency than liabilities.
Long run: Referring to a long time horizon. This is not always well defined, but in trade models it usually means long enough for industries to vary the amounts of all factors they employ, and therefore for the factors to be mobile across industries. Contrasts with short run.
Long-term capital: In the capital account of the balance of payments, long-term capital movements include FDI and movements of financial capital with maturity of more than one year (including equities).
Look-Thru: A method for calculating U.S. taxes owed on income from controlled foreign corporations that was introduced by the Tax Reform Act of 1986.
Lorenz Curve: The graph of the percent of income owned by the poorest x percent of the population, for all x. Provides a picture of the income distribution within the population, and is used to construct the Gini Coefficient.
Lost Decade: There is, sadly, no single meaning for this term, as it has been applied to many episodes of economies that stagnated for most of a decade. Examples: Argentina and other Latin America in the 1980s; Japan in the 1990s; and the least developed countries in the 1990s.
Louvre Accord: An agreement reached in 1987 among the central banks of France, Germany, Japan, US, and UK to stop the decline in the value of the US dollar that they had initiated at the Plaza Accord. Named for the Paris landmark where it was negotiated, this accord called for the G-7 nations to support the falling dollar by pegging exchange rates within a narrow, undisclosed range, while they also moved to bring their economic policies into line.
Ltd: The abbreviation used in the United Kingdom to represented a limited liability company, thus analogous to "Inc", for incorporated, in the United States.
Lump sum: Describes a tax or subsidy that does not distort behavior. By using a tax (or subsidy) in an amount (the lump sum) independent of any aspect of the payer's or recipient's behavior, it does not alter behavior. Nondistorting lump sum taxes and subsidies do not exist, but are a convenient fiction for theoretical analysis, especially of gains from trade.

M1: The smallest of several measures of the stock of money in an economy, this consisting primarily of currency held by the public and demand deposits. Also includes several other very liquid items: traveler’s checks and other accounts on which checks can be written.
M2: A measure of the stock of money in an economy that includes, in addition to all that is in M1, savings deposits and other relatively liquid assets such as small certificates of deposit and money market mutual funds.
Maastricht Criteria: Tough standards on inflation, currency stability, and deficit spending established in the Maastricht Treaty that European nations must meet in order to join EMU.
Maastricht Treaty: Agreement under which the EC nations would establish a European Monetary Union with a single central bank having the sole power to issue a single European currency called the euro.
Macro country risks: Country (or political) risks that affect all foreign firms in a host country.
Macroeconomic policy: Any policy intended to influence the behavior of important macroeconomic variables, especially unemployment and inflation. Macroeconomic policies include monetary and fiscal policies, but also such things as price controls and incentives for economic growth.
Macroeconomic: Referring to the variables or performance of an economy as a whole, or its major components, as opposed to that of individual industries, firms, or households.
Made-to-measure tariff: A tariff set so as to raise the price of an imported good to the domestic price, so as to leave domestic producers unaffected. It is also called a scientific tariff.
Magnification effect: The property of the Heckscher-Ohlin Model that changes in certain exogenous variables lead to magnified changes in the corresponding endogenous variables: goods prices as they affect factor prices in the Stolper-Samuelson Theorem; factor endowments as they affect outputs in the Rybczynski Theorem.
Majority-rule voting: A method of electing corporate directors, where each common share held carries one vote for each director position that is open; it is also called statutory voting.
Managed float: An exchange rate regime in which the rate is allowed to be determined in the exchange market without an announced par value as the goal of intervention, but the authorities do nonetheless intervene at their discretion to influence the rate. Also known as a "dirty" float, this is a system of floating exchange rates with central bank intervention to reduce currency fluctuations.
Management buyout (MBO): A leveraged buyout (LBO) in which pre-buyout management ends up with a substantial equity position.
Management contract: An agreement by which one firm allows another to manage its foreign activities on behalf of it. The managing firm is forbidden to make capital investment or financing decisions.
Managerial (real) option: Management flexibility to make future decisions that affect a project's expected cash flows, life, or future acceptance.
Managerial flexibility: Flexibility in the timing and scale of investment provided by a real investment option.
Mandated counter-trade: A requirement by government that importing firms engage in counter-trade, as a means of increasing exports.
Manifest: Document that lists in detail al the bills of lading issued by a carrier of its agent or master, i.e., a detailed summary of the total cargo of a vessel.
Manufacturing: Production of goods primarily by the application of labor and capital to raw materials and other intermediate inputs, in contrast to agriculture, mining, forestry, fishing, and services.
Maquiladoras: Duty-free assembly plants located mainly in the developing world. Maquiladoras are one type of foreign direct investment.
Margin account: An account maintained by an investor with a brokerage firm in which securities may be purchased by borrowing a portion of the purchase price from the brokerage, or may be sold short by borrowing the securities from the brokerage firm.
Margin requirement: A performance bond paid upon purchase of a futures contract that ensures the exchange clearinghouse against loss.
Marginal analysis: The determination of optimal behavior by comparing benefits and costs at the margin, that is, benefits and costs that result from small (i.e., marginal) changes. Optimality requires that marginal benefit equal marginal cost, since otherwise a rise or fall could increase benefit more than cost.
Marginal cost: The increase in cost that accompanies a unit increase in output; the partial derivative of the cost function with respect to output.
Marginal product: In a production function, the marginal product of a factor is the increase in output due to a unit increase in the input of the factor; that is, the partial derivative of the production functions with respect to the factor. In a competitive equilibrium, the equilibrium price of any factor is its marginal value product in every sector where it is employed.
Marginal profit: The amount by which profit rises or falls when output increases by one unit; thus marginal revenue minus marginal cost.
Marginal propensity: The fraction of a change in income devoted to an activity, such as consumption, importing, or saving.
Marginal propensity to consume: The fraction of a change in income (or perhaps disposable income) spent on consumption. It contrasts with average propensity to consume.
Marginal propensity to import: The fraction of a change in income (or perhaps disposable income) spent on imports. It contrasts with average propensity to import.
Marginal propensity to save: The fraction of a change in income (or perhaps disposable income) that is saved. Marginal rate of substitution In a production function or a utility function, the ratio at which one argument (input) substitutes for another along an iso-quant or indifference curve.
Marginal rate of technical substitution: More complete name for the marginal rate of substitution between factors in a production function, sometimes used to distinguish it from the analogous concept in a utility function.
Marginal rate of transformation: The increase in output of one good made possible by a one-unit decrease in the output of another, given the technology and factor endowments of a country; thus the absolute value of the slope of the transformation curve.
Marginal returns:
The extra that you get in return for doing more of something.
Marginal revenue product: The additional revenue generated by the extra output from employing one more unit of a factor of production. In a competitive industry this equals the marginal value product, but with imperfect competition it is smaller, due to the implied price reduction. It determines factor prices in competitive factor markets. Marginal utility: In a utility function, the increase in utility associated with a one-unit increase in consumption of one good; or the partial derivative of the utility function.
Marginal revenue: The amount by which a firm's revenue increases when it expands output by one unit, taking into account that to sell one more unit it may need to reduce price on all units.
Marginal value product: The value of the marginal product of a factor in an industry; that is, the price of the good produced times the marginal product. It determines factor prices when all markets are competitive.
1. The belief that marginal analysis provides a useful theory of economic behavior.
2. The belief that economic value reflects marginal utility.
Market access: The extent to which a domestic industry can penetrate a related market in a foreign country. Access can be limited by tariffs or other non-trade barriers. The ability of firms from one country to sell in another.
Market adjustment: When conditions change, creating a new market equilibrium, the process by which the economy moves to it.
Market balance: Equality of supply and demand.
Market clearing: Equality of supply and demand. A market-clearing condition is an equation (or other representation) stating that supply equals demand. A market-clearing price is a price that causes supply and demand to be equal.
Market dynamics: The process by which market adjustment takes place.
Market economy: An economy in which resource allocations, prices and other marketing decisions are primarily determined by the free market. A country in which most economic decisions are left up to individual consumers and firms interacting through markets. It contrasts with central planning and non-market economy.
Market Efficiency: A market in which the prices of traded securities readily incorporate new information.
Market equilibrium: Equality of supply and demand.
Market failure: A failure of arms-length markets to efficiently complete the production of a good or service. In the eclectic paradigm, the multinational corporation’s market internalization advantages take advantage of market failure. Any market imperfection, but especially the complete absence of a market due to incomplete or asymmetric information.
Market imperfection: Any departure from the ideal benchmark of perfect competition, due to externalities, taxes, market power, etc.
Market internalization advantages: Advantages that allow the multinational corporation to internalize or exploit the failure of an arms-length market to efficiently accomplish a task.
Market maker: A financial institution that quotes bid (buy) and offer (sell) prices.
Market mechanism: The process by which a market solves a problem allocating resources, especially that of deciding how much of a good or service should be produced, but other such problems as well. The market mechanism is an alternative, for example, to having such decisions made by government.
Market portfolio: A portfolio of all assets weighted according to their market values.
Market power:
1. Ability of a firm or other market participant to influence price by varying the amount that it chooses to buy or sell.
2. Ability of a country to influence world prices by altering its trade policies.
Market price: The price at which a market clears.
Market rate: The interest rate or exchange rate at which a market clears.
Market risk premium: The risk premium on an average stock, i.e., the difference between the required return on a particular stock market and the risk-free interest rate.
Market structure: The way that suppliers and demanders in an industry interact to determine price and quantity. There are four main idealized market structures that have been used in trade theory: perfect competition, monopoly, oligopoly, and monopolistic competition.
Market timing: An investment strategy of shifting among asset classes in an attempt to anticipate which asset class will appreciate or depreciate during the coming period.
Market value: The market price at which an asset trades.
1. The interaction between supply and demand to determine the market price and corresponding quantity bought and sold.
2. The determination of economic allocations by decentralized, voluntary interactions among those who wish to buy and sell, responding to freely determined market prices.
Marketability (or liquidity): The ability to sell a significant volume of securities in a short period of time in the secondary market without significant price concession.
Market-based corporate governance system: A system of corporate governance in which the supervisory board represents a dispersed set of largely equity shareholders.
Marketing board: A form of state trading enterprise, a marketing board typically buys up the domestic supply of a good and sells it on the international market.
Marketing mix: The set of marketing tools that the firm uses to pursue its marketing objectives in the target market. One of the most popular classifications of marketing mix tools is called the "4 P's" of marketing: product, price, place, and promotion.
Marking to market: The process by which changes in the value of futures contracts are settled daily. A daily settlement feature in which profits and losses of futures contracts are paid over every day at the end of trading. More generally, this term refers to pricing assets at their market value rather than their book value.
1. The amount (percentage) by which price exceeds marginal cost. One effect of international trade that increases competition is to reduce markups.
2. In WTO terminology, sometimes used for the extent to which an applied tariff exceeds the bound rate.
Marshallian adjustment: A market adjustment mechanism in which quantity rises when demand price exceeds supply price and falls when supply price exceeds demand price.
Marshall-Lerner condition: The condition that sum of the elasticity’s of demand for exports and imports exceed one (in absolute value. Under certain assumptions, this is the condition for a depreciation to improve the trade balance, for the exchange market to be stable, and for international barter exchange to be stable.
Material injury: The injury requirement of the AD and CVD statutes understood to be less stringent than serious injury but otherwise apparently not rigorously defined.
Maturity date: The date on which the last payment on a bond is due.
Maturity: The life of a security; the amount of time before the principal amount of a security becomes due.
Maximum price system: Similar to a minimum price system, except that the price specified is the highest, rather than the lowest, permitted for an imported good.
Maximum revenue tariff: A tariff set to collect the largest possible revenue for the government.
Meade Geometry: The geometric technique introduced by Meade of deriving a country's offer curve from its transformation curve and community indifference curves by first constructing a set of trade indifference curves.
Mean-variance efficient: An asset that has higher mean return at a given level of risk (or lower risk at a given level of return) than other assets.
Measure of economic welfare: An aggregate figure that adjusts GDP in an attempt to measure a country's economic well-being rather than its production, with adjustments for leisure, environmental degradation, etc.
Medium-term note (MTN): A corporate or government debt instrument that is offered to investors on a continuous basis. Maturities range from nine months to 30 years (or more).
Mercantilism: An economic philosophy of the 16th and 17th centuries that international commerce should primarily serve to increase a country's financial wealth, especially of gold and foreign currency. To that end, exports are viewed as desirable and imports as undesirable unless they lead to even greater exports.
Merchandise trade: Exports and imports of goods. Contrasts with trade in services.
MERCOSUR: The "common market of the South,” a customs union which includes Argentina, Brazil, Paraguay, and Uruguay in a regional trade pact that reduces tariffs on intrapact trade by up to 90 percent. Bolivia and Chile are associate members.
Merger: A form of corporate acquisition in which one firm absorbs another and the assets and liabilities of the two firms are combined. The combination of two or more companies in which only one firm survives as a legal entity.
Method of payment: The way in which a merger or acquisition is financed.
Metzler paradox: The possibility, identified by Metzler that a tariff may lower the domestic relative price of the imported good. This will happen if it drives the world price down by even more than the size of the tariff, as it may do if the foreign demand for the importing country's export good is inelastic.
Micro country risks: Country risks that are specific to an industry, company, or project within a host country.
Microcredit: Small loans that are extended to small businesses to finance a business start-up or other business activity.
Microeconomic: Referring to the behavior of and interactions among individual economic agents, especially firms and consumers, and especially in markets. Contrasts with macroeconomic.
Middle market: A market segment generally represented by financing under $2 million. In leasing this sector is dominated by single investor leases.
Middle product: A good that has undergone some processing and that requires further processing before going to final consumers; an intermediate good. Notice that almost all international trade is of middle products, and they provided a model based on that assumption.
Migration: The permanent relocation of people from one country to another.
Miller and Modigliani’s irrelevance proposition: If financial markets are perfect, then corporate financial policy (including hedging policy) is irrelevant.
Mill's test: One of two conditions needed for infant industry protection to be welfare-improving, this requires that the protected industry become, over time, able to compete internationally without protection.
Minimum efficient scale: The smallest output of a firm consistent with minimum average cost. In small countries, in some industries the level of demand in autarky is not sufficient to support minimum efficient scale.
Minimum price system: Specification of the lowest price permitted for an import. Prices below the minimum may trigger a tariff, hence a variable levy, or quota. These have several names: basic import price, minimum import price, reference price, and trigger price.
Mixed economy: An economy in which some production is done by the private sector and some by the state, in state-owned enterprises.
Mixed tariff: A combination of specific and ad valorem tariffs.
Mixing regulation:
1. Specification of the proportion of domestically produced content in products sold on the domestic market.
2. Specification of an amount of domestically produced product that must be bought by an importer for given quantities of imports, under a linking scheme.
Modality: Method or procedure. WTO documents speak of modalities of negotiations, i.e., how the negotiations are to be conducted.
Mode of supply: The method by which suppliers of internationally traded services deliver their service to buyers. The four modes usually identified are: cross-border supply, consumer movement, producer presence, and movement of natural persons.
Model: A stylized simplification of reality in which behavior is represented by variables and assumptions about how they are determined and interact. Models enable one to think consistently and logically about complex issues, to work out how changes in an economic system matter, and (sometimes) to make predictions about economic performance.
Monetary approach: A framework for analyzing exchange rates and the balance of payments that focuses on supply and demand for money in different countries. A floating exchange rate is assumed to equate supply and demand and thus to reflect relative growth rates of money supplies and determinants of demand. Under a pegged exchange rate, the balance of payments surplus or deficit equals the excess demand or supply, respectively, for a country's money.
Monetary assets and liabilities: Assets and liabilities with contractual payoffs.
Monetary base: Usually, the currency and central bank deposits that together provide the base for the money supply under fractional reserve banking. It also defined as the central bank assets the acquisition of which creates this monetary base by injecting domestic money into the economy. The latter definition usually includes international reserves and domestic credit. By either definition, the monetary base changes as a result of open market operations and exchange market intervention.
Monetary independence: The ability of a country to determine its own monetary policy, as opposed to allowing the money supply to be determined by the exchange market intervention required to maintain a fixed exchange rate.
Monetary integration: The adoption of a common currency by two or more countries.
Monetary policy: The use of the money supply and/or the interest rate to influence the level of economic activity and other policy objectives including the balance of payments or the exchange rate.
Monetary union: Two or more countries sharing a common currency. A group of states that join together to have a single central bank that issues a common currency.
Monetary/Nonmonetary Method: Under this translation method, monetary items (for example, cash, accounts payable and receivable, and long-term debt) are translated at the current rate while nonmonetary items (for example, inventory, fixed assets, and long-term investments) are translated at historical rates.
1. To turn anything into money.
2. To convert government debt into currency.
Money income: Nominal income; contrasts with real income.
Money market hedge: A hedge that replicates a currency forward contract through the spot currency and Eurocurrency markets.
Money market instruments: All government securities and short-term corporate obligations.
Money market mutual funds (MMFs): Mutual funds that utilize pools of investors' funds to invest in large-denomination money market instruments.
Money market preferred stock (MMP): Preferred stock having a dividend rate that is reset at auction every 49 days.
Money market yield: A bond quotation convention based on a 360-day year and semiannual coupons. Contrast with bond equivalent yield.
Money market: The market for short-term (less than one year original maturity) government and corporate debt securities. It also includes government securities originally issued with maturities of more than one year but that now have a year or less until maturity. The money market, in macroeconomics and international finance, refers to the equilibration of demand for a country's domestic money to its money supply. Both refer to the quantity of money that people in the country hold (a stock), not to the quantity that people both in and out of the country choose to acquire during a period in the exchange market, mostly for the purpose of then using it to buy something else. Financial markets for debt securities that pay off in the short term, usually less than one year.
Money overhang: A money supply that is larger than people want to hold at prevailing prices. This was said to be a major cause of inflation in Russia after the fall of the Soviet Union, which left an excess of money in circulation.
Money Supply: The total amount of currency in circulation and peso deposits subject to check of the monetary system. There are several formal definitions, but all include the quantity of currency in circulation plus the amount of demand deposits. The money supply, together with the amount of real economic activity in a country, is an important determinant of its price level and its exchange rate.
Money-Market Hedge: The use of simultaneous borrowing and lending transactions in two different currencies to lock in the home currency value of a foreign currency transaction.
Monopolistic: Having some power to set price.
Monopolistic competition: A market structure in which there are many sellers each producing a differentiated product. Each can set its own price and quantity, but is too small for that to matter for prices and quantities of other producers in the industry.
Monopoly argument: The monopoly argument for a tariff is the same as the optimal tariff argument. It gets its name from the fact that a country using a tariff to improve the terms of trade is acting much like a monopoly firm, restricting its sales to get a better price.
Monopoly: Exclusive control or possession by one group of the means of producing or selling goods or services. A market structure in which there is a single seller.
Monopsony: A market structure in which there is a single buyer.
Monotonic: Changing in one direction only; thus either strictly rising or strictly falling, but not reversing direction.
Moral hazard: The tendency of individuals, firms, and governments, once insured against some contingency, to behave so as to make that contingency more likely. A pervasive problem in the insurance industry, it also arises internationally when international financial institutions assist countries in financial trouble. The tendency to incur risks that one is protected against.
More flexible exchange rate system: The International Monetary Fund’s name for a floating exchange rate system.
Morgan Stanley Capital International World Index: An internationally diversified index of developed country stock markets that combines EAFE index with the U.S. market index.
Mortgage banker: A financial institution that originates (buys) mortgages primarily for resale.
Mortgage bond: A bond issue secured by a mortgage on the issuer's property.
Most favored nation (MFN): A status granted to one country by another; the granting country then accords the recipient's imports and exports the most favorable treatment that it accords any country.
Most Favored Nation: The principle, fundamental to the GATT, of treating imports from a country on the same basis as that given to the most favored other nation. That is, and with some exceptions, every country gets the lowest tariff that any country gets, and reductions in tariffs to one country are provided also to others.
Mortgage Terms:

Mothballing: The preservation of a production facility without using it to produce, but keeping the machinery in working order and supplies available. This may be preferable -- if the facility's operating costs are high and the aim is to have it available in time of war -- to having it produce in peacetime under a subsidy or import protection.
Movement of natural persons: One of four modes of supply under the GATS, this involving the temporary movement across national borders of natural persons employed by or associated with a firm in order to participate in the firm's business. It is also called temporary producer movement.
Multi-cone equilibrium: Free-trade equilibrium in the Heckscher-Ohlin Model in which prices are such that all goods cannot be produced within a single country, and instead there are multiple diversification cones. This, or a two cone equilibrium, will arise if countries' factor endowments are sufficiently dissimilar compared to factor intensities of industries. It contrasts with one cone equilibrium.
Multicurrency Clause: This clause gives a Eurocurrency borrower the right to switch from one currency to another when the loan is rolled over.
Multifactor model: A model with more than two factors. In the context of trade theory this is likely to mean a Heckscher-Ohlin Model with more than two factors.
Multifunctionality: Refers to the purposes that an industry may serve in addition to producing its output. Most often applied to agriculture by countries that wish to subsidize it, who argue that subsidies are needed to serve these other purposes, such as rural viability, land conservation, cultural heritage, etc.
Multilateral environmental agreements (MEAs) : Environmental agreements negotiated by a number of countries.
Multilateral: Among a large number of countries. It contrasts with bilateral and poly-lateral.
Multinational Cash Mobilization: A system designed to optimize the use of funds by tracking current and near-term cash positions and redeploying funds in an efficient manner.
Multinational company: A company that does business and has assets in two or more countries.
Multinational corporation: A corporation with operations in more than one country. A Corporation that operates in two or more countries. Since it is headquartered in only one country but has production or marketing facilities in others, it is the result of previous FDI.
Multinational enterprise: A firm, usually a corporation that operates in two or more countries. In practice the term is used interchangeably with multinational corporation.
Multinational Financial System: The aggregate of the internal transfer mechanisms available to the MNC to shift profits and money among its various affiliates. These transfer mechanisms include transfer price adjustments, leading and lagging interaffiliate payments, dividend payments, fees and royalties, intercompany loans, and intercompany equity investments.
Multinational netting: Elimination of offsetting cash flows within the multinational corporation.
Multiple equilibrium: Refers to a system in which there is more than one equilibrium, most commonly a market in which a backward bending supply curve crosses a demand curve more than once, at prices each of which is a market clearing price.
Multiplier: In Keynesian macroeconomic models, the ratio of the change in an endogenous variable to the change in an exogenous variable. Usually means the multiplier for government spending on income. In the simplest Keynesian model of a closed economy, this is 1/s, where s is the marginal propensity to save.
Mundell-Fleming Model: An open-economy version of the IS-LM model that allows for international trade and international capital flows.
Mutatis mutandis: Latin phrase meaning, approximately, "allowing other things to change accordingly." Used as shorthand for indicating the effect of one economic variable on another, within a system in which other variables that matter will also change as a result. It contrasts with ceteris paribus.
Mutual recognition: The acceptance by one country of another country's certification that a satisfactory standard has been met for ability, performance, safety, etc.
Mutually exclusive investment decisions: Investment decisions in which the acceptance of a project precludes the acceptance of one or more alternative projects.
Mutually exclusive project: A project whose acceptance precludes the acceptance of one or more alternative projects.
Mystery of the missing trade: The empirical observation, by Trefler, that the amount of trade is far less than predicted by the HOV version of the Heckscher-Ohlin Model. More precisely, the factor content of trade is far less than the differences between countries in their factor endowments.

National debt: Although this term looks like it should mean the amount that a country owes to foreigners, in practice it is used instead to refer to the amount that a nation's government owes to anybody, including its own citizens. Thus it is the total of a national government's outstanding government bonds.
NAIRU: The level of the unemployment rate at which prices rise at the same rate that they are expected to rise, and thus at which (since expectations needn't change) the rate of inflation does not then rise or fall. It stands for Non-Accelerating Inflation Rate of Unemployment.
Nash equilibrium: Equilibrium in game theory in which each player's action is optimal given the actions of the other players. E.g., in a tariff-and-retaliation game, with each country able to improve its terms of trade with a tariff, zero tariffs are not Nash, since each can do better by raising its tariff. Nash equilibrium, with positive tariffs, is likely to be inferior to free trade for both.
National defense argument for protection: The argument that imports should be restricted in order to sustain a domestic industry so that it will be available in case of trade disruption due to war. This is a second best argument, since there are a variety of ways of providing for defense at lower economic cost, including production subsidies, mothballing, and stockpiling.
National Income and Product Accounts: The statistics collected by the Bureau of Economic Analysis on aggregate economic activity in the United States.
National income: The income generated by a country's production, and therefore the total income of its factors of production. Except for some adjustments that don't usually enter theoretical models, NI is the same as GDP.
National tax policy: The way in which a nation chooses to allocate the burdens of tax collections across its residents.
National treatment: A country accords no less favorable treatment to imported goods than it does to domestic goods. The principle of providing foreign producers and sellers the same treatment provided to domestic firms.
Nationalization: A process whereby privately owned companies are brought under state ownership and control. Contrast with privatization. It is the taking of property, with or without compensation, by a government.
Natural hedge: A hedge (risk reduction action) that occurs naturally as a result of a firm's normal operations. For example, revenue received in a foreign currency and used to pay commitments in the same foreign currency would constitute a natural hedge.
Natural person: This term appears in the GATS where it deals with the international movement of employees of firms that are providing services in another country. Persons are called "natural" to distinguish them from juridical persons, such as partnerships or corporations that are given certain rights of persons under the law.
Natural resource: Anything that is provided by nature, such as deposits of minerals, quality of land, old-growth forests, fish populations, etc. The availability of particular natural resources is an important determinant of comparative advantage and trade in products that depend on them. Natural resources constitute one of the primary factors of production.
Natural trade: Trade that is either free or restricted, but that is not artificially encouraged by subsidies or other stimulants.
Natural trading bloc: A trading bloc consisting of natural trading partners.
Natural trading partner: A country with whom another country's trade is likely to be large, because of low transport or other trade costs between them.
Necessity test: A procedure to determine whether a trade restriction intended to serve some purpose is necessary for that purpose.
Negative externality: A harmful externality; that is, a harmful effect of one economic agent's actions on another. Considered a distortion because the first agent has inadequate incentive to curtail their action. Examples are pollution from factories (a production externality) and smoke from cigarettes (a consumption externality).
Negative list: In an international agreement, a list of those items, entities, products, etc. to which the agreement will not apply, the commitment being to apply the agreement to everything else. It contrasts with positive list.
Negative pledge clause: A protective covenant whereby the borrower agrees not to allow a lien on any of its assets.
Negative-NPV tie-in project: A negative-NPV infrastructure development project that a local government requires of a company pursuing a positive-NPV investment project elsewhere in the economy.
Negotiable certificate of deposit (CD): A large denomination investment in a negotiable time deposit at a commercial bank or savings institution paying a fixed or variable rate of interest for a specified time period.
Neighborhood production structure: A structure of technology for a general equilibrium model due to Jones and Kierzkowski. With an arbitrary but equal number of goods and factors, each factor produces two (different) goods, each good uses two (different) factors, in a way that yields more unambiguous results than one normally finds in high-dimension trade models without specific factors.
Neighborhood: In mathematical Euclidean space, a small set of points surrounding and including a particular point. Thus, for an economic variable, such as an allocation, the neighborhood of a particular allocation includes all those allocations that are sufficiently similar to it.
Neoclassical ambiguity: In the specific factors model, the fact that the effect of a change in relative prices on the real wage of the mobile factor cannot be known a priori, since the wage rises relative to one price and falls relative to the other.
Neoclassical economics: Most of modern, mainstream economics based on neoclassical assumptions. It tends to ascribe inevitability, if not necessarily desirability, to market outcomes.
Neoclassical growth model: A model of economic growth in which income arises from neoclassical production functions in one or more sectors displaying diminishing returns to saving and capital accumulation.
Neoclassical: A collection of assumptions customarily made by mainstream economists starting in the late 19th century, including profit maximization by firms, utility maximization by consumers, and market equilibrium, with corresponding implications for determination of factor prices and the distribution of income. It contrasts with classical, Keynesian, and Marxist.
Neo-liberalism: A view of the world that favors social justice while also emphasizing economic growth, efficiency, and the benefits of free markets.
Net asset value: The sum of the individual asset values in a closed-end mutual fund. Closed-end funds can sell at substantial premiums or discounts to their net asset values.
Net currency exposure: Exposure to foreign exchange risk after netting all intracompany cash flows.
Net domestic product: Gross domestic product minus depreciation. This is the most complete measure of productive activity within the borders of a country, though its accuracy suffers from the difficulty of measuring depreciation.
Net exports: Exports minus imports; same as the balance of trade.
Net exposed assets: Exposed assets less exposed liabilities. The term is used with market values or, in translation accounting, with book values.
Net float: The dollar difference between the balance shown in a firm's (or individual's) checkbook balance and the balance on the bank's books.
Net foreign asset position: The value of the assets that a country owns abroad, minus the value of the domestic assets owned by foreigners. Equals balance of indebtedness.
Net foreign factor income: The income of a country's factors earned abroad minus the income paid to foreign-owned factors domestically.
Net international reserves: International reserves minus reserves that have been borrowed from the IMF and other governments.
Net lease: A lease where the lessee maintains and insures the leased asset.
Net Liquidity Balance: The change in private domestic borrowing or lending tha is required to keep payments in balance without adjusting official reserves. Nonliquid, private, short-term capital flows and errors and omissions are included in the balance; liquid assets and liabilities are excluded.
Net monetary assets: Monetary assets less monetary liabilities.
Net national product: Gross national product minus depreciation. This is the most complete measure of productive activity by a country's nationals, though its accuracy suffers from the difficulty of measuring depreciation.
Net operating income (NOI) approach (to capital structure: A theory of capital structure in which the weighted average cost of capital and the total value of the firm remain constant as financial leverage is changed.
Net operating profit after tax (NOPAT): A company's potential after-tax net profit if it was all-equity-financed or "unleveled.”
Net output: The output of a product that is available for final users, after deducting amounts of it used up as an intermediate input in producing itself and other products. It contrasts with gross output.
Net position: A currency position after aggregating and canceling all offsetting transactions in each currency, maturity, and security.
Net present value (NPV): The present value of future cash returns, discounted at the appropriate market interest rate, minus the present value of the cost of the investment. The present value of an investment project's net cash flows minus the project's initial cash outflow. Same as present value, being sure to include (negative) payments as well as (positive) receipts.
Net working capital: Current assets minus current liabilities.
Netting: System in which cross-border purchases among participating subsidiaries of the same company are netted so that each participant pays or receives only the net amount of its intracompany purchases and sales. Exposure netting; Payments netting.
Network: A set of connections among a multiplicity separate entities sharing a common characteristic. Networks of firms or individuals in different countries are thought to facilitate trade.
1. Said of a technological change or technological difference if it is not biased in favor of using more or less of one factor than another. This can be defined in several different ways that are not normally equivalent: Hicks-neutral, Harrod-neutral, and Solow-neutral.
2. Said of economic growth if it expands actual or potential output of all goods at the same rate, not being biased in favor of one over another. In the Heckscher-Ohlin Model neutral growth will occur all factor endowments grow at the same rate or if there is Hicks Neutral technological progress at the same rate in all industries.
3. Said of a trade regime if the structure of protection favors neither exportable nor importable.
New bancor: A proposed new non-national world currency to be used for payment and reserve purposes, to be issued by the IMF and intended to maintain a fixed purchasing power in the dollar and euro countries.
New Economic Geography: The study of the location of economic activity across space, particularly a strand of literature begun by Krugman using agglomeration economies to help explain why industries cluster within particular countries and regions.
New Economy: This term was used in the late 1990's to suggest that globalization and/or innovations in information technology had changed the way that the world economy works. Conjectures included changes in productivity, the inflation-unemployment tradeoff, the business cycle, and the valuation of enterprises.
New International Economic Order: A set of proposals put forward during the 1970s by developing countries through UNCTAD to promote their interests by improving their terms of trade, increasing development assistance, developed-country tariff reductions, and other means.
New protectionism: Recent efforts to pressure national governments to exercise greater control over foreign trade and foreign direct investment.
New Trade Theory: Models of trade that, especially in the 1980s, incorporated aspects of imperfect competition, increasing returns, and product differentiation into both general equilibrium and partial equilibrium models of trade and trade policy.
Newly Industrializing Country: Refers to a group of countries previously regarded as LDCs that have recently achieved high rates and levels of economic growth.
News: Unexpected information. In an efficient market, as the exchange market is supposed to be, price reflects all available information. It can change, therefore, only in response to news.
No-Arbitrage Condition: The relationship between exchange rates such that profitable arbitrage opportunities don’t exist. If this condition is violated on an ongoing basis, we would wind up with a money machine.
Nominal (stated) interest rate: A rate of interest quoted for a year that has not been adjusted for frequency of compounding. If interest is compounded more than once a year, the effective interest rate will be higher than the nominal rate.
Nominal anchor: The technique of fixing a nominal variable in an economy as a means of reducing inflation. For example, by firmly pegging the nominal exchange rate, a central bank or government reduces its own ability to expand the money supply.
Nominal cash flow: A cash flow expressed in nominal terms if the actual dollars to be received (or paid out) are given.
Nominal Exchange Rate: The actual exchange rate; it is expressed in current units of currency. The actual exchange rate at which currencies are exchanged on an exchange market. It contrasts with real exchange rate. The interest rate actually observed in the market, in contrast to the real interest rate. Interest rate unadjusted for inflation. The price quoted on lending and borrowing transactions. It is expressed as the rate of exchange between current and future units of currency unadjusted for inflation.
Nominal rate of protection: The protection afforded an industry directly by the tariff and/or NTB (Nontariff barrier) on its output, ignoring effects of other trade barriers on the industry's inputs. It contrasts with the ERP.
Nominal return: The earnings on an asset or other investment, comparable to a nominal interest rate, thus not adjusted for inflation.
Nominal tariff: The nominal protection provided by a tariff; that is, the tariff itself. It contrasts with effective tariff.
Nominal wage: The wage of labor in units of currency, not adjusted for inflation, and thus not in terms of the goods that it will buy. It contrasts with real wage.
1. In the form most directly observed or named, in contrast to a form that has been adjusted or modified in some fashion.
2. As measured in terms of money, usually in contrast to real.
Non-actionable subsidy: A subsidy that is permitted by the rules of the WTO, thus not subject to countervailing duties. These include non-specific subsidies, subsidies for industrial research, regional aids, and some environmental subsidies.
Non-automatic licensing: Import licensing that is discretionary, based on an import quota, or performance related.
Noncash item: Expense against revenue that does not directly affect cash flow, such as depreciation and deferred taxes.
Nonconvexity: The property of an economic model or system that sets representing technology, preferences, or constraints are not mathematically convex. Because convexity is needed for proof that competitive equilibrium is efficient and well-behaved, nonconvexities may imply market failures.
Nondistorted: Without distortions. Many propositions in trade theory are strictly valid, often only implicitly, only in nondistorted economies.
Nondistorting lump sum: Redundant appellation for a lump sum tax or subsidy.
Noneconomic objectives argument for protection: The view that a restriction on imports may serve a purpose outside of conventional economic models. Unless that purpose is itself the restriction of trade, then this is a second-best argument, since changes in output, consumption, etc. can be achieved at lower economic cost in other ways.
Non-governmental organization:
Non-governmental organizations (NGOs): Special interest groups that operate in the global community. A not-for-profit organization that pursues an issue or issues of interest to its members by lobbying, persuasion, and/or direct action. In the arena of international economics, NGOs play an increasing role defending human rights and the environment, and fighting poverty.
Nonhomothetic: Any function that is not homothetic, but usually applied to consumer preferences that include goods whose shares of expenditure rise (and others that fall) with income.
Nonintermediated debt market: A financial market in which borrowers (governments and large corporations) appeal directly to savers for debt capital through the securities markets without using a financial institution as intermediary.
Non-market economy: A country in which most major economic decisions are imposed by government and by central planning rather than by free use of markets. Contrasts with a market economy.
Non-market-clearing: A situation or economic model in which a market or markets do not clear, perhaps because something prevents prices from adjusting to discrepancies between supply and demand.
Nonmonetary assets and liabilities: Assets and liabilities with noncontractual payoffs.
Nonproduction worker: A worker not directly engaged in production. In empirical studies of skilled and unskilled labor, data on nonproduction workers are often taken to represent skilled labor.
Nonprohibitive tariff: A tariff that is not prohibitive.
Nonrecourse: Method of borrowing against an asset, such as a receivable, under which the lender assumes all the credit and political risks except for those involving disputes between the transacting parties. The lender has no recourse to the borrower.
Non-specific subsidy: A subsidy that is available to more than a single specific industry and is therefore non-actionable under WTO rules.
Nonsterilization: Refers to exchange market intervention that is done without sterilizing its effects on the domestic money supply.
Nontariff barrier: Any policy that interferes with exports or imports other than a simple tariff, prominently including quotas and VERs. An indirect measure used to discriminate against foreign manufacturers, for example, extensive inspection procedures for foreign imports that create barriers to entering the market.
Nontariff measure: Any policy or official practice that alters the conditions of international trade, including ones that act to increase trade as well as those that restrict it. The term is therefore broader than nontariff barrier, although the two are usually used interchangeably.
Nontradable good: A good that, by its nature, is nontradable.
1. Not capable of being traded among countries.
2. A good or service that is nontradable; with nontradables referring to an aggregate of such goods and services.
Nontraded good: A good that is not traded, either because it cannot be or because trade barriers are too high. Except when services are being distinguished from goods, they are often mentioned as examples of nontraded goods, or at least they were until it became common to speak of trade in services.
Nonviolation: In WTO terminology, this is shorthand for a complaint that a country's action, though not a violation of WTO rules, has nullified or impaired a member's expected benefits from the agreement.
Normal distribution: Symmetric bell-shaped frequency distribution that can be defined by its mean and standard deviation.
Normal good: A good the demand for which rises with income if relative prices do not change. It contrasts with inferior good.
Normal value: Price charged for a product on the domestic market of the producer. It is used to compare with export price in determining dumping.
Normative: Refers to value judgments as to "what ought to be," in contrast to positive which is about "what is."
North American Free Trade Agreement (NAFTA): A regional trade pact among the United States, Canada, and Mexico.
North American Industry Classification System (NAICS, pronounced nakes) Codes: A standardized classification of businesses by types of economic activity developed jointly by Canada, Mexico, and the United States. A five- or six-digit code number is assigned depending on how a business is defined.
North-South model: An economic model in which two countries, North and South, represent developed and less developed countries respectively.
Note Issuance Facility (NIF): A facility provided by a syndicate of banks that allows borrowers to issue short-term notes, which are then placed by the syndicate providing the NIF. Borrowers usually have the right to sell their notes to the bank syndicate at a price that yields a prearranged spread over LIBOR.
Notional Principal: A reference amount against which the interest on a swap is calculated. In a swap agreement, a principal amount that is only "notional" and is not exchanged.
NPV profile: A graph showing the relationship between a project's net present value and the discount rate employed.
Numeraire: The unit in which prices are measured. This may be a currency, but in real models, such as most trade models, the numeraire is usually one of the goods, whose price is then set at one. The numeraire can also be defined implicitly by, for example, the requirement that prices sum to some constant.

Obsolescing Bargain Model: A model of interaction between a multinational enterprise and a host country government, which initially reach a bargain that favors the MNE but where, over time as the MNE's fixed assets in the country increase, the bargaining power shifts to the government.
Offer (ask) rates: The rate at which a market maker is willing to sell the quoted asset.
Offer curve Diagram: A diagram that combines the offer curves of two countries (or one country and the rest of world) to determine equilibrium relative prices.
Offer curve: A curve showing, for a two-good model, the quantity of one good that a country will export (or offer) for each quantity of the other that it imports. Also called the reciprocal demand curve, it is convenient for representing both exports and imports in the same curve and can be used for analyzing tariffs and other changes.
Offering statement: In the United States, a shortened registration statement required by the Securities and Exchange Commission on debt issues with less than a nine-month maturity.
Official rate: The par value of a pegged exchange rates.
Official Reserve Transactions Balance: The adjustment required in official reserves to achieve balance-of-payments equilibrium.
Official reserve transactions: Transactions by a central bank that cause changes in its official reserves. These are usually purchases or sales by its own currency in the exchange market in exchange for foreign currencies or other foreign-currency-denominated assets. In the balance of payments a purchase of its own currency is a credit (+) and a sale is a debit (-).
Official reserves: The reserves of foreign-currency-denominated assets (and also gold and SDRs) that a central bank holds, sometimes as backing for its own currency, but usually only for the purpose of possible future exchange market intervention. Holdings of gold and foreign currencies by official monetary institutions.
Official settlements balance (overall balance): An overall measure of a country’s private financial and economic transactions with the rest of the world.
Offset requirement: As a condition for importing into a country, a requirement that foreign exporters purchase domestic products and/or invest in the importing country.
Offshore Finance Subsidiary: A wholly affiliate incorporated overseas, usually in a tax-haven country, whose function is to issue securities abroad for use in either the parent’s domestic or foreign business.
Offshore financial centers (OFCs): The many types of financial instiutions that operate without financial supervision by governments or other agencies.
Ohlin definition: The price definition of factor abundance. In contrast to the quantity definition, the price definition incorporates differences in demands as well as supplies.
OLI Paradigm: A framework for analyzing the decision to engage in FDI, based on three kinds of advantage that FDI may provide in comparison to exports: Ownership, Location, and Internalization.
Oligopoly: A market structure in which there are a small number of sellers, at least some of whose individual decisions about price or quantity matter to the others. A market dominated by so few sellers that action by any of them will impact both the price of the good and the competitors.
Oligopsony: A market structure in which there are a small number of buyers.
One cone equilibrium: A free-trade equilibrium in the Heckscher-Ohlin Model in which prices are such that all goods can be produced within a single country, and there is only one diversification cone. This will arise if countries' factor endowments are sufficiently similar compared to factor intensities of industries. It contrasts with multi-cone equilibrium.
One-dollar-one-vote yardstick: A characterization of the Kaldor-Hicks welfare criterion normally used in evaluating trade policies and more generally in cost-benefit analysis, based on a sum of monetary values including consumer and producer surplus.
One-way arbitrage: The use, by a potential supplier or demander in a market, of a different market or markets to accomplish the same purpose, taking advantage of a discrepancy among their prices. With transaction costs, this enforces smaller price discrepancies than would be permitted by conventional arbitrage.
One-way option: Refers to the situation of a speculator on an exchange market with a pegged exchange rate. If there is doubt about the viability of the peg, the speculator can sell the currency short knowing that there is only one direction (one way) that the currency is likely to move. Therefore there is little risk associated with such speculation.
Open account selling: This selling method involves shipping goods first and billing the importer later.
Open account: The seller delivers the goods to the buyer and then bills the buyer according to the terms of trade.
Open and reform policy: An economic policy enacted by the Chinese government combining central planning with market-oriented reforms to increase productivity, living standards, and technological quality without exacerbating inflation, unemployment, and budget deficits, with the goal of moving from a centrally-planned economy to a market-based one.
Open economy: An economy that permits transactions with the outside world, at least including trade of some goods. It contrasts with closed economy.
Open Interest: The number of futures contracts out-standing at any one time.
Open market operation: The sale or purchase of government bonds by a central bank, in exchange for domestic currency or central-bank deposits. This changes the monetary base and therefore the domestic money supply, contracting it with a bond sale and expanding it with a bond purchase.
Open markets: Markets that are free of restrictions on who can buy and sell.
Open position: An obligation to take or make delivery of an asset or currency in the future without cover, that is, without a matching obligation in the other direction that protects them from effects of change in the price of the asset or currency. Aside from simple ownership and debt, an open position can be acquired or avoided using the forward market.
Open regionalism: Regional economic integration that is not discriminatory against outside countries; typically, a group of countries that agrees to reduce trade barriers on an MFN basis. Adopted as a fundamental principle, but not defined, by APEC in 1989.
Open-economy multiplier: The simple Keynesian multiplier for a small open economy. It equals 1/(s+m), where s is the marginal propensity to save and m is the marginal propensity to import.
Open-end fund: A mutual fund in which the amount of money under management grows/shrinks as investors buy/sell the fund.
Open-market operation: Purchase or sale of government securities by the monetary authorities to increase or decrease the domestic money supply.
Openness coefficient: The coefficient on any variable measuring openness in a regression, often a regression explaining economic growth. It is an estimate of the importance of openness for growth.
Openness index:
1. Any measure of openness.
2. The ratio of a country's trade (exports plus imports) to its GDP.
Openness: The extent to which an economy is open to trade, and sometimes also to inflows and outflows of international investment.
Operating cash flow: Earnings before interest and depreciation minus taxes. It measures the cash flow generated form operations, not counting capital spending or working capital requirements.
Operating cycle: The length of time from the commitment of cash for purchases until the collection of receivables resulting from the sale of goods or services.
Operating exposure: Changes in the value of real (nonmonetary) assets or operating cash flows as a result of changes in currency values. Degree to which an exchange rate, in combination with price changes, will alter a company’s future operating cash flows.
Operating lease: A short-term lease that is often cancelable.
Operating leverage: The trade-off between fixed and variable costs in the operation of the firm. The use of fixed operating costs by the firm.
Operational efficiency: Market efficiency with respect to how large an influence transactions costs and other market frictions have on the operation of a market.
OPIC Overseas Private Investment Corporation: A US agency that assists US companies protect their investment against risk in a particular country besides providing other services.
Opportunity cost: Most valuable alternative that is given up. The rate of return used in NPV computation is an opportunity interest rate. The cost of something in terms of opportunity foregone. The opportunity cost to a country of producing a unit more of a good, such as for export or to replace an import, is the quantity of some other good that could have been produced instead. What is lost by not taking the next-best investment alternative.
Opportunity set: The set of all possible investments.
Optimal capital structure: The capital structure that minimizes the firm's cost of capital and thereby maximizes the value of the firm.
Optimal currency area: The optimal grouping of regions or countries within which exchange rates should be held fixed.
Optimal output:
1. For a firm this usually means the output of the good that it produces that, when sold, maximizes profit.
2. For a country, this usually means the combination of different goods (and services) that it can produce that is worth the most at world prices, perhaps adjusted for any externalities.
Optimal tariff argument: An argument in favor of levying a tariff in order to improve the terms of trade. The argument is valid only in a large country, and then only if other countries do not retaliate by rising tariffs them. Even then, this is a beggar thy neighbor policy, since it lowers welfare abroad.
Optimal tariff: The level of a tariff that maximizes a country's welfare. In a nondistorted small open economy, the optimal tariff is zero. In a large country it is positive, due to its effect on the terms of trade.
Optimal: Best, by whatever criterion decisions are being made; thus yielding the highest level of utility, profit, economic welfare, or whatever objective is being pursued.
Optimum Currency Area: Largest area in which it makes sense to have only one currency. It is defined as that area for which the cost of having an additional currency-higher costs of doing business and greater currency risk-just balances the benefits of another currency-reduced vulnerability to economic shocks associated with the option to change the area’s exchange rate.
Optimum: The best. Usually refers to a most preferred choice by consumers subject to a budget constraint, a profit maximizing choice by firms or industry subject to a technological constraint, or in general equilibrium, a complete allocation of factors and goods that in some sense maximizes welfare.
Option: A contract that permits one party to buy from (or sell to) the other party something at a pre-specified price during a pre-specified period of time, leaving the choice of whether to do this or not (whether to "exercise" the option) up to the first party, which buys the option. Options exist for many assets, including foreign exchange. It is a financial instrument that gives the holder the right-but not obligation-to sell (put) or buy (call) another financial instrument at a set price and expiration date.
Order point: The quantity to which inventory must fall in order to signal that an order must be placed to replenish an item.
Orderly Marketing Arrangement: An agreement among a group of exporting and importing countries to restrict the quantities traded of a good or group of goods. Since the impetus normally comes from the importers protecting their domestic industry, an OMA is effectively a multi-country VER.
Organization for Economic Cooperation and Development (OECD): A group of 30 countries that meets regularly to discuss global issues and make appropriate economic and social policies.
Organization of Petroleum Exporting Countries (OPEC): A producer cartel that produces and sells oil.
Origin principle: The principle in international taxation that value added taxes be kept only by the country where production takes place. Under the origin principle, value added taxes are not collected on imports and not rebated on exports. It contrasts with the destination principle.
Out-of-the-money option: An option that has no value if exercised immediately.
Out-of-the-Money: An option that would not be profitable to exercise at the current price.
Output augmenting: Said of a technological change or technological difference if one production function produces a scalar multiple of the other. It is also called Hicks neutral.
Output gap: The amount by which a country's output, or GDP, falls short of what it could be given its available resources. A positive output gap is considered to exist when a country's unemployment rate is greater than the NAIRU.
Outright quote: A quote in which all of the digits of the bid and offer prices are quoted. Contrast with points quote.
Outright Rate: Actual forward rate expressed in dollars per currency unit, or vice versa.
Outsourcing: A situation in which a firm's functions are performed or provided by a person or group from outside the company. Subcontracting a certain business operation to an outside firm instead of doing it in house. The practice of purchasing a significant percentage of intermediate components from outside suppliers.
1. Performance of a production activity that was previously done inside a firm or plant outside that firm or plant.
2. Manufacture of inputs to a production process, or a part of a process, in another location, especially in another country.
3. Another term for fragmentation.
Outstrike: Pre-defined exchange rate at which a knockout option is canceled if the spot rate crosses this price even temporarily.
Overall balance: Official settlements balance.
Overall FTC limitation: In the U.S. tax code, a limitation on the FTC equal to foreign-source income times U.S. tax on worldwide income divided by worldwide income.
Overdraft facility: In the IMF, an arrangement permitting countries to draw more foreign currency from it than they have deposited. The right to do so is a Special Drawing Right and, when used, is transferred to the country whose currency is withdrawn.
Overdraft: A line of credit against which drafts (checks) can be drawn (written) up to a specified maximum amount.
Over-invoicing: The provision of an invoice that reports the price as higher than is actually being paid.
Overseas Private Investment Corporation (OPIC): Agency of the U.S. government that provides political risk insurance coverage to U.S. multinationals. Its purpose is to encourage U.S. direct investment in less-developed countries.
Oversubscription privilege: The right to purchase, on a pro rata basis, any unsubscribed shares in a rights offering.
Over-the-Counter Market (OTC): A market in which the terms and conditions on contracts are negotiated between the buyer and seller, in contrast to an organized exchange where contractual terms are fixed by the exchange.
Over-the-Counter Options: Option contracts whose specifications are generally negotiated as to the amount, exercise price, underlying instrument, and expiration. They are traded by commercial and investment banks.
Over-valued currency: The situation of a currency whose value on the exchange market is higher than is believed to be sustainable. This may be due to a pegged or managed rate that is above the market-clearing rate, or, under a floating rate, it may be due to speculative capital inflows. It contrasts with under-valued currency.
Ownership-specific advantages: Property rights or intangible assets, including patents, trademarks, organizational and marketing expertise, production technology and management, and general organizational abilities, that form the basis for the multinational’s advantage over local firms.

Packing list: Document listing the contents of a consignment of goods. It may be called for on a letter of credit.
Par value: The central value of a pegged exchange rate, around which the actual rate is permitted to fluctuate within set bounds. The face value of a stock or bond.
Para tariff: A charge on imports that is not included in a country's tariff schedule, such as a statistical tax, stamp fee, etc.
Paradox: As used in economics, it seems to mean something unexpected, rather than the more extreme normal meaning of something seemingly impossible. Some paradoxes are just theoretical results that go against what one thinks of as normal. Others, like the Leontief paradox, are empirical findings that seem to contradict theoretical predictions.
Parallel import: Trade that is made possible when the owner of intellectual property causes the same product to be sold in different countries for different prices. If someone else imports the low-price good into the high-price country, that is a parallel import.
Parallel loan: A loan arrangement in which a company borrows in its home currency and then trades this debt for the foreign currency debt of a foreign counterpart. Simultaneous borrowing and lending operation usually involving four related parties in two different countries.
Para-tariff: A charge on an imported good instead of, or in addition to, a tariff.
Parent: In a firm that has one or more subsidiaries, especially a multinational corporation, the portion of the firm that owns and ultimately controls the others.
Pareto criterion: The criterion that for change in an economy to be viewed as socially beneficial it should be Pareto-improving.
Pareto-improving: Making no one worse off and making at least one person better off.
Pareto-optimal: Having the property that no Pareto-improving change is possible.
Paris Club: A group of creditor countries that meets regularly but informally in Paris to seek ways of helping debtor countries to manage their debts through coordinated rescheduling and other means.
Parity: Official value, or par value.
Parsimonious: Stingy. Although in normal language, this has a negative connotation, when applied to a model or an explanation in economics it tends to be positive, meaning that it relies on as simple a structure as possible.
Partial equilibrium: Equality of supply and demand in only a subset of an economy's markets -- usually just one -- taking variables from other markets as given. Partial equilibrium models are appropriate for products that constitute only a negligibly small part of the economy. They are used routinely (not always appropriately) for analysis of trade policies in single industries. It contrasts with general equilibrium.
Partial: Favoring one person or side over another; not impartial.
Participating preferred stock: Preferred stock where the holder is allowed to participate in increasing dividends if the common stockholders receive increasing dividends.
Partnership: Form of business organization in which two or more co-owners form a business. In a general partnership each partner is liable for the debts of the partnership. Limited partnership permits some partners to have limited liability. A business form in which two or more individuals act as owners. In a general partnership all partners have unlimited liability for the debts of the firm; in a limited partnership one or more partners may have limited liability.
Passive income: In the U.S. tax code, income (such as investment income) that does not come from active participation in a business.
Pass-through: The extent to which an exchange rate change is reflected in the prices of imported goods. With full pass-through, a currency depreciation, which increases the price of foreign currency, would increase the prices of imported goods by the same amount, and vice versa. With no pass-through, prices of imports remain constant.
Patent: A government grant that gives inventors exclusive right of making, using, or selling the invention. The legal right to the proceeds from and control over the use of an invented product or process, granted for a fixed period of time, usually 20 years. Patent is one form of intellectual property that is subject of the TRIPS agreement.
Path dependent: The property that where you get to depends on how you got there. That is, if the equilibrium that will ultimately be reached by a system depends on the values of variables taken on away from equilibrium, then the equilibrium is path dependent.
Patriotism argument for protection: The view that one is helping one's country by buying domestically produced goods instead of imports. In a nondistorted economy, this is not correct, since the country can do better producing where it has a comparative advantage rather than using scarce resources where it does not.
Pattern of specialization: Which goods a country produces and which it does not produce.
Pauper labor argument: The view that a country loses by importing from another country that has low wages, presumably by lowering wages at home. This view ignores the fact that low wages are due to low productivity, and that the high-wage home country, with high productivity, will have comparative advantage in some products and will gain from trade.
Payable through draft (PTD): A check-like instrument that is drawn against the payor and not against a bank, as is a check. After a PTD is presented to a bank, the payor gets to decide whether to honor or refuse payment.
Payback period (PBP): The period of time required for the cumulative expected cash flows from an investment project to equal the initial cash outflow.
Payback period rule: An investment decision rule which states that all investment projects that have payback periods equal to or less than a particular cutoff period are accepted, and all those that pay off in more than the particular cutoff period are rejected. The payback period is the number of years required for a firm to recover its initial investment required by a project from the cash flow it generates.
Payment at sight: Written as one of the terms of payment in a letter of credit, this means that the payment will be made immediately when the completion of the trade is documented, as opposed to after some specified delay.
Payment date: The date when the corporation actually pays the declared dividend.
Payments imbalance: Imbalance in the balance of payments, normally including both current and capital accounts.
Payments Netting: Reducing fund transfers between affiliates to only a netted amount. Netting can be done on a bilateral basis (between pairs of affiliates) or on a multilateral basis (taking all affiliates together).
Payoff profile: A graph with the value of an underlying asset on the x-axis and the value of a position taken to hedge against risk exposure on the y-axis. Also used with changes in value. Contrast with risk profile.
Payout ratio: Proportion of net income paid out in cash dividends.
Peak: The point in the business cycle when an economic expansion reaches its highest point before turning down. It contrasts with trough.
1. To maintain a pegged exchange rate; thus to set a currency's value within a narrow range.
2. The par value of a pegged exchange rate.
3. The regime of a pegged exchange rate.
Pegged Currency: A currency whose value is set by the government.
Pegged exchange rate system: The International Monetary Fund’s name for a fixed exchange rate system.
Pegged exchange rate: A regime in which the government or central bank announces an official (par value) of its currency and then maintains the actual market rate within a narrow band above and below that by means of exchange market intervention.
Pension liabilities: A recognition of future liabilities resulting from pension commitments made by the corporation. Accounting for pension liabilities varies widely by country.
Per capita income: Income per person, usually measured as GDP divided by population.
Per capita output: The value of an economy's output per person, GDP divided by population and thus the same as per capita income.
Perfect capital mobility:
1. The absence of any barriers to international capital movements.
2. The requirement that, in equilibrium, rates of return on capital (interest rates) must be the same in different countries.
Perfect competition: Also assumes homogeneous products, free entry and exit, and complete information. Most international trade theory prior to the New Trade Theory assumed perfect competition. An idealized market structure in which there are large numbers of both buyers and sellers, all of them small, so that they act as price takers.
Perfect foresight: Exact knowledge of the future. Under perfect foresight, for example, the forward rate would exactly equal the spot rate that later prevails when the forward contract matures.
Perfect market assumptions: A set of assumptions under which the law of one price holds. These assumptions include frictionless markets, rational investors, and equal access to market prices and information.
Perfect substitute: A good that is regarded by its demanders as identical to another good, so that the elasticity of substitution between them is infinite.
Perfectly competitive: Refers to an economic agent (firm or consumer), group of agents (industry), model, or analysis that is characterized by perfect competition. It contrasts with imperfectly competitive.
Perfectly elastic: Refers to a supply or demand curve with a price elasticity of infinity, implying that the supply or demand curve as usually drawn is horizontal. A small open economy faces perfectly elastic demand for its exports and supply of its imports, and a foreign offer curve that is a straight line from the origin.
Performance requirement: A requirement that an importer or exporter achieve some level of performance, in terms of exporting, domestic content, etc., in order to obtain an import or export license.
Performance target: In the international economic context, this is likely to refer to one of several targets specified by the IMF as a condition for a loan to a developing country.
Peril point: The point beyond which tariff reduction in an industry would cause it serious injury. The U.S. Tariff Commission was required to determine peril points for U.S. industries as a constraint on negotiations in early GATT Rounds.
Periodic call auction: A trading system in which stocks are auctioned at intervals throughout the day.
Periphery: This is something that is on the edge. It therefore is used to refer to countries that are located far from the center of the world's economic activity.
Permanent normal trading relations: The granting of permanent MFN status to a country that is not a member of the WTO. It is normal in the sense that most countries are WTO members and therefore have MFN status (or better) automatically.
Permanent working capital: The amount of current assets required to meet a firm's long-term minimum needs.
Permit: A license issued by government granting permission to engage in some activity, such as to export, import, or invest.
Perpetuity: A constant stream of cash flows without end. A British consol is an example. It is an ordinary annuity whose payments or receipts continue forever.
Peso Problem: Reference to the possibility that during the time period studied investors anticipated significant events that didn’t materialize, thereby invalidating statistical inferences base on data drawn from that period.
Petrodollar: Refers to the profits made by oil exporting countries when the price rose during the 1970s, and their preference for holding these profits in U.S. dollar-denominated assets, either in the U.S. or in Europe as Eurodollars. A portion of these were in turn lent by banks to oil-importing developing countries that used them to buy oil.
Physical capital: The same as "capital," without any adjective, in the sense of plant and equipment. The word physical is used only for clarity, to distinguish it from human capital and financial capital.
Phytosanitary measure: A piece of legislation, regulation, or procedure with the purpose of preventing the introduction or spread of pests. Phytosanitary procedures often include the performance of inspections, tests, surveillance, or other treatments.
Phytosanitary: Pertaining to the health of plants.
Piecemeal tariff reform: The reduction of only one tariff (or a subset of tariffs) by a country that has additional tariffs on other products. Platform See export platform.
Plaza Agreement: A coordinated program agreed to in September 1985 that was designed to force down the dollar against other major currencies and thereby improve American competitiveness.
Points quote: An abbreviated form of the outright quote used by traders in the interbank market.
Poison pill: A device used by a company to make itself less attractive as a takeover candidate. Its poison, so to speak, is released when the buyer takes a sufficient bite of the target firm.
Policy: A deliberate act of government that in some way alters or influences the society or economy outside the government. Includes, but is not limited to, taxation, regulation, expenditures, and legal requirements and prohibitions, including in each case those which affect international transactions.
Political economy of protection: The study of reasons, especially political ones, that countries choose to use protection. It includes models of voting, lobbying, and campaign contributions as these lead policy makers to erect tariffs.
Political economy:
1. Early name for the discipline of economics.
2. A field within economics encompassing several alternatives to neoclassical economics, including Marxist economics. Also called radical political economy.
3. A field within economics that concerns the interactions between political processes and economic variables, especially economic policies.
Political risk: The risk that a sovereign host government will unexpectedly change the rules of the game under which businesses operate. Political risk includes both macro and micro risks. Uncertain government action that affects the value of a firm.
Pollution haven: A country that, because of its weak or poorly enforced environmental regulations, attracts industries that pollute the environment.
Poly-lateral agreement: The poly-lateral agreements of the WTO contrast with the larger multilateral agreements in that the former are signed onto by only those member countries that choose to do so, while all members are party to the multilateral agreements.
Poly-lateral: Among several countries -- more than two, which would be bilateral, but not a great many, which would be multilateral.
Pooling of interests (method): A method of accounting treatment for a merger based on the net book value of the acquired company's assets. The balance sheets of the two companies are simply combined.
Pooling: Transfer of excess cash into a central account (pool), usually located in a low-tax nation, where all corporate funds are managed by corporate to certain tax breaks.
Porter's diamond: The four determinants of competitive advantage of nations, as identified by Porter (1990): factor conditions; demand conditions; related and supporting industries; and firm strategy, structure, and rivalry.
Portfolio approach: An approach to explaining exchange rates that stresses their role in changing the proportions of different currency-denominated assets in portfolios. The exchange rate adjusts to equate these proportions to desired levels.
Portfolio capital: Financial assets, including stocks, bonds, deposits, and currencies.
Portfolio flow: The sale or purchase of financial assets across countries.
Portfolio investment: The acquisition of portfolio capital. Usually refers to such transactions across national borders and/or across currencies.
Portfolio: Combined holding of more than one stock, bond, real estate asset, or other asset by an investor. A combination of two or more securities or assets. The entirety of the financial assets (and usually also liabilities) that an economic agent or group of agents owns.
Positive externality: A beneficial externality; that is, a beneficial effect of one economic agent's actions on another. It is considered a distortion because the first agent has inadequate incentive to act. Examples are the attractiveness of well-kept farms for the tourism industry (a production externality) and reduced contagion of disease due to vaccines (a consumption externality).
Positive list: In an international agreement, a list of those items, entities, products, etc. to which the agreement will apply, with no commitment to apply the agreement to anything else. It contrasts with negative list.
Positive sum game: A game in which the payoffs to the players may add up to more than zero, so that it may be possible for all players to gain. Contrasts with zero sum game. Due to the gains from trade, trade and trade policy may be thought of as positive sum games.
Positive: Refers to what is, in contrast to normative which involves value judgments as to what ought to be. For example, Positive Economics vs. Normative Economics. The word is not, in this use, the opposite of either negative or harmful.
Possession Corporation: A U.S. corporation operation in a U.S. possession. Such companies are entitled to certain tax breaks.
Post-completion audit: A formal comparison of the actual costs and benefits of a project with original estimates. A key element of the audit is feedback: that is, results of the audit are given to relevant personnel so that future decision making can be improved.
Poverty line: The level of annual income below which a household is defined to be living in poverty. This is defined differently by different governments and institutions and, in spite of the great importance of its intent, is not in fact very meaningful.
Poverty Reduction and Growth Facility: The IMF's low-interest lending facility for poor countries, established in 1999 and intended to be more favorable to reducing poverty and promoting growth than previous policies.
Power distance: The extent to which a society accepts hierarchical differences.
Preauthorized debit: The transfer of funds from a payor's bank account on a specified date to the payee's bank account; the transfer is initiated by the payee with the payor's advance authorization.
Prebisch-Singer Hypothesis: The idea that the relative prices of primary products would decline over the long term, and therefore that developing countries that were led by comparative advantage to specialize in them would find their prospects for development diminished.
Precautionary principle: The view that when science has not yet determined whether a new product or process is safe or unsafe, policy should prohibit or restrict its use until it is known to be safe. Applied to trade, this has been used as the basis for prohibiting imports of GMOs, for example.
Predation: The use of aggressive (low) pricing to put a competitor out of business, with the intent, once they are gone, of raising prices to gain monopoly profits.
Predatory dumping: Dumping for the purpose of driving competitors out of business and then raising price. This is the one motivation for dumping that most economists agree is undesirable, like predatory pricing (predation) in other contexts.
Predatory pricing: It is a form of price discrimination that requires selling below cost with the intention of destroying competition. However, predatory pricing is against law.
Preemptive right: The privilege of shareholders to maintain their proportional company ownership by purchasing a proportionate share of any new issue of common stock, or securities convertible into common stock.
Preference for variety: The increased utility that people experience when they have access to a larger number of differentiated product varieties. In reality this may reflect their ability to find products more closely suited to their own particular needs, but as modeled in the Dixit-Stiglitz utility function, they are better off consuming small quantities of each of a larger number of products.
1. In trade policy, this refers to special advantages, such as lower-than-MFN tariffs, accorded to another country's exports, usually in order to promote that country's development.
2. In trade theory, this refers to the attitudes of consumers toward different goods, as represented by a utility function. Some propositions in trade theory use the assumption of identical and/or homothetic preferences.
Preferential duty: A tariff lower than the MFN tariff, levied against imports from a country that is being given favored treatment, as in a preferential trading arrangement or under the GSP.
Preferential Trading Arrangement:
1. A group of countries that levies lower (or zero) tariffs against imports from members than outsiders. Includes FTAs, customs unions, and common markets.
2. It is also used for an arrangement where internal tariffs are reduced but not zero, reserving FTA for a trading bloc with zero internal tariffs.
Preferred stock: A type of stock that promises a (usually) fixed dividend but at the discretion of the board of directors. It has preference over common stock in the payment of dividends and claims on assets.
Premium over conversion value: The market price of a convertible security minus its conversion value; also called conversion premium.
Premium over straight bond value: Market price of a convertible bond minus its straight bond value.
Premium: If a bond is selling above its face value, it is said to sell at a premium.
Prepackaged bankruptcy (prepack): A reorganization that a majority of a company's creditors have approved prior to the beginning of a bankruptcy proceeding.
Present value factor: Factor used to calculate an estimate of the present value of an amount to be received in a future period.
Present value: The current value of a future amount of money, or a series of payments, evaluated at a given interest rate. The value of a future cash stream discounted at the appropriate market interest rate.
Preshipment inspection: Certification of the value, quality, and/or identity of traded goods done in the exporting country by specialized agencies or firms on behalf of the importing country. Traditionally used as a means to prevent over- or under-invoicing, it is now being used also as a security measure.
Preston Curve: The relationship between a country's life expectancy and its real per capita income.
Price ceiling: A government-imposed upper limit on the price that may be charged for a product. If that limit is binding, it implies a situation of excess demand and shortage.
Price competition: Competition among firms by reducing price, as opposed to by changing characteristics of the product.
Price control: Intervention by a government to set the price in a market or limit its movement, thus attempting to override the market mechanism.
Price definition: A method of defining relative factor abundance based on ratios of factor prices in autarky.
Price discrimination: The sale by a firm to buyers at two different prices. When this occurs internationally and the lower price is charged for export, it is regarded as dumping.
Price elastic: Having a price elasticity greater than one (in absolute value).
Price elasticity of demand: The sensitivity of quantity sold to a percentage change in price. Percentage change in the quantity demanded of a particular good or service for a given percentage change in price.
Price elasticity: The elasticity of supply or demand with respect to price.
Price floor: A government-imposed lower limit on the price that may be charged for a product. If that limit is binding, it implies a situation of excess supply, which the government may need to purchase itself to keep price from falling.
Price index: A measure of the average prices of a group of goods relative to a base year.
Price inelastic: Having a price elasticity of less than one (in absolute value).
Price level: The overall level of prices in a country, as usually measured empirically by a price index, but often captured in theoretical models by a single variable.
Price line: A straight line representing the combinations of variables, usually two goods, that cost the same at some given prices. The slope of a price line measures relative prices and changes in prices can therefore be represented by changing the slope of, or rotating, a price line. A steeper line means a higher relative price of the good measured on the horizontal axis.
Price stabilization:
1. Intervention in a market in order to reduce fluctuations in price. This has sometimes been attempted by means of a buffer stock in markets for primary products.
2. The use of macroeconomic policies to reduce inflation.
Price support: Government action to increase the price of a product, usually by buying it. It may be associated with a price floor.
Price taker: An economic entity that is too small relative to a market to affect its price, and that therefore must take that price as given in making its own decisions. It applies to all buyers in sellers in markets that are perfectly competitive. It applies also to a country if it is a small open economy.
Price uncertainty: Uncertainty regarding the future price of an asset.
Price undertaking: A commitment by an exporting firm to raise its price in an importing-country market, as a means of settling an anti-dumping suit and preventing an anti-dumping duty.
Price/earnings (P/E) ratio: The market price per share of a firm's common stock divided by the most recent 12 months of earnings per share; also known as a trailing P/E ratio.
Price-Specie-Flow Mechanism: Adjustment mechanism under the classical gold standard whereby disturbances in the price level in one country would be wholly or partly offset by a countervailing flow of specie (gold coins) that would act to equalize prices across countries and automatically bring international payments back in balance.
Pricing to market: The practice of an exporting firm holding fixed (or not fully adjusting) the price it charges in the export market when its costs or exchange rate change.
Primary budget surplus: The primary budget surplus (or deficit) of a government is the surplus excluding interest payments on its outstanding debt.
Primary factor: An input that exists as a stock providing services that contribute to production. The stock is not used up in production, although it may deteriorate with use, providing a smaller flow of services later. The major primary factors are labor, capital, human capital (or skilled labor), land, and sometimes natural resources.
Primary market: A market where new securities are bought and sold for the first time (a new issues market).
Primary product: A good that has not been processed and is therefore in its natural state, specifically products of agriculture, forestry, fishing, and mining.
Primary surplus: The government budget surplus, not including net interest payments on the government debt.
Prime rate: Short-term interest rate charged by banks to large, creditworthy customers. It is also called simply prime. The interest rate that a country's largest banks announce for loans to their best customers. In practice, their most creditworthy customers get a rate lower than this.
Principal supplier: The country that has the largest share of imports of a good into a particular importing country, among those exporters subject to MFN tariffs. It is customary in tariff negotiations, and to some extent mandated by WTO rules, that countries negotiate with their principal suppliers.
1. The initial amount of a loan, thus not including interest.
2. The person or other entity on whose behalf an agent acts, in the Principal Agent Theory.
Principal-Agent Theory: The theory of interaction between an agent and the principal for whom they act, the point being to structure incentives so that the agent will act to benefit the principal. Can be used, for example, to analyze government as agent for society, or international institutions as agents for governments.
Prisoners' dilemma: A strategic interaction in which two players both gain individually by not cooperating, leading to a Nash equilibrium in which both are worse off than if they cooperated. Important especially for explaining why countries may choose protection even though all lose as a result.
Private (or direct) placement: The sale of an entire issue of unregistered securities (usually bonds) directly to one purchaser or a group of purchasers (usually financial intermediaries).
Private benefit: The benefit to an individual economic agent, such as a consumer or firm, from an event, action, or policy change. It contrasts with social benefit.
Private cost: The cost to an individual economic agent, such as a consumer or firm, from an event, action, or policy change. It contrasts with social cost.
Private Export Funding Corporation (PEFCO): Company that mobilizes private capital for financing the export of big-ticket items by U.S. firms by purchasing at fixed interest rates the medium-to long-term debt obligations of importers of U.S. products.
Private placement: A securities issue privately placed with a small group of investors rather than through a public offering. Securities that are sold directly to only a limited number of sophisticated investors, usually life insurance companies and pension funds.
Privatization: A process whereby publicly owned enterprises are sold to private investors. It contrast with nationalization. The conversion of a government-owned enterprise to private ownership. The act of returning state-owned or state-run companies back to the private sector, usually by selling them off.
Privileged subscription: The sale of new securities in which existing shareholders are given a preference in purchasing these securities up to the proportion of common shares that they already own; also known as a rights offering.
Pro Forma invoice: An invoice provided by a supplier prior to the shipment of merchandise, informing the buyer of the kinds and quantities of goods to be sent their value and important specifications.
Probability distribution: A set of possible values that a random variable can assume and their associated probabilities of occurrence.
Probability tree: A graphic or tabular approach for organizing the possible cash-flow streams generated by an investment. The presentation resembles the branches of a tree. Each complete branch represents one possible cash-flow sequence.
Processed good: A good that has been transformed in some way by a production activity, in contrast to a raw material.
Producer presence: A mode of supply of a traded service in which the producer establishes a presence in the buyer's country by FDI and/or permanent relocation of workers.
Producer subsidy equivalent:
1. Producer support estimate.
2. This ought logically to measure the extent to which existing policies serve to subsidize producers, defined as the ad valorem subsidy that, if paid directly to producers per unit of production, would lead to the same level of output as existing policies.
Producer support estimate: Introduced by the OECD to quantify support in agriculture, it measures transfers from consumers and taxpayers to agricultural producers as a result of measures of support, expressed as percentage of gross farm receipts. It is also called producer subsidy equivalent.
Producer surplus: The difference between the revenue of producers and production cost, measured as the area above the supply (or marginal cost) curve and below price, out to the quantity supplied, and net of fixed cost and losses at low output. If input prices are constant, this is profit; if not, it includes gains to input suppliers, such as labor. It is often useful only as the change in producer surplus.
Product cycle theory: Product cycle theory views the products of the successful firm as evolving through four stages: (1) infancy, (2) growth, (3) maturity, and (4) decline.
Product cycle: The life cycle of a new product, which first can be produced only in the country where it was developed, then as it becomes standardized and more familiar, can be produced in other countries and exported back to where it started. The time it takes to bring new and improved products to market. Japanese companies have excelled in compressing product cycles.
Product life cycle (PLC): The complete life of a product, from early planning through sales build-up, maximum sales, declining sales, and withdrawal of the product. Product life cycle lengths and types can vary depending on the type of product, the frequency of replacement, and other factors.
Product price equalization: The equalization of the price of a homogeneous good (or perhaps service, though that is less likely) across countries as a result of free trade. Full product price equalization can be expected, other than by accident, only if all trade costs are zero.
Production function: A function that specifies the output in an industry for all combinations of inputs.
Production possibilities schedule: The maximum amount of goods (for example, food and clothing) that a country is able to produce given its labor supply. It is a table reporting various combinations of outputs that are possible for an economy, given its technology and factor endowments. It is therefore, the data on which the production possibility frontier is based.
Production possibility frontier: A diagram showing the maximum output possible for one good for various outputs of another (or several others), given technology and factor endowments. It is also called a transformation curve or production possibility curve.
Production sharing: Production sharing occurs when a producer chooses to make a product in stages - and in different countries - so that the firm can employ the lowest-cost resources in the production process.
Production worker: A worker directly engaged in production. In empirical studies of skilled and unskilled labor, data on production workers are often taken to represent unskilled labor.
Productivity: Output per unit of input, usually measured either by labor productivity or by total factor productivity.
Profit maximization: Maximizing a firm's earnings after taxes (EAT). It is the level of a variable or behavior that maximizes the profit of a firm.
Profit remittance: In a multinational corporation, the return of part of the profit earned by a subsidiary in one country to the parent in another.
Profit shifting: The use of government policies to alter the outcome of international oligopolistic competition so as to increase the profits of domestic firms at the expense of foreign firms. This is a key element of strategic trade policy.
1. The net gain from an activity.
2. For a firm: revenue minus cost.
Profitability index (PI): The ratio of the present value of a project's future net cash flows to the project's initial cash outflow. A method used to evaluate projects. It is the ratio of the present value of expected future cash flows after initial investment divided by the amount of the initial investment.
Profitability ratios: Ratios that relate profits to sales and investment.
Progressive taxation: A convex tax schedule that results in a higher effective tax rate on high income levels than on low-income levels.
Prohibited subsidy: A subsidy that is prohibited under the rules of the WTO. These include subsidies that are specifically designed to distort international trade, such as export subsidies or subsidies that require use of domestic rather than imported inputs.
Prohibition: Denial of the right to import or export, applying to particular products and/or particular countries. It includes embargo.
Prohibitive tariff: A tariff that reduces imports to zero.
Project financing: A way to raise nonrecourse financing for a specific project characterized by the following:
1 - the project is a separate legal entity and relies heavily on debt financing and
2 - the debt is contractually linked to the cash flow generated by the project.
Promissory note: Financial document in which the buyer agrees to make payment to the seller at a specified time. A legal promise to pay a sum of money to a lender.
Propensity: The extent to which an economic agent is inclined to use income for a particular purpose, such as the (marginal or average) propensity to import, or propensity to consume, measured as the fraction of income (or of a change in income, if marginal) devoted to such an activity.
Property Rights: Rights of individuals and companies to own and utilize property as they fit and to receive the stream of income that their property generates.
Proprietary knowledge: Private or exclusive knowledge that cannot be legally used or duplicated by competitors.
Prospectus: A brochure that describes a mutual fund’s investment objectives, strategies, and position limits. Part I of the registration statement filed with the SEC. It discloses information about the issuing company and its new offering and is distributed as a separate booklet to investors.
1. Without any adjective, or as import protection, this refers to restriction of imports by means of tariffs and/or NTBs (Nontariff barrier), and thereby to insulate domestic producers from competition with imported goods.
2. As IP protection, or intellectual property protection, this refers to enforcement of intellectual property rights by granting patents, copyrights, and trademarks and by prosecuting those who violate them.
Protectionism: Protection of local industries through tariffs, quotas, and regulations that discriminate against foreign businesses. Advocacy of protection has a negative connotation, and few advocates of protection in particular situations will acknowledge being protectionists. It is the idea of protecting domestic industry from import competition by means of tariffs, quotas, and other trade barriers.
Protocol of accession: Legal document specifying the procedures for a country's to join an international agreement or organization, including the rights and responsibilities that accompany such accession.
Proxy: A legal document giving one person the authority to act for another. In business, it generally refers to the instructions given by a shareholder with regard to voting shares of common stock.
Psychic distance: The similarities or lack thereof between country markets. This concept takes into account geographic distance, cultural similarities, linguistic aspects, legal systems and methods of conducting business.
Public Company Accounting Oversight Board (PCAOB): Private-sector, nonprofit corporation, created by the Sarbanes-Oxley Act of 2002 to oversee the auditors of public companies in order to protect the interests of investors and further the public interest in the preparation of informative, fair, and independent audit reports.
Public good: A good that is provided for users collectively, use by one not precluding use of the same units of the good by others.
Public issue: Sale of bonds or stock to the general public.
Public relations: A variety of programs designed to promote and/or protect a company's image or its individual products.
Public securities offering: A securities issue placed with the public through an investment or commercial bank.
Punitive tariff: A high tariff the purpose of which is to inflict harm on a foreign exporter as punishment for some previous behavior.
Purchase (method): A method of accounting treatment for a merger based on the market price paid for the acquired company.
Purchasing power parity (law of one price): The principle that equivalent assets sell for the same price. Purchasing power parity is a measurement of a currency's value based on the buying power within its own domestic economy.
Purchasing power parity exchange rate: An exchange rate calculated to yield absolute purchasing power parity. Useful for making comparisons of real values (wages, GDP) across countries with different currencies. Since the purchasing power parity theory is rarely correct, this contrasts with the nominal exchange rate.
Purchasing power parity theory: A theory of the exchange rate that the rate will adjust to achieve purchasing power parity, in either its absolute or its relative form.
Purchasing power parity (PPP): The notion that the ratio between domestic and foreign price levels should equal the equilibrium exchange rate between domestic and foreign currencies. The idea that a basket of goods should sell for the same price in two countries, after exchange rates are taken into account.
1. The equality of the prices of a bundle of goods (usually the CPI) in two countries when valued at the prevailing exchange rate. Called absolute PPP.
2. The equality of the rates of change over time in the prices of a bundle of goods in two countries when valued at the prevailing exchange rate. Called relative PPP. Implies that the rate of depreciation of a currency must equal the difference between its inflation rate and the inflation rate in the currency to which it is being compared.
Purchasing power: The amount of goods that money will buy, usually measured (inversely) by the CPI.
Pure discount bond: Bonds that pay no coupons and only pay back the face value at maturity. It referred to as bullets and zeros.
Pure exchange economy: A theoretical economy in which goods are not produced, but exist as endowments, and are then traded among consumers.
Pure play: An investment concentrated in one line of business. The extreme opposite of a pure play would be an investment in a conglomerate.
Put option: A contract that gives the holder the right to sell a specified quantity of the underlying asset at a predetermined price (the exercise price) on or before a fixed expiration date. It is the right to sell the underlying asset at a specified price and on a specified date.
Put-call option interest rate parity: A parity condition that relates put and call currency options prices to the interest differential between two currencies and, by extension, to their forward differential.

1. Referring only to the characteristics of something being described, rather than exact numerical measurement.
2. Indicative only of relative sizes or magnitudes, rather than their numerical values. A qualitative comparison would say whether one thing is larger, smaller, or equal to another, without specifying the size of any difference. As opposed to quantitative.
Quantitative Restriction (QR): A restriction on trade, usually imports, limiting the quantity of the good or service that is traded; a quota is the most common example, but VERs usually take the form of QRs. QRs on traded services are more likely to restrict the number or activities of foreign service providers than the services themselves, since the latter are hard to monitor and measure.
Quantitative: Expressed in numerical values.
Quantity quota: A quota specifying quantity, in units, weight, volume, etc. of a good.
Quantity theory of money: The classic theory of the price level and therefore of inflation, building on the equation of exchange and the additional assumption that velocity of money is constant. Together, these imply that the rate of inflation equals the rate of growth of money minus the rate of growth of real output.
Quarter: One of the four three-month periods into which the calendar year is divided for the reporting of economic data.
Quartile: One of four segments of a distribution that has been divided into quarters. For example, the second-from-the-bottom quartile of an income distribution is those whose income exceeds the incomes of from 25% to 50% of the population.
Quasi-fiscal: Having to do with financial transactions of units that are not included in a government's budget but that have some of the same effects as fiscal policy. Most often mentioned as having quasi-fiscal effects are central banks.
Quid pro quo FDI: FDI in response to the threat of protection. Done by a firm who exports into the domestic market, the motive is to create jobs there and lessen. Latin for this for that , an exchange of one thing for another.
Quintile: One of five segments of a distribution that has been divided into fifths. For example, the second-from-the-bottom quintile of an income distribution is those whose income exceeds the incomes of from 20% to 40% of the population.
Quota by country: A quota that specifies the total amount to be imported (or exported) and also assigns specific amounts to each exporting (or importing) country.
Quota rent: The economic rent received by the holder of the right (or license) to import under a quota. Equals the domestic price of the imported good, net of any tariff, minus the world price, times the quantity of imports.
1. The quantity of goods of a specific kind that a country permits to be imported without restriction or imposition of additional duties. Government regulation specifying the quantity of particular products that can be imported to a country. A government-imposed restriction on quantity, or sometimes on total value.
2. An import quota specifies the maximum amount of an import per year, typically administered with import licenses that may be sold or directly allocated, to individuals or firms, domestic or foreign. May be global, bilateral, or by country.
3. And IMF quota.

Race to the bottom: The idea that, if one country provides a competitive advantage to its firms by lax regulation (of the environment, for example), then competing firms in other countries will demand even weaker regulation by their governments, and regulation will be reduced to minimal levels everywhere.
Random walk: A process in which instantaneous changes in exchange rates are normally distributed with a zero mean and constant variance.
Range Forward: currency collar.
Rate of return: The percentage of an asset's value that the owner of the asset earns, usually per year.
Ration foreign exchange: To ration access to scarce foreign currency under a pegged exchange rate with an over-valued currency. It is usually done by means of import licensing.
1. In the presence of excess demand (for a good, etc.), to allocate among demanders by some means other than the price they are willing to pay.
2. The quantity of a rationed good allocated to one demander.
Rational expectations: In forming opinion about future events, the use of all available information to assess the probabilities of the possible states of the world. More simply, expectations are as correct as is possible with available information. The idea that people rationally anticipate the future and respond to what they ahead.
Raw material: A good that has not been transformed by production; a primary product.
Ray: A straight line drawn from the origin of a diagram. In the Heckscher-Ohlin Model, two rays are used to define a diversification cone.
Reaction function: The function specifying the choice of a strategic variable by one economic agent as a function of the choice of another agent
Real appreciation/depreciation: A change in the purchasing power of a currency.
Real cash flow: A cash flow is expressed in real terms if the current, or date 0, purchasing power of the cash flow is given.
Real effective exchange rate: The effective exchange rate adjusted for the rates of inflation in each country.
Real exchange rate: A measure of the nominal exchange rate that has been adjusted for inflation differentials since an arbitrarily defined base period. The spot rate adjusted for relative price level changes since a base period.
1. The nominal exchange rate adjusted for inflation. Unlike most other real variables, this adjustment requires accounting for price levels in two currencies. The real exchange rate is: R = EP*/P where E is the nominal domestic-currency price of foreign currency, P is the domestic price level, and P* is the foreign price level.
2. The real price of foreign goods; i.e., the quantity of domestic goods needed to purchase a unit of foreign goods. Equals the reciprocal of the terms of trade. Equivalent to definition 1.
3. The relative price of traded goods in terms of nontraded goods.
Real GDP: The real counterpart to nominal GDP, obtained by valuing output in a given year by prices from another year, called the base year.
Real interest rate: Interest rate expressed in terms of real goods; that is, the nominal interest rate minus the expected inflation rate. The nominal interest rate adjusted for inflation, to get the percentage yield an asset holder gets in terms of real resources. Equals the nominal interest rate minus the rate of inflation. The nominal interest rate adjusted for expected inflation over the life of the loan; it is the exchange rate between current and future goods.
Real model: An economic model without money. Most general equilibrium models of trade are real models. This includes the Ricardian Model, the Heckscher-Ohlin Model, and the models of the New Trade Theory.
Real money balances: The real value of the amount of money held by a person, household, or firm, or the amount in circulation in the economy. Real national income adjusted for inflation.
Real options: An option or option-like feature embedded in a real investment opportunity.
Real or Inflation-Adjusted Exchange Rate: Measured as the nominal exchange rate adjusted for changes in relative price levels.
Real trade: A shorthand term for most of the theory of international trade, which consists largely of real models. It contrasts with international finance.
Real wage: The wage of labor -- or more generally the price of any factor -- relative to an appropriate price index for the goods and services that the worker (or factor owner) consumes.
1. Expressed in terms of the amount of goods and service that something is worth at market prices.
2. Adjusted for inflation.
3. Referring only to real economic variables as opposed to nominal, or monetary ones, as in real models.
4. Used with appreciation or depreciation, refers to the real exchange rate. Thus a real appreciation means that the nominal value of a country's currency has increased by more than its relative price level may have decreased, so that the prices of its goods relative to foreign goods have increased.
5. The name of one unit of the Brazilian currency. One real equals 100 centavos. It is pronounced ray-all.
Recapitalization: An alteration of a firm's capital structure. For example, a firm may sell bonds to acquire the cash necessary to repurchase some of its outstanding common stock.
Recession: A significant decline in economic activity. In the U.S., recession is approximately defined as two successive quarters of falling GDP, as judged by NBER. A recession in one country may be caused by, or itself cause, recession in another country with which it trades.
Reciprocal demand curve: An offer curve. So called to emphasize that a country exports in order, reciprocally, to get imports in return.
Reciprocal demand: The concept that, in international trade, it is not just supply and demand that interact, but demand and demand. That is, a trading equilibrium is a reciprocal equilibrium in which one country's demand for another country's products (and willingness to pay for them with its own) matches with the other country's demands for the products of the first.
Reciprocal dumping: The sale by firms from two countries into each others' markets for prices below what each charges at home. So called because the exports of both firms meet the price-discrimination definition of dumping. This is likely to happen in an international duopoly with transport costs.
Reciprocal marketing agreement: A strategic alliance in which two companies agree to comarket each other’s products in their home market. Production rights may or may not be transferred.
Reciprocal trade agreement: Agreement between two countries to open their markets to each other's exports, usually by each reducing tariffs. Early trade rounds under the GATT consisted mostly of reciprocal trade agreements, extended to other contracting parties by the MFN requirement.
Reciprocity conditions: The fact that the effect of a small change in any factor endowment on output of any good is equal to the effect of a small change in the price of that good on the price of that factor.
Reciprocity: A principle that underlies GATT negotiations, that countries exchange comparable concessions.
Record date: The date, set by the board of directors when a dividend is declared, on which an investor must be a shareholder of record to be entitled to the upcoming dividend.
Recourse: The right to demand return of money paid. In negotiation of a letter of credit, payment by the negotiating bank will normally be with recourse.
Red box: A category of subsidies that is forbidden under WTO rules. This terminology is used in the Agriculture Agreement, where however there is no red box.
Red herring: The preliminary prospectus. It includes a legend in red ink on the cover stating that the registration statement has not yet become effective.
Redistributed tariff revenue: Refers to a common assumption that tariff revenue is given to consumers as transfer payments (not in proportion to what they paid by importing) to be spent like any other income. Since in general equilibrium the effects of a tariff depend on how the revenue is spent, this is a useful neutral assumption.
Redundant tariff: A tariff that, if changed, will not change the quantity of imports, either because the tariff is prohibitive, or because some other policy such as a quota or an embargo is limiting quantity.
Reexport: The export without further processing or transformation of a good that has been imported.
Refunding: Replacing an old debt issue with a new one, usually to lower the interest cost.
Regional aid: A subsidy directed at a geographic region of a country to assist its development. Such subsidies are non-actionable under WTO rules.
Regional development banks: Banks that are owned and operated by member nations; they are designed to extend development loans and provide other assistance to member nations. The world's four regional development banks are the African Development Bank Group, the Asian Development Bank, the European Bank for Reconstruction and Development, and the Inter-American Development Bank.
Regional Fund: A mutual fund that invests in a specific geographic areas overseas, such as Asia or Europe.
Regional integration: The formation of closer economic linkages among countries that are geographically near each other, especially by forming preferential trade agreements.
Regional policy: In a trade context, this usually refers to a regional aid.
Regional trade: Trade among countries that are geographically close together, especially on the same continent.
Regionalism: The formation or proliferation of preferential trading arrangements.
Registered bonds: Bonds for which each issuer maintains a record of the owners of its bonds. Countries requiring that bonds be issued in registered form include the United States and Japan. Contrast with bearer bonds.
Registered exports and imports: If a country regulates what can be traded, then registered means legal. In contrast, unregistered exports and imports are smuggled in some fashion.
Registration statement: In the United States, a statement filed with the Securities and Exchange Commission on securities issues that discloses relevant information to the public. The disclosure document filed with the SEC to register a new securities issue. The registration statement includes the prospectus and other information required by the SEC.
Regression analysis: The statistical technique of finding a straight line that approximates the information in a group of data points. Used throughout empirical economics, including in both international trade and finance.
Regressor: In a linear regression model, an independent -- or right-hand-side -- variable. That is, one of the variables that is being used to explain another.
Regular dividend: The dividend that is normally expected to be paid by the firm.
Regulation: Any government effort to influence the performance of the economy or the behavior of economic agents, especially firms, within it. Conflicts sometimes arise between domestic regulations and international commerce or commitments.
Regulatory Arbitrage: The process whereby the users of capital markets issue and trade securities in financial centers with the lowest regulatory standards and, hence, the lowest costs.
Reinvoicing center: A company-owned financial subsidiary that purchases exported goods from company affiliates and resells (reinvoices) them to other affiliates or independent customers. A subsidiary that takes title of all goods sold by one corporate unit to another affiliate or to a third-party customer. The center pays the seller and in turn is paid by the buyer. An offshore financial affiliate that is used to channel funds to and from the multinational’s foreign operations.
Relative demand: The ratio of the demand for one good to the demand for another, most useful in representing general equilibrium in a two-good economy, where relative price adjusts to equate relative supply and relative demand. The relative factor prices. The ratio of the price of one factor to the price of another. In a two-factor model with constant returns to scale, this alone determines the ratio of factors employed in a sector.
Relative price: The price of one thing (usually a good) in terms of another; i.e., the ratio of two prices.
Relative supply: The ratio of the supply of one good to the supply of another, most useful in representing general equilibrium in a two-good economy, where relative price adjusts to equate relative supply and relative demand.
Remedy: In a trade dispute in the WTO or other forum, the measure recommended by the dispute settlement panel to resolve the dispute, usually a measure that will bring the offending country into compliance with WTO (or other) rules.
Remittances: Payments from one country to another that are not payment for anything (goods, services, assets, the use of capital, etc.), such as charitable contributions, gifts to family members, and government aid.
Remote disbursement: A system in which the firm directs checks to be drawn on a bank that is geographically remote from its customer so as to maximize check-clearing time.
Remuneration: Payment in return for services rendered.
Rent seeking: The using up of real resources in an effort to secure the rights to economic rents that arise from government policies. In international economics the term usually refers to efforts to obtain quota rents.
1. Economic rent: The premium that the owner of a resource receives over and above its opportunity cost.
2. The payment to the owner of land or other property in return for its use.
Rental price: The payment per unit time for the services of a unit of a factor of production, such as land or capital.
Rentier: A person whose income comes mainly from rent on land or, more broadly, from assets rather than labor. (Pronounced Ron' Tee Yay.)
Reorganization: Recasting of the capital structure of a financially troubled company, under Chapter 11 of the Bankruptcy Act, to reduce fixed charges. Claim holders may be given substitute securities.
Reparations: Payment or other compensation provided by a government to a group of people or to another country to compensate for loss or damage that it has caused. Internationally, reparations have been paid after a war by the losers to the winners, most notably by Germany after World War I.
Repatriation: The act of remitting cash flows from a foreign affiliate to the parent firm. To return something, especially money or profit, to the country of its owner or its origin.
Reporting Currency: The currency in which the parent firm prepares its own financial statements; that is, U.S. dollars for a U.S. company.
Repurchase agreement: An agreement to sell a security for a specified price and to buy it back later at another specified price. A repo is essentially a secured loan. Agreements to buy securities (usually Treasury bills) and to resell them at a specified higher price at a later date.
Reschedule: To renegotiate the terms of a loan, reducing payments by extending them over time and/or forgiving a portion of the principal. Debt rescheduling has been a primary means of dealing with international debt crises.
Research and development: The use of resources for the deliberate discovery of new information and ways of doing things, together with the application of that information in inventing new products or processes.
Reservation price: The price below (above) which a seller (purchaser) is unwilling to go.
Reserve asset: Any asset that is used as international reserves, including a national currency, precious metal such as gold, or SDRs.
Reserve currency: A currency that is used as international reserves, often because it is an intervention currency.
Reserve ratio: The ratio of a commercial bank's reserves to its deposits.
1. International reserves of a government or central bank. 2. Amounts held by commercial banks in their vaults or on deposit with the central bank as backing for deposits.
Residual Value: The value of an asset at the conclusion of a lease. The value of a leased asset at the end of the lease period.
1. An input to be used in an activity, especially production.
2. A natural resource.
Restricted trade: Trade that is restrained in some fashion by tariffs, transport costs, or NTBs (Nontariff barrier).
Restrictive business practice: Action by a firm or group of firms to restrict entry by other firms, that is, to prevent other firms from selling their product or in their market. This is a restraint of competition and would normally be illegal under competition policy.
Restrictive endorsement: Endorsement transferring title or right to a named party.
Restructure: To alter the terms of repayment of a debt, usually by extending repayment over a longer period of time, perhaps at a lower interest rate.
Results-based trade policy: The use of trade policies targeted to specific indicators of economic performance. For example, in the early 1990s, the U.S. insisted on achieving specified market shares in trade with Japan.
1. The use of an increased trade barrier in response to another country increasing its trade barrier, either as a way of undoing the adverse effects of the latter's action or of punishing it.
2. The formal procedure permitted under the GATT whereby a country may raise discriminatory tariffs above bound levels against a GATT member that has violated GATT rules and not provided compensation.
Retention ratio: Retained earnings divided by net income.
Return on equity (ROE): Net income after interest and taxes divided by average common stockholder's equity.
Return to capital: Same as the rental price of capital. Since capital can only be measured in monetary units, the rental price is, say, dollars per dollar's worth of capital per unit time, and it therefore has the form of a rate of return like an interest rate.
Return: Income received on an investment plus any change in market price, usually expressed as a percentage of the beginning market price of the investment. The amount that is earned by someone who holds an asset, usually expressed as a percentage of what it cost to acquire the asset. The return includes interest, dividends, and capital gains and losses, the latter due to both changes in the price of the asset and, for international holdings, changes in exchange rates.
Revaluation: An increase in a currency value relative to other currencies in a fixed exchange rate system. An increase in the spot value of a currency.
Revealed preference: The use of the value of expenditure to reveal the preference of a consumer or group of consumers for the bundle of goods they purchase compared to other bundles of equal or smaller value.
Revenue argument for a tariff: The use of a tariff to raise revenue for the government. Many other kinds of tax cause smaller distortions and are therefore preferable to tariffs for this purpose. However, a tariff is one of the easier taxes to collect, and it is therefore common in the early stages of a country's development.
Revenue deficit:
1. In general use, this seems to be essentially the same as a budget deficit, but with attention given to the low level of revenue rather than to the high level of expenditure.
2. More precisely, this means a larger deficit (or smaller surplus) than had been budgeted for.
Revenue seeking: The use of real resources in an effort to secure a share of the disposition of tariff revenues.
Revenue: Referring to a tariff, the money collected by the government. It equals the size of the tariff times the quantity of imports. An analysis of the effects of a tariff needs to account for the revenue, and in a general equilibrium model it must specify whether and how the revenue is spent.
Reverse engineering: The process of learning how a product is made by taking it apart and examining it.
Reverse stock split: A stock split in which the number of shares outstanding is decreased; for example, a 1-for-2 reverse stock split where each shareholder receives one new share in exchange for every two old shares held.
Revolving credit agreement: A formal, legal commitment to extend credit up to some maximum amount over a stated period of time.
Revolving Underwriting Facility (RUF): A note issuance facility that includes underwriting services. The RUF gives borrowers long-term continuous access to short-term money underwritten by banks at a fixed margin.
Ricardian model: The classic model of international trade introduced by David Ricardo to explain the pattern and the gains from trade in terms of comparative advantage. It assumes perfect competition and a single factor of production, labor, with constant requirements of labor per unit of output that differ across countries.
Ricardo point: On the world PPF of a two-country, 2-good Ricardian Model, the point at which each country is specialized in production of a different good; the kink of the world PPF.
Ricardo-Viner Model: A specific factors model with a single specific factor in each industry and one mobile factor, named after two of the many who used this as the standard model of trade prior to the Heckscher-Ohlin Model. It extends the simple Ricardian Model by allowing the marginal product of labor to fall with output.
Right of Offset: Clause that gives each party to a swap or parallel loan arrangement of principal or interest with a comparable nonpayment.
Right of priority: The right of a patent holder of a patent issued in one country to intellectual property rights in a foreign market for one year, without filing for a local patent, even if someone from the foreign market files a local patent for the same process or concept.
Right: A short-term option to buy a certain number (or fraction) of securities from the issuing corporation; also called a subscription right.
Rights of set-off: An agreement defining each party’s rights should one party default on its obligation. Rights of set-off were common in parallel loan arrangements.
Risk Arbitrage: The process that leads to equality of risk-adjusted returns on different securities, unless market imperfections that hinder this adjustment process exist.
Risk averse: Seeking stability rather than risk. Term applied to an investor who demands a higher expected return, the higher the risk.
Risk aversion: Desire to avoid uncertainty. Risk aversion is usually quantified by the mathematical expected value that one is willing to forego in order to get greater certainty.
Risk free rate: The interest rate on a safe (not risky), asset, usually taken to be a short-term U.S. government security.
Risk premium: The excess return on the risky asset that is the difference between expected return on risky assets and the return of risk-free assets.
Risk premium:
1. The higher expected return (in the sense of mathematical expected value) that an uncertain asset must pay in order for risk averse investors to be willing to hold it.
2. The difference between the interest rate on a risky asset and that on a safe one.
3. In exchange markets the difference between the forward rate and the expected future spot rate.
Risk profile: A graph with the value of an underlying asset on the x-axis and the value of a position exposed to risk in the underlying asset on the y-axis. Also used with changes in value. Contrast with payoff profile.
Risk: The variability of returns from those that are expected.
1. Uncertainty associated with a transaction or an asset.
2. The probability of loss. Differs from definition 1. because uncertainty includes probability of gain as well.
Risk-adjusted discount rate (RADR): A required return (discount rate) that is increased relative to the firm's overall cost of capital for projects or groups showing greater than average risk and decreased for projects or groups showing less than average risk.
Roll’s Critique: The CAPM holds by construction when performance is measured against a mean-variance efficient index. Otherwise, it holds not at all.
1. The phasing out of measures that is not consistent with an agreement.
2. In the Uruguay Round, the agreement to remove all GATT-inconsistent trade-restricting and trade-distorting measures by the time negotiations were completed.
Rollover Date: Date on which the interest rate on a floating-rate loan is reset based on current market conditions.
Roll-up: The combining of multiple small companies in the same industry to create one larger company.
Royalty: Payment made for the use of a person or business’s property based on an agreed percentage of the income arising from its use.
Rule #1: Always keep track of your currency units.
Rule #2: Always think of buying and selling the currency in the denominator of a foreign exchange quote.
Rule 144A: Rule adopted by the Securities and Exchange Commission (SEC) in 1990 that allows qualified institutional investors to trade in unregistered private placements, making them a closer substitute for public issues.
Rule of law: A legal system in which rules are clear, well-understood, and fairly enforced, including property rights and enforcement of contracts.
Rules of origin (ROO): Rules included in a FTA specifying when a good will be regarded as produced within the FTA, so as to cross between members without tariff. Typical ROOs are based on percentage of value added or on changes in tariff heading. Rules used to determine in what country a good will be considered as actually made for tariff and other trade purposes.
Rules-based trade policy: Institutional arrangements in which national trade policies are governed by internationally agreed-upon rules, as in the GATT and WTO.
Run on a currency: The short-term capital outflows that occur when a pegged exchange rate regime is thought to be running out of reserves and is thus expected (and therefore forced) to devalue.
Rybczynski derivative: The effect of a small change in a single factor endowment on the output of a good.
Rybczynski Theorem: The property of the Heckscher-Ohlin Model that, at constant prices, an increase in the endowment of one factor increases the output of the industry that uses that factor intensively and reduces the output of the other (or some other) industry.

Safety (of principal): It refers to the likelihood of getting back the same number of dollars you originally invested (principal).
Safety stock: Inventory stock held in reserve as a cushion against uncertain demand (or usage) and replenishment lead time.
Sale and leaseback: The sale of an asset with the agreement to immediately lease it back for an extended period of time.
Same-Day Value: Funds that are credited and available for use the same day are transferred.
Samurai Bonds: Yen bonds sold in Japan by a non-Japanese borrower.
1. To approve or give permission for an action, as when an international organization sanctions the use of particular economic policies.
2. A coercive measure used by a nation or group of nations against another as a penalty for violating international law or international norms. Usually plural: sanctions.
Sanitary and phytosanitary regulations: Government standards to protect health, of humans, plants, and animals. SPS measures are subject to rules in the WTO to prevent them from acting as NTBs (Nontariff barrier).
Sarbanes-Oxley Act of 2002 (SOX): Addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information.
Satisficing: Seeking or achieving a satisfactory outcome, rather than the best possible. Contrasts with the optimizing behavior usually assumed in economics and trade theory. Alternative models based on satisficing are spreading within economics, but not yet much in international.
Say's Law: The proposition that supply creates its own demand. The idea is clearest in a barter economy, where the act of supplying one thing is, intrinsically, the act of demanding something else. Named for Jean Say.
Scarce factor: The factor in a country's endowment with which it is least well endowed, relative to other factors, compared to other countries. It may be defined by quantity or by price.
Scarce: Available in small supply; opposite of abundant. Usually meaningful only in relative terms, compared to demand and/or to supply at another place or time.
Scarcity rent: An economic rent that is due to something being scarce.
Scenario analysis: A process of asking What if? using scenarios that capture key elements of possible future realities.
1. A list, e.g., tariff schedule.
2. A graph of a list of data; thus also a curve, e.g., demand schedule.
Scientific tariff: A made-to-measure tariff.
Scitovszky indifference curve: An indifference curve for a group of individuals representing the minimum needed to keep all of them at given levels of utility. A well-behaved family of such indifference curves is defined holding utilities of all but one individual constant and varying only the one. These are useful in discussing the gains from trade.
Seasonal dating: Credit terms that encourage the buyer of seasonal products to take delivery before the peak sales period and to defer payment until after the peak sales period.
Seasonal quota: A restriction on the quantity of imports of a good for a specified period of the year.
Seasonal tariff: A tariff that is levied at different rates at different times of the year, usually on agricultural products, being highest at the time of the domestic harvest.
Second best: It refers to what is the optimal policy when the true optimum (the first best) is unavailable due to constraints on policy choice. The Theory of Second Best says that a policy that would be optimal without such constraints (such as a zero tariff in a small country) may not be second-best optimal if other policies is constrained.
Second theorem of welfare economics: The proposition of welfare economics that any Pareto optimal allocation can be attained by a competitive general equilibrium.
Secondary market: A market for existing (used) securities rather than new issues. The market where investors trade securities already bought.
Secondary tariffs: Any charges imposed on imports in addition to the statutory tariff, such as an import surcharge.
Second-best argument for protection:
1. Any argument for protection that can be countered by pointing to a different and less distortion policy that would achieve the same desired result at lower economic cost.
2. An argument for protection to partially correct an existing distortion in the economy when the first-best policy for that purpose is not available. For example, if domestic production generates a positive externality and a production subsidy to internalize it is not available, then a tariff may be second-best optimal.
Section 482: United States Department of Treasury regulations governing transfer prices.
Secured loans: A form of debt for money borrowed in which specific assets have been pledged to guarantee payment.
Securities Act of 1933 (1933 Act:) Generally requires that public offerings be registered with the federal government before they may be sold; also known as the Truth in Securities Act.
Securities and Exchange Commission (SEC): The US government agency responsible for administration of federal securities laws, including the 1933 and 1934 Acts. Regulates the secondary market for long-term securities – the securities exchanges and the over-the-counter market.
Securities: Stocks, bonds, and other tradable financial assets.
Securitization: The matching up of borrowers and lenders wholly or partly by way of the financial markets. This process usually refers to the replacement of nonmarketable loans provided by financial intermediaries with negotiable securities issued in the public capital markets.
Security (collateral): Asset(s) pledged by a borrower to ensure repayment of a loan. If the borrower defaults, the lender may sell the security to pay off the loan.
Security market line (SML): A line that describes the linear relationship between expected rates of return for individual securities (and portfolios) and systematic risk, as measured by beta.
Security selection: An investment strategy that attempts to identify individual securities that are under-priced relative to other securities in a particular market or industry.
Seeking stability rather than risk: An element of the Paris Convention for the Protection of Industrial Property that gives an inventor 12 months from the date of the first application filed in a Paris Convention country in which to file in other Paris Convention countries. This relieves companies of the burden of filing applications in many countries simultaneously. Approximately 100 countries, including the United States, signed the Paris Convention.
Segmented market: A market that is partially or wholly isolated from other markets by one or more market imperfections.
Seigniorage: The difference between what money can buy and its cost of production. Therefore, seigniorage is the benefit that a government or other monetary authority derives from the ability to create money. In international exchange, if one country's money is willingly held by another, the first country derives these seigniorage benefits. This is the case of a reserve currency. The profit to the central bank from money creation; it equals the difference between the cost of issuing the money and the value of the goods and services that money can buy.
Selective: Applied to a trade policy, this means one that affects only some countries, not all, in contrast to MFN policy. Selectivity is an important concern in the use of safeguards, which countries often would prefer to make selective but are required by GATT to be nondiscriminatory.
Self-sufficiency argument for protection: The view that a country is better off providing for its own needs than depending on imports. It may be based on fear that war or foreign governments will interrupt imports. This is a second-best argument, since many policies could provide for that contingency without sacrificing all the gains from trade.
Self-sufficiency: Provision by one's self of all of one's own needs. In international trade this means either not trading at all (autarky), or importing only non-necessities.
Self-tender offer: An offer by a firm to repurchase some of its own shares.
Sell-off: The sale of a division of a company, known as a partial sell-off, or the company as a whole, known as a voluntary liquidation.
Sensitive: In trade negotiations and agreements, countries often identify lists of particular sensitive products or sensitive sectors that they regard as especially vulnerable to import competition and that they wish to exempt from trade liberalization.
Sensitivity analysis: Analysis of the effect on the project when there is some change in critical variables such as sales and costs. Type of what if uncertainty analysis in which variables or assumptions are changed from a base case in order to determine their impact on a project's measured results, such as net present value (NPV) or internal rate of return (IRR).
Separation principle: The principle that portfolio choice can be separated into two independent tasks:
1 - determination of the optimal risky portfolio, which is purely technical problem, and
2 - the personal choice of the best mix of the risky portfolio and the risk-free asset.
Serial bonds: An issue of bonds with different maturities, as distinguished from an issue where all the bonds have identical maturities (term bonds).
Serious injury: The injury requirement of the escape clause, understood to be more stringent than material injury but otherwise apparently not rigorously defined.
1. A product that is not embodied in a physical good and that typically effects some change in another product, person, or institution. Contrasts with good. Trade in services is the subject of the GATS.
2. To make the scheduled payments on a debt, usually including both interest and amounts towards repayment of the principal.
Set-of-contracts perspective: A view of the corporation as the nexus of a set of legal contracts linking the various stakeholders. Important contracts include those with customers, suppliers, labor, management, debt, and equity.
Shadow exchange rate:
1. The shadow price of foreign exchange.
2. What the market exchange rate would be in the absence of various market imperfections.
Shadow price: The implicit value or cost associated with a constraint. That is, the increased value that will be achieved by relaxing the constraint by one unit. When foreign exchange is rationed, the shadow price of foreign exchange becomes the relevant exchange rate decisions.
Shallow integration: Reduction or elimination of tariffs, quotas, and other barriers to trade in goods at the border, such as trade-limiting customs procedures. It contrasts with deep integration.
Shareholders' equity: Total assets minus total liabilities. Alternatively, the book value of a company's common stock (at par) plus additional paid-in capital and retained earnings.
Shark repellent: Defenses employed by a company to ward off potential takeover bidders – the sharks.
Sharpe index: A measure of risk-adjusted investment performance in excess return per unit of total risk.
Shelf life: The length of time that a good can be stored while still remaining useful enough to sell. Important for both perishable goods and goods that may become obsolete for reasons of technology or fashion. Relevant for international trade when, for example, customs procedures cause delays.
Shelf registration: A procedure whereby a company is permitted to register securities it plans to sell over the next two years; also called SEC Rule 415. These securities can then be sold piecemeal whenever the company chooses.
Shipper: Usually the supplier or owner of commodities shipped.
1. An unexpected change.
2. Any change in an exogenous variable (although strictly speaking, models often fail to deal adequately with the complications of an exogenous change being expected).
Shogun Bonds: Foreign currency bonds issued within Japan by Japanese corporations.
Shogun Lease: Yen-based international lease.
Short position: A position in which a particular asset (such as a spot or forward currency) has been sold. In the foreign exchange market, it means that one has more liabilities in a particular currency than assets.
Short run: Referring to a short time horizon, usually one in which some aspects of behavior that would vary over a longer time do not have time to do so. In trade models, it usually means that the employment of some factors of production is fixed. It contrasts with long run.
Short selling: Selling an asset that you do not own, or taking a short position.
1. Used with sell or sale, this means that the seller does not currently have the thing being sold, but intends to acquire it on the market prior to making delivery.
2. Used by itself as a verb, it means to sell short, as to short a currency, meaning to sell it forward in anticipation that its value on the spot market will fall.
Short-term capital flow: A capital flow that is short-term; of interest because such capital flows are likely to be very liquid and therefore easily reversed and sources of instability in exchange markets.
1. Happening within the short run, or within a matter of months.
2. In the case of bonds or capital flows, this refers to financial assets with a maturity of less than one year.
Shrimp-Turtle Case: A case filed in the WTO against the United States for restricting imports of shrimp from countries whose shrimp were caught by means that endangered sea turtles. The WTO ruled against the U.S., enraging many environmentalists.
Shuttle trade: The trade accomplished by individuals and groups traveling to other countries, buying goods, and bringing them home, often in their luggage, to resell. An important source of imports for Russia in 1990s, some people traveling abroad several times a month for this purpose.
Side effect: Any aspect of an investment project that can be valued separately from the project itself.
Sight draft: A draft that is payable on demand. A draft that must be paid on presentation or else dishonored.
Signaling: The use of observable managerial actions in the marketplace as an indication of management’s beliefs concerning the prospects of the company.
Silver standard: A monetary system in which the value of a currency is defined in terms of silver. If two currencies are both on a silver standard, then the exchange rate between them is approximately determined by their two prices in terms of silver.
Simple interest: Interest calculated by considering only the original principal amount. Interest paid (earned) on only the original amount, or principal, borrowed (lent).
Single undertaking: A term, in trade negotiations, for requiring participants to accept or reject the outcome of multiple negotiations in a single package, rather than selecting among them.
Single-Country Fund: A mutual fund that invests in individual countries outside the United States, such as Germany or Thailand.
Sinking fund: Fund established to periodically retire a portion of a security issue before maturity. The corporation is required to make periodic sinking-fund payments to a trustee.
Skill intensive: Describing an industry or sector of the economy that relies relatively heavily on inputs of skilled labor, usually relative to unskilled labor, compared to other industries or sectors.
Skill: The abilities acquired by workers through education, training, and experience that permit them to be more productive. It is same as human capital.
Skill-biased: A technological change or technological difference that is biased in favor of using more skilled labor, compared to some definition of neutrality.
Skilled labor: Labor with a high level of skill or human capital. Identified empirically as labor earning a high wage, with a high level of education, or in an occupational category associated with these; sometimes crudely proxied as nonproduction workers.
Slicing up the value chain: Term for fragmentation.
Slump: A decline in performance, either of a firm as a slump in sales or profits, or of a country as a slump in output or employment.
Small Business Administration (SBA): An independent agency of the U.S. federal government that aids, counsels, assists, and protects the interests of small business concerns to preserve free competitive enterprise and to maintain and strengthen the overall economy of the nation.
Small country assumption: The assumption in an economic model that a country is too small to affect world prices, incomes, or interest rates.
Small open economy: An economy that is small enough compared to the world markets in which it participates that (as a good approximation) its policies do not alter world prices or incomes. The country is thus a price taker in world markets. The term is normally applied to a country as a whole, although it is sometimes used in the context of only a single product.
Smithsonian Agreement: After the currency turmoil of August 1971, the United States agreed in December 1971 to devalue the dollar to 1/38 of an ounce of gold, and other countries agreed to revalue their currencies by negotiated amounts vis-à-vis the dollar.
Smoot Hawley Act: Passed in 1930, this protectionist act increased import duties to the highest rate ever imposed by the United States, resulting in the downfall of the world trade system.
Smoot-Hawley Tariff: The Tariff Act of 1930, this raised average U.S. tariffs on dutiable imports to 53% and provoked retaliation by other countries.
Smuggle: To take a good across a national border illegally. If the good itself is legal, the purpose is usually to avoid paying a tariff or to circumvent some other trade barrier.
Snake in the Tunnel: An arrangement used briefly in Europe after the collapse of the Bretton Woods System in which European currencies were permitted to vary 1% against each other (the snake but 2.25% against the dollar (the tunnel).
Snake: An arrangement in which currencies were pegged to each other but left free to float as a group against the U.S. dollar. Named for the graph that the limits of variation of a currency would follow over time.
Social benefit: The benefit to society as a whole from an event, action, or policy change. Includes externalities and deducts any benefits that are transfers from others, in contrast to private benefit.
Social capital: The networks of relationships among persons, firms, and institutions in a society, together with associated norms of behavior, trust, cooperation, etc., that enable a society to function effectively. Physical or real capital that is owned by the public sector rather than by private firms.
Social cost: The cost to society as a whole from an event, action, or policy change. Includes negative externalities and does not count costs that are transfers to others, in contrast to private cost.
Social dumping: Export of a good from a country with weak or poorly enforced labor standards, reflecting the idea that the exporter has costs that are artificially lower than its competitors in higher-standards countries, constituting an unfair advantage in international trade.
Social indifference curve: A curve showing the combinations of goods that, when available to a country, yield the same level of social welfare.
Social welfare function: A function mapping allocations of goods to the individuals in an economy to a level of welfare for the economy as a whole. If it depends only on the levels of utility of the individuals rather than separately on the allocations, then it is a Bergsonian social welfare function.
Society for Worldwide Interbank Financial Telecommunication (SWIFT): The major international financial telecommunications network that transmits international payment instructions as well as other financial messages. A dedicated computer network to support funds transfer messages internationally between more than 900 member banks worldwide.
Soft currency: A currency that is not widely accepted in exchange for other currencies, in contrast to a hard currency. A currency expected to depreciate.
Sogo sosha: A term referring to general trading companies that import and export merchandise.
Sole importing agency: An entity, either private or government, that has been granted by government the exclusive right to import certain goods.
Solow model: The neoclassical growth model. It is also called the Solow-Swan Model.
Sole proprietorship: A business owned by a single individual. The sole proprietorship pays no corporate income tax but has unlimited liability for business debts and obligations. A business form for which there is one owner. This single owner has unlimited liability for all debts of the firm.
Solow neutral: A particular specification of technological change or technological difference that is capital augmenting.
Solow residual: A measure of technological progress equal to the difference between the rate of growth of output and the weighted average of the rates of growth of capital and labor, with factor income shares as weights. Also called the growth of total factor productivity. It is Used to compare sources of growth across countries.
Sound money: A currency that is responsibly managed so as to avoid excessive inflation.
Sovereign Debt Restructuring Mechanism: A framework proposed by the IMF for permitting countries facing financial crises to restructure their debts in an orderly manner and minimally disruptive manner, analogous to bankruptcy for a private debtor.
Sovereign Risk: The risk that the country of origin of the currency a bank is buying or selling will impose foreign exchange regulations that will reduce or negate the value of the contract: also refers to the risk of government default on a loan made to it or guaranteed by it.
Sovereign spread: The spread on the debt of a sovereign government, and thus a measure of the riskiness of lending to it and the cost to it of borrowing.
Sovereignty: A country or region's power and ability to rule itself and manage its own affairs. Some feel that membership in international organizations such as the WTO is a threat to their sovereignty.
Spaghetti bowl: Term frequently used by Bhagwati for the tangle of relationships created by multiple overlapping preferential trading arrangements.
Spatial arbitrage: Arbitrage on price differences in different locations.
Special and differential treatment: The GATT principle that developing countries be accorded special privileges, exempting them from some requirements of developed countries. It also permits tariff preferences among developing countries and by developed countries in favor of developing countries, as under the GSP.
Special Drawing Right (SDR): Originally intended within the IMF as a sort of international money for use among central banks pegging their exchange rates, the SDR is a transferable right to acquire another country's currency. Defined in terms of a basket of currencies, today it plays the role in that form of a unit of international account. An international reserve created by the International Monetary Fund and allocated to member countries to supplement foreign exchange reserves. A new form of international reserve assets, created by the IMF in 1967, whose value is based on a portfolio of widely used currencies.
Special economic zone: These exist in several countries, including especially China, and their characteristics vary. Typically they are regions designated for economic development oriented toward inward FDI and exports, both fostered by special policy incentives that may include being an EPZ.
Special entry procedure: An administrative procedure that is required as a condition of entry for an imported good, such as transport by the importing country's national fleet, or entry through a specific port or customs station.
Special safeguard: As part of the Agreement on Agriculture of the WTO, a special provision for providing safeguard protection to specified agricultural products that had been subject to tariffication.
1. Producing more than you need of some things, and less of others, hence specializing in the first. In international trade, this is just the opposite of self-sufficiency.
2. Doing less than everything, as when a country produces fewer different goods than it consumes. In a 2x2 trade model, this means each country produces just one good. With many goods and countries, it means each country has some goods that it does not (and cannot competitively) produce. Also may be called complete specialization.
Specie flow mechanism: Under the gold standard, the mechanism by which international payments would adjust. A country with high inflation would export less, import more, and thus lose specie, i.e., gold. With the money supply fixed to the quantity of gold, the resulting monetary contraction would reduce prices. Due to David Hume.
Specie: Coins, normally including only those made of precious metal.
Specific commitment: Under the GATS, the identification of a category of services in which a country will apply national treatment and assure market access for foreign service providers.
Specific factor: A factor of production that is unable to move into or out of an industry. The term is used to describe both factors that would not be of any use in other industries and -- more loosely -- factors that could be used elsewhere but do not, in the short run, have the time or resources needed to move.
Specific factors model: A model in which some or all factors are specific factors. The most common version is the Ricardo-Viner Model, with one specific factor (often capital or land) in each industry plus another factor (often labor) that is mobile between them. But an extreme form of the model, the Cairnes-Haberler Model, has all factors specific.
Specific tariff: A tariff assessed at a specific amount per unit of weight. A tariff specified as an amount of currency per unit of the good.
Specificity rule: The principle that the optimal policy for correcting a distortion is one that deals most directly, or specifically, with that distortion.
Specificity: The property that a policy measure applies to one or a group of enterprises or industries, as opposed to all industries.
Speculation: The purchase or sale of an asset (or acquisition otherwise of an open position) in hopes that its price will rise or fall respectively, in order to make a profit.
Speculative attack: In any asset market, the surge in sales of the asset that occurs when investors expect its price to fall. A common phenomenon in the exchange market, especially under an adjustable pegged exchange rate.
Speculator: Anyone who engages in speculation. May include those who transfer their assets into different forms (or currencies) in order to avoid a prospective capital loss.
Spin-off: A form of divestiture resulting in a subsidiary or division becoming an independent company. Ordinarily, shares in the new company are distributed to the parent company's shareholders on a pro rata basis.
Spontaneous financing: Trade credit, and other payables and accruals that arise spontaneously in the firm's day-to-day operations.
Spot exchange rate: The rate today for exchanging one currency for another for immediate delivery. Exchange-rate today for settlement in two days.
Spot market: A market for exchange, of currencies, in the case of the exchange market, in the present, as opposed to a forward or futures market in which the exchange takes place in the future. A market in which trades are made for immediate delivery, within two business days for most spot currencies.
Spot rate: The exchange rate on the spot market. It is also called the spot exchange rate. The price at which foreign exchange can be bought or sold with payment set for the same day.
1. The difference between the price one must pay to buy something, such as a currency, and the price one receives for selling it.
2. The difference between the interest rate on a bond and the risk free rate; thus the risk premium on the bond.
Stabilization policies: Government policies designed to promote economic growth, steady employment, and stable prices. The use of monetary and fiscal policies to stabilize GDP, aggregate employment, and prices.
Stabilize: To reduce the size of fluctuations in an economic variable over time. Examples include stabilizing exchange rates by exchange market intervention; stabilizing the price of a commodity by operation of a buffer stock; and stabilizing GDP by macroeconomic stabilization policy.
Stabilizing speculation: Speculation that decreases the movements of the price in the market where the speculation occurs.
1. Of an equilibrium, that the dynamic adjustment away from equilibrium converges to the equilibrium.
2. Of an economic variable, not subject to large or erratic fluctuations.
Stackelberg equilibrium: A game theoretic equilibrium in which one player acts as a leader and another as a follower, the leader setting strategy taking account of the follower's optimal response. Contrasts with Nash equilibrium in which both players take the other's strategy as given.
Stakeholders: Those with an interest in the firm. A narrow definition includes the corporation’s debt and equity holders. A broader definition includes labor, management, and perhaps other interested parties, such as customers, suppliers, and society at large. All constituencies with a stake in the fortunes of the company. They include shareholders, creditors, customers, employees, suppliers, and local communities.
Stamp tax: A tax on a financial transaction.
Standard & Poor's 500 Stock Index (S&P 500 Index: A market-value-weighted index of 500 large capitalization common stocks selected from a broad cross section of industry groups. It is used as a measure of overall market performance.
Standard deviation: The positive square root of the variance. This is the standard statistical measure of the spread of a sample. A statistical measure of the variability of a distribution around its mean. It is the square root of the variance.
Standard error: A common measure of the uncertainty associated with a numerical estimate. In a regression analysis, standard errors are often reported with (or below) the coefficient estimates. As a rough rule of thumb, one can be 95% confident that the true coefficient is within 2 standard errors of the estimate.
Standard Industrial Classification (SIC): A standard numerical code system used by the U.S. government to classify products and services.
Standard of living: Usually refers to a country's per capita income, but sometimes takes account also of additional conditions that matter for a person's or household's wellbeing such as leisure or the quality of the environment.
Standard: Rule and/or procedure specifying characteristics that must be met for a product to be sold in a country's domestic market, typically to protect health and safety. When a standard puts foreign producers at a disadvantage, it may constitute an NTB (Nontariff barrier).
Standby arrangement: A measure taken to ensure the complete success of a rights offering in which an investment banker or group of investment bankers agrees to stand by to underwrite any unsubscribed (unsold) portion of the issue.
1. A commitment to refrain from introducing new measures that are not consistent with an agreement.
2. In the Uruguay Round, the agreement not to introduce new GATT-inconsistent trade-restricting and trade-distorting measures during the negotiations.
State bank: A bank owned by government, other than the central bank, and performing the same functions as a commercial bank. State banks are often directed by their governments to provide credit to activities or persons favored by the government.
State trading enterprise: An entity of government that is responsible for exporting and/or importing specified products.
Stated annual interest rate: The interest rate expressed as a percentage per annum, by which interest payment is determined.
Statement of cash flows: A summary of a firm's cash receipts and cash payments during a period of time.
Statement of Financial Accounting Standards No. 133 (FASB 133): Statement issued by the Financial Standards Board that establishes accounting and reporting standards for derivative instruments and for hedging activities that U.S. firms must use.
Statement of Financial Accounting Standards No. 52: This is the currency translation standard currently in use by U.S. firms. It basically mandates the use of the current rate method.
Statement of Financial Accounting Standards No. 8: This is the currency translation standard previously in use by U.S. firms.
Statement of retained earnings: A financial statement summarizing the changes in retained earnings for a stated period – resulting from earnings (or losses) and dividends paid. This statement is often combined with the income statement.
State-owned enterprise (SOE): A firm owned by government. Relations between SOEs and private firms on international markets raise special problems for GATT, since SOEs may not respond normally to market forces and their actions may reflect government policies.
Static gains from trade: The economic benefits from trade that arise in static models, including the efficiency gains from exploiting comparative advantage, the reduced costs from scale economies, reduction in distortion from imperfect competition, and increased product variety. It contrasts with dynamic gains from trade.
Static model: An economic model that has no explicit time dimension. A static model abstracts from the process by which, equilibrium or an optimum might be reached only over time, as well as from the dependence of the variables in the model itself on a changing past or future. It contrasts with dynamic model.
Stationary time series: A time series in which the process generating returns is identical at every instant of time.
Statistical discrepancy: A number on the balance-of-payments account that reflects errors and omissions in collecting data on international transactions.
Status quo: The current situation. A preference for the status quo means a reluctance to change.
Steady state: A type of equilibrium, especially in a neoclassical growth model, in which those variables that are not constant grow over time at a constant and common rate.
Step-down note: A debt instrument with a high coupon in earlier payment periods and a lower coupon in later payment periods.
Step-up note: A callable debt issue that features one or more increases in a fixed rate or a step-up in a spread over LIBOR during the life of the note.
Sterilize: To use offsetting open market operations to prevent an act of exchange market intervention from changing the monetary base. With sterilization, any purchase of foreign exchange is accompanied by an equal-value sale of domestic bonds, and vice versa.
Sterilized intervention: Foreign exchange market intervention in which the monetary authorities have insulated their domestic money supplies from the foreign exchange transactions with offsetting sales or purchases of domestic assets.
Stochastic: Random; arising from a process that generates different values each with some probability.
Stock dividend: A payment of additional shares of stock to shareholders. Often used in place of or in addition to a cash dividend.
Stock index futures: A futures contract on a stock index.
Stock index swap: A swap involving a stock index. The other asset involved in a stock index swap can be another stock index (a stock-for-stock swap), a debt index (a debt-for-stock swap), or any other financial asset or financial price index.
Stock market: An institution that facilitates the buying and selling of stocks.
Stock repurchase: The repurchase (buyback) of stock by the issuing firm, either in the open (secondary) market or by self-tender offer.
Stock split: An increase in the number of shares outstanding by reducing the par value of the stock; for example, a 2-for-1 stock split where par value per share is reduced by one-half.
Stock: A share in the ownership of a corporation.
Stockout: Not having enough items in inventory to fill an order.
Stockpiling: The storage of something in order to have it available in the future if the need for it increases. In international economics, stockpiling occurs for speculative purposes, by governments to provide for national security, and by central banks managing international reserves.
Stolper-Samuelson derivative: In general equilibrium, the effect of a small change in the price of a single good on the price of a factor of production.
Stolper-Samuelson Theorem:
1. The proposition of the Heckscher-Ohlin Model that a rise in the relative price of a good raises the real wage of the factor used intensively in that industry and lowers the real wage of the other factor.
2. The further proposition (requiring addition assumptions) that protection raises the real wage of a country's scarce factor and lowers the real wage of its abundant factor.
Straight bond value: The value of a convertible bond if the convertible feature were valueless; in other words, the value of a nonconvertible bond with the same coupon rate, maturity, and default risk as the convertible bond.
Straight debt (or equity): Debt (or equity) that cannot be exchanged for another asset.
Straight-line depreciation: A method of depreciation that allocates expenses evenly over the depreciable life of the asset.
Strategic alliance: A collaborative agreement between two companies designed to achieve some strategic goal. Strategic alliances include international licensing agreements, management contracts, and joint ventures as special cases. An agreement between two or more independent firms to cooperate in order to achieve some specific commercial objective.
Strategic industry argument for a tariff: The view that an industry serves a special strategic purpose in an economy and needs to be protected by a tariff to prevent it from disappearing. Views of what constitutes a strategic purpose are often vague and contradictory.
Strategic trade policy argument for a tariff: In an example of strategic trade policy, the use of a tariff to extract monopoly profits from a foreign monopolist, or to shift profit from foreign to domestic competitors in an international oligopoly.
Strategic trade policy: The use of trade policies, including tariffs, subsidies, and even export subsidies, in a context of imperfect competition and/or increasing returns to scale to alter the outcome of international competition in a country's favor, usually by allowing its firms to capture a larger share of industry profits.
Strategic variable: An economic variable that is chosen with regard to, and sometimes with a view to influencing, economic behavior by someone else. Most frequently refers to the choice of firms in an oligopoly.
Stretching accounts payable: Postponing payment of the amount due to suppliers beyond the end of the net (credit) period; also called leaning on the trade.
Striking price: The price at which an option can be exercised. It is also called the exercise price.
Structural adjustment program: The list of budgetary and policy changes required by the IMF and World Bank in order for a developing country to qualify for a loan. This conditionality typically includes reducing barriers to trade and capital flows, tax increases, and cuts in government spending.
Structural adjustment: The reallocation of resources (labor and capital) among sectors of the economy in response to changing economic circumstances, including trading conditions, or changes in policy.
Structure of protection: The pattern of protection across sectors of an economy: which sectors are highly protected and which not, perhaps in terms of effective protection, or - even better - in terms of their expansion and contraction that would occur if all protection were removed.
Structured Notes: Interest-bearing securities whose interest payments are determined by reference to a formula set in advance and adjusted on specific reset dates.
Subcontracting: Delegation by one firm of a portion of its production process, under contract, to another firm, including in another country. It is an example of fragmentation.
Subordinated debenture: A long-term, unsecured debt instrument with a lower claim on assets and income than other classes of debt; known as junior debt.
Subpart F income: In the U.S. tax code, income from foreign subsidiaries owned more than 10 percent and controlled foreign corporations that is taxed on a pro rata basis as it is earned.
Subpart F: Special category of foreign-source unearned income that is currently taxed by the IRS whether or not it is remitted back to the United States.
Subsidiary: Any organization controlled by another with more than 50 percent of its whose voting capital held by the latter. A company that has more than half of its voting shares owned by another company (the parent company). A firm that is owned and ultimately controlled by another firm. Thus a multinational corporation has a parent in once country and one or more subsidiaries in others. A foreign-based affiliate that is separately incorporated entity under the host country’s law.
Subsidized financing: Financing that is provided by a host government and that is issued at a below-market interest rate.
Subsidy: Monetary assistance granted by the government to an individual or other entity in support of an activity that is regarded as being in the public interest. A payment by government, perhaps implicit, to the private sector in return for some activity that it wants to reward, encourage, or assist. Under WTO rules, subsidies may be prohibited, actionable, or non-actionable.
Subsistence agriculture: Small-scale agriculture designed to meet the consumption needs of individual households.
Substitute in production: One good is a substitute for another in production if an increase in output of one (or a rise in its price) causes a decrease in output of the other.
Substitute: One good is a substitute for another if an increase in demand for one (or a fall in its price) causes a decrease in demand for the other.
Substitution effect: That portion of the effect of price on quantity demanded that reflects the changed tradeoff between the good and other alternatives. Contrasts with income effect.
Sunk cost: A cost that has already been incurred and cannot be reversed, which therefore cannot be avoided by current or future action. Sunk costs should therefore be irrelevant to current decisions. A cost that has already occurred and cannot be removed. Because sunk costs are in the past, such costs should be ignored when deciding whether to accept or reject a project. Expenditures that is at least partially lost once an investment is made. Unrecoverable past outlays that, because they cannot be recovered, should not affect present actions or future decisions.
Sunset clause: A provision within a piece of legislation providing for its demise on a specified date unless it is deliberately renewed.
Sunset industry argument: The argument, in contrast to the infant industry argument, that a mature industry should be provided protection, either to help it restore its competitiveness, or to cushion its exit from the economy.
Superior good: A good the demand for which is income elastic.
Supernatural trading bloc: A trading bloc among countries that are natural trading partners but that, because its tariff preferences are too extreme or transport costs with the outside world are too low, reduces world welfare.
Supervisory board: The board of directors that represents stakeholders in the governance of the corporation.
Supply chain management (SCM): Managing the process of moving goods, services, and information from suppliers to end customers.
Supply chain: The sequence of steps, often done in different firms and/or locations, needed to produce a final good from primary factors, starting with processing of raw materials, continuing with production of perhaps a series of intermediate inputs, and ending with final assembly and distribution.
Supply curve: The graph of quantity supplied as a function of price, normally upward sloping, straight or curved, and drawn with quantity on the horizontal axis and price on the vertical axis. Supply curves for exports and for foreign exchange usually have the same qualitative properties as supply curves for labor, being potentially backward bending.
Supply elasticity: The elasticity of a supply function, usually with respect to price.
Supply function: The mathematical function explaining the quantity supplied in terms of its various determinants, including price; thus the algebraic representation of the supply curve.
Supply price: The price at which a given quantity is supplied; the supply curve viewed from the perspective of price as a function of quantity.
Supply side: Anything that contributes to supply, as opposed to demand, in a market or, especially, in the aggregate economy; aggregate supply.
1. The act of offering a product for sale.
2. The quantity offered for sale.
3. The quantities offered for sale at various prices; the supply curve.
Supranational: Transcending nations, especially through organizations that encompass more than one nation, such as the European Union
Surplus: In the balance of payments, or in any category of international transactions within it, the surplus is the sum of credits minus the sum of debits. Also called simply the balance for that category. Thus the balance of trade is the same as the surplus on trade, or the trade surplus, and similarly for merchandise trade, current account, and capital account.
Sustainable development: Economic development that is achieved without undermining the incomes, resources, or environment of future generations.
Swan diagram: A diagram illustrating the conflict between internal balance and external balance as they respond to its fiscal deficit and its costs relative to the world (and thus its exchange rate.)
Swap book: A swap bank’s portfolio of swaps, usually arranged by currency and by maturity.
Swap rate: The difference between the spot and forward exchange rates. Thus the price of a swap. The difference between spot and forward rates expressed in points (e.g., $0.0001 per pound sterling or DM 0.0001 per dollar).
Swap: An agreement to exchange two liabilities (or assets) and, after a prearranged length of time, to reexchange the liabilities (or assets). A foreign exchange transaction that combines a spot and a forward contract. More generally, it refers to a financial transaction in which two counterparties agree to exchange streams of payment over time, such as in a currency swap or an interest rate swap.
1. In the exchange markets, this is a simultaneous sale of a currency on the spot market together with a purchase of the same amount on the forward market. By combining these two transactions into a single one, transactions costs may be reduced.
2. An arrangement between central banks whereby they each agree to lend their currency to the other.
Swaption: A swap with one or more options attached.
Sweatshop: A manufacturing workplace that treats its workers inhumanely, paying low wages, imposing harsh and unsafe working conditions, and demanding levels of performance that are harmful to the workers.
SWIFT (Society for Worldwide Interbank Financial Transactions): Network through which international banks conduct their financial transactions.
Swiss formula: A formula devised during the Tokyo Round for reducing tariffs in a manner that would harmonize them. The formula is tnew=(told-M)/(told+M), where the t's are the new and old tariffs, in percent, and M is a number that turns out to be the maximum possible new tariff.
Switching options: A sequence of options in which exercise of one option creates one or more additional options. Investment-disinvestment, entry-exit, expansion-contraction, and suspension-reactivation decisions are examples of switching options.
Syndicate: The selling group of investment banks in a public securities offering.
Synergy: In an acquisition or merger, when the value of the combination is greater than the sum of the individual parts: Synergy = VAT - (VA + VT). Economies realized in a merger where the performance of the combined firm exceeds that of its previously separate parts.
Synthetic forward position: A forward position constructed through borrowing in one currency, lending in another currency, and offsetting these transactions in the spot exchange market.
Systematic (nondiversifiable) risk: Marketwide influences that affect all assets to some extent, such as the state of the economy.
Systematic risk: Risk that is common to all assets and cannot be diversified away, measured by beta. That element of an assets risk that cannot be eliminated no matter hoe diversified an investor’s portfolio. The variability of return on stocks or portfolios associated with changes in return on the market as a whole.

2x2x2 Model: The Heckscher-Ohlin Model with 2 factors, 2 goods, and 2 countries.
Takeover: The acquisition of another company that may (from the viewpoint of the acquired firm's management) take the form of a friendly or unfriendly merger.
Tangibility: Tangible assets are real assets that can be used as collateral to secure debt.
Tare weight: The weight of a container and packing materials that excludes the weight of the goods it contains.
1. Any objective of economic policy.
2. The value of an economic variable that policy makers regard as ideal and use as the basis for setting policy. Contrasts with instrument.
3. The level of an exchange rate that guides exchange market intervention by a central bank or exchange stabilization fund.
Targeted registered offerings: Securities issues sold to targeted foreign financial institutions according to U.S. SEC guidelines. These foreign institutions then maintain a secondary market in the foreign market.
Target-Zone Arrangement: A monetary system under which countries pledge to maintain their exchange rates within a specific margin around agreed-upon, fixed central exchange rates.
Tariff binding: A commitment, under the GATT, by a country not to raise the tariff on an item above a specified level, called the bound rate.
Tariff classification: See tariff heading.
Tariff equivalent: The level of tariff that would be the same, in terms of its effect, usually on the quantity of imports, as a given NTB (Nontariff barrier).
Tariff escalation: In a country's tariff schedule, the tendency for tariffs to be higher on processed goods than on the raw materials from which they are produced. This causes the effective rate of protection on these goods to be higher than the nominal rate and puts LDC producers of primary products at a disadvantage.
Tariff factory: A production facility established by a foreign firm through FDI in a country in spite of its higher production costs, in order to serve its market without paying a tariff.
Tariff heading: The descriptive name attached to a tariff line, indicating the product to which it applies. It is aame as tariff classification.
Tariff jumping: The establishment of a production facility within a foreign country, through FDI or licensing, in order to avoid a tariff.
Tariff line: A single item in a country's tariff schedule.
Tariff peak: In a tariff schedule, a single tariff or a small group of tariffs that are particularly high, often defined as greater than three times the average nominal tariff.
Tariff preference: A lower (or zero) tariff on a product from one country than is applied to imports from most countries. This violation of the MFN principle is permitted in special cases, including some preferential trade arrangements and the GSP.
Tariff protection: Protection provided by a tariff.
Tariff rate quota: A combination of an import tariff and an import quota in which imports below a specified quantity enter at a low (or zero) tariff and imports above that quantity enter at a higher tariff. It is also called a tariff quota.
Tariff schedule: The list of all of a country's tariffs, organized by product.
Tariff wall: A tariff, presumably a high one, perhaps in lots of industries. The term is used to highlight the difficulty foreign sellers have in getting their products past the tariff, often in the context of the incentive therefore provided for FDI.
Tariff: A tax on trade, usually an import tariff but sometimes used to denote an export tax. Tariffs may be ad valorem or specific. A tax imposed on imported products. It can be used to raise revenue, to discourage purchase of foreign products, or some combination of the two.
Tariff-and-retaliation game: The game of countries setting tariffs knowing that by doing so they alter the terms of trade to their own advantage. This is one very specific form of trade war.
Tariff-quota: A tariff that is set at a lower rate until a specified quantity (the quota) of goods has been imported, at which point the tariff increases for additional imports.
Tariffs and retaliation: The process of one country raising its tariff to secure some advantage, to which another country responds by raising its tariff, the first raises its tariff still further, etc.
Tariffs: Taxes on imported goods and services, levied by governments to raise revenues and create barriers to trade.
Tax arbitrage: Arbitrage using a difference in tax rates or tax systems as the basis for profit. The shifting of gains or losses from one tax jurisdiction to another to profit from differences in tax rates.
Tax base: The amount on which a taxpayer pays taxes, as for example their taxable income in the case of an income tax, or the taxable value of their property in the case of a property tax.
Tax break: Any provision of the tax code, such as a tax credit or tax deduction, that reduces the amount of tax that a firm or individual will pay, perhaps in return for behavior that the government wishes to encourage.
Tax buoyancy: A measure of how rapidly the actual revenue from a tax rises (including that due to any change in the tax law) as the tax base rises.
Tax clienteles: Clienteles of investors with specific preferences for debt or equity that are driven by differences in investors’ personal tax rates.
Tax credit: A provision of the tax code that specifies an amount by which a taxpayer's taxes will be reduced in return for some behavior.
Tax deduction: A provision of the tax code that specifies an amount by which a taxpayer's tax base will be reduced in return for some behavior, resulting in a lowering of the amount of tax paid that depends on their tax rate.
Tax elasticity: The elasticity of the real revenue from a tax with respect to the real tax base, for a given tax law.
Tax Haven: A nation with a moderate level of taxation and/or liberal tax incentives for undertaking specific activities such as exporting. A country or region imposing low or no taxes on foreign source income.
Tax holiday: A reduced tax rate provided by a government as an inducement to foreign direct investment.
Tax neutrality: Taxes that do not interfere with the natural flow of capital toward its most productive use.
Tax preference items: Items such as tax-loss carry forwards and carry backs and investment tax credits that shield corporate taxable income from taxes.
Tax rebate: The refund of a tax that has been overpaid. Some countries rebate certain taxes that have been paid on goods that are then exported.
Tax Reform Act of 1986: A 1986 law involving a major overhaul of the U.S. tax system.
Tax shield: A tax-deductible expense. The expense protects (shields) an equivalent dollar amount of revenue from being taxed by reducing taxable income.
Tax-haven affiliate: A wholly owned affiliate that is in a low-tax jurisdiction and that is used to channel funds to and from the multinational’s foreign operations. The tax benefits of tax-haven affiliates were largely removed in the United States by the Tax Reform Act of 1986.
Technical analysis: Any method of forecasting future exchange rates based on the history of exchange rates. An approach that focuses exclusively on past price and volume movements-while totally ignoring economic and political factors-to forecast future asset prices.
Technical barrier to trade: A technical regulation or other requirement (for testing, labeling, packaging, marketing, certification, etc.) applied to imports in a way that restricts trade.
Technical regulation: A requirement of characteristics (such as dimensions, quality, performance, or safety) that a product must meet in order to be sold on a country's market.
Technique of analysis: A method used for displaying or manipulating economic models.
1. A specific method of production, using a particular combination of inputs.
2. A point on an isoquant.
Technological change: A change in a production function that alters the relationship between inputs and outputs. Normally it is understood to be an improvement in technology, or technological progress, and it is of interest in international economics for its implications for trade and economic welfare.
Technological difference: A difference in production functions, usually for the same industry compared between two countries, such that one country has higher output for any given input than the other.
Technological progress: A technological change that increases output for any given input.
Technology gap: The presence in a country of a technology that other countries do not have, so that it can produce and export a good whose cost might otherwise be higher than abroad.
Technology spillover: Same as technology transfer, though usually not done intentionally by the transferor.
Technology transfer: The communication or transmission of a technology from one country to another. This may be accomplished in a variety of ways, ranging from deliberate licensing to reverse engineering.
1. The complete set of knowledge about how to produce in an economy at a point in time, including techniques of production that are available but not economically viable.
2. The set of production functions available to an economy.
3. Referring to industries that are experiencing, or recently have experienced, technological progress.
Temporal (and monetary/nonmonetary) method: A translation accounting method (such as FAS #8 in the United States) that translates monetary assets and liabilities at current exchange rates and all other balance sheet accounts at historical exchange rates. Under this currency transaction method, the choice of exchange rate depends on the underlying method of valuation. Assets and liabilities valued at historical cost (market) are translated at the historical rate (current rare).
Temporary working capital: The amount of current assets that varies with seasonal requirements.
Tender offer: An offer to buy current shareholders' stock at a specified price, often with the objective of gaining control of the company. The offer is often made by another company and usually for more than the present market price.
Tender: To offer a product for sale at a specified price, usually in response to a specific request from a potential purchaser. Government procurement, for example, that is not open to international tendering is a form of nontariff barrier.
Term loan: Debt originally scheduled for repayment in more than 1 year, but generally in less than 10 years. A straight loan, often unsecured, that is made for a fixed period of time.
Term of Trade: The weighted average of a nation’s export prices relative to its import prices.
Term structure of interest rates: The relationship between yield and maturity for securities differing only in the length of time (or term) to maturity.
Terminal warehouse receipt: A receipt for the deposit of goods in a public warehouse that a lender holds as collateral for a loan.
Terms of trade effect: The effect of a tariff on the terms of trade. By reducing the demand for imports, a tariff levied by a large country causes the prices of those imported goods to fall on the world market relative to the country's exports, improving its terms of trade.
Terms of trade:
The relative price of a country's exports compared to its imports.
2. Outside of the economics of international trade, this expression often refers more broadly to the policies, facilities, and other arrangements that characterize the trade between one country or group of countries and another. Terms of trade argument Same as the optimal tariff argument, which works by restricting the quantity of trade in order to improve the terms of trade.
Territorial tax system: A tax system that taxes domestic income but not foreign income. This tax regime is found in Hong Kong, France, Belgium, and the Netherlands.
The National Trade Data Bank: Is the U.S. Government's most comprehensive source of international trade data and export promotion information. Types of information on the NTDB include: International Market Research, Export Opportunities; Indices of foreign and domestic companies; how-to market guides; Reports on demographic, political, and socio-economic conditions for hundreds of countries; and much more.
Theoretical proposition: A property of an economic model that is derived (deduced) from its assumptions. It usually takes the form of a prediction about something that would be true in the world if the world conformed to the model's assumptions, and perhaps also to additional assumptions specified in the proposition.
Ticker: Ticker (tape). While the stock markets are in session, there is a running record of trading activity in each individual stock. Today's computerized system, still referred to as the ticker, actually replaces the scrolling paper tape of the past.
Ticker symbol: A unique, letter-character code name assigned to securities and mutual funds. It is often used in newspapers and price-quotation services. This shorthand method of identification was originally developed in the nineteenth century by telegraph operators.
Tied aid: Aid that is given under the condition that part or all of it must be used to purchase goods from the country providing the aid.
Tiger economy: Any one of several economies that have developed extremely rapidly over a period of years. Especially the Four Tigers, but also a number of others who began to grow more recently.
Time draft: A draft that is payable on a specified future dare. A draft that is payable at some specified future date and as such becomes a useful financing device.
Time value of an option: The difference between the value of an option and the option’s intrinsic value.
Time Value: The excess of an option’s value over its intrinsic value.
Timing option: The ability of the firm to postpone investment (or disinvestment) and to reconsider the decision at a future date.
Tobin tax: A small tax on international currency transactions to discourage destabilizing short-term international capital movements. Advocates suggest a tax of 0.1-0.25% with revenue be used for urgent global priorities. Others question enforceability.
Tombstone advertisement: An announcement placed in newspapers and magazines giving just the most basic details of a security offering. The term reflects the stark, black-bordered look of the ad.
Total (or combined) leverage: The use of both fixed operating and financing costs by the firm.
Total cash flow of the firm: Total cash inflow minus total cash outflow.
Total Dollar Return: The dollar return on a non-dollar investment, which includes the sum of any dividend/interest income, capital gains (losses), and currency gains (losses) on the investment.
Total factor productivity: A measure of the output of an industry or economy relative to the size of all of its primary factor inputs. The term, and its acronym TFP, often refer to the growth of this measure, as measured by the Solow residual.
Total firm risk: The variability in earnings per share (EPS). It is the sum of business plus financial risk.
Total Quality Management (TQM): An organization-wide approach to continuously improving the overall quality of its process, products, and service.
Total risk: The sum of systematic and unsystematic risk (measured by the standard deviation or variance of return).
1. Capable of being traded among countries.
2. A good or service that is tradable; with tradable referring to an aggregate of such goods and services.
Trade acceptance: A time draft that is drawn on and accepted by an importer. A draft accepted by a commercial enterprise.
Trade balance: A country’s net balance (exports minus imports) on merchandise trade.
Trade barrier: A governmental policy, action, or practice that intentionally interrupts the free flow of goods or services between countries.
Trade cost: Any cost incurred in order to engage in international trade, including transport cost, insurance, etc.
Trade creation: Trade that occurs between members of a preferential trading arrangement that replaces what would have been production in the importing country were it not for the PTA. Associated with welfare improvement for the importing country since it reduces the cost of the imported good.
Trade credit: Credit granted from one business to another. It is the imports minus exports of goods and services. A trade deficit occurs when the value of a country's exports is less than the value of its imports.
1. An amount that is loaned to an exporter to be repaid when the exports are paid for by the foreign importer.
2. Credit extended by an exporter to an importer, permitting them to pay at some time after they take delivery.
Trade deflection: Entry, into a low-tariff member of a free trade area, of imports intended for a purchaser in its higher-tariff partner.
Trade diversion: Trade that occurs between members of a preferential trading arrangement that replaces what would have been imports from a country outside in the PTA. Associated with welfare reduction for the importing country since it increases the cost of the imported good.
Trade Draft: A draft addressed to a commercial enterprise.
Trade facilitation: One of the Singapore Issues, this refers in the Doha Declaration to expediting the movement, release and clearance of goods, including goods in transit. This includes customs procedures and other practices that may add to the cost or time requirements of trade.
Trade flow: The quantity or value of a country's bilateral trade with another country.
Trade imbalance: A trade surplus or trade deficit.
Trade in services: The provision of a service to buyers within or from one country by a firm in or from another country. Because such transactions do not involve a physical product crossing borders, they were not regarded as trade and were not covered by GATT. In the mid-1980s they were recognized as a form of trade and were incorporated into the WTO's GATS.
Trade indifference curve: In a diagram measuring quantities of exports and imports, a curve representing amounts of trade among which a freely trading country is indifferent, based on its community indifference curves and its transformation curve.
Trade integration: The process of increasing a country's participation in world markets through trade, accomplished by trade liberalization.
Trade intensity index: For a group or bloc of countries, usually in a PTA, the ratio of the bloc's share of intra-bloc trade to the bloc's share in world trade. If greater than one, this is said to suggest that the bloc displays trade diversion.
Trade liabilities: Money owed to suppliers.
Trade liberalization: Reduction of tariffs and removal or relaxation of NTBs (Nontariff barrier).
Trade minister: The government official, at the ministerial or cabinet level, primarily responsible for issues of international trade policy; the minister of international trade. In the U.S. that is USTR.
Trade mission:
1. An office or other facility maintained in one country by the government of another to help residents of both to engage in international trade between them.
2. A group of persons from business and government of a country that travels to another country to promote its exports.
Trade negotiation: A negotiation between pairs of governments, or among groups of governments, exchanging commitments to alter their trade policies, usually involving reductions in tariffs and sometimes nontariff barriers.
Trade pattern: What goods and services a country trades, with whom, and in what direction. Explaining the trade pattern is one of the major purposes of trade theory, especially which goods a country will export and which it will import. This may be done directly, as the commodity pattern of trade, in indirectly as the factor content pattern of trade.
Trade Policy Review Mechanism: The periodic review of the trade policies and practices of the member countries of the WTO, conducted and published by the WTO.
Trade policy: Any policy affecting international trade, including especially tariffs and nontariff barriers.
Trade regime: The rules and practices prevailing in a country's international trade relationships.
Trade remedy: Protection provided by any of the following: anti-dumping duties, countervailing duties, or safeguards protection.
Trade restriction: Any policy that reduces the amount of exports or imports, such as a tariff, quota, or other nontariff barrier.
Trade restrictiveness Index: A theoretically consistent index of the restrictiveness of trade policy -- both tariffs and NTBs (Nontariff barrier).
Trade round: A set of multilateral negotiations, held under the auspices of the GATT, in which countries exchanged commitments to reduce tariffs and agreed to extensions of the GATT rules.
Trade sanction: Use of a trade policy as a sanction, most commonly an embargo imposed against a country for violating human rights.
Trade share: This can mean a variety of things, but most commonly it refers either to imports or exports as a percentage of GDP.
Trade surplus: Exports minus imports of goods and services, or balance of trade.
Trade surplus: A trade surplus occurs when the value of a country's exports is greater than the value of its imports.
Trade theory: The body of economic thought that seeks to explain why and how countries engage in international trade and the welfare implication of that trade, encompassing especially the Ricardian Model, the Heckscher-Ohlin Model, and the New Trade Theory.
Trade triangle: In the trade-and-transformation-curve diagram, the right triangle formed by the world price line and the production and consumption points, the sides of which represent the quantities exported and imported.
Trade war: Generally, a period in which each of two countries alternate in further restricting trade from the other. More specifically, it is the process of tariffs and retaliation.
1. To exchange one item for another, one person or firm providing an item (good, service, asset, etc.) to another person or firm, with the latter providing a different item to the first in return, as payment.
2. To export and/or import.
3. The quantity or value of exports and/or imports.
Traded good: A good that is exported or imported or -- sometimes -- a good that could be exported or imported if it weren't for those pesky tariffs.
Trade-in allowance: Price discount granted for a new item by turning in an old item at the time of purchase.
Trademark: A registration process under which a name, logo, or characteristic can be identified as exclusive. A symbol and/or name representing a commercial enterprise, whose right to the exclusive use of that symbol is, along with patents and copyrights, one of the fundamental intellectual property rights that is the subject of the WTO TRIPS agreement.
Trade-related intellectual property rights: This was the term used for bringing intellectual property protection into the Uruguay Round of trade negotiations under the pretense that only trade-related aspects of the issue would be included. In practice, that did not constrain the coverage of the resulting agreement.
Trade-related investment measure: Any policy applied to foreign direct investment that has an impact on international trade, such as an export requirement.
Trade-weighted average tariff: The average of a country's tariffs, weighted by value of imports. This is easily calculated as the ratio of total tariff revenue to total value of imports.
Trade-weighted exchange rate: The weighted average of a country's bilateral exchange rates using bilateral trade -- exports plus imports -- as weights. It is also called an effective exchange rate.
Trading arrangement: An agreement between two or more countries concerning the rules under which trade among them will be conducted, either in a particular industry or more broadly.
Trading bloc: A group of countries that are somehow closely associated in international trade, usually in some sort of PTA.
Trading desk (dealing desk): The desk at an international bank that trades spot and forward foreign exchange.
Traditional approach (to capital structure): A theory of capital structure in which there exists an optimal capital structure and where management can increase the total value of the firm through the judicious use of financial leverage.
Transaction cost: On the foreign exchange markets, this includes broker's fees and/or the bid/ask spread.
Transaction exposure: Changes in the value of contractual (monetary) cash flows as a result of changes in currency values. The extent to which a given exchange rate changes will change the value of foreign-currency-denominated transactions already entered into.
Transaction Statement: A document that clearly outlines the terms and conditions agreed upon between an importer and an exporter.
Transaction value: The actual price of a product, paid or payable, used for customs valuation purposes.
Transfer payment: Payment made by the government or private sector of one country to another as a gift or aid, not as payment for any good or service nor as an obligation. It is also called a unilateral transfer.
Transfer price: Literally this only refers to the price charged on goods and services that are traded between subsidiaries of a multinational corporation. However, the term usually connotes the setting of such prices high or low so as to minimize the total taxes paid to different governments, in response to differences in corporate tax rates. It is the price at which one unit of a firm sells goods or services to an affiliated unit. Prices on intra-company sales.
Transfer pricing: The price one unit of a company charges to another unit of the same company for goods or services exchanged between the two.
Transformation curve: Same as production possibility frontier. The name comes from the idea that, by devoting resources to producing one good instead of another, it is as though one good is being transformed into another.
Transition: The process of converting from a centrally planned, non-market economy to a market economy.
Translation (accounting) exposure: Changes in a corporation’s financial statements as a result of changes in currency values.
Translation gain or loss: An accounting gain or loss arising from the translation of the assets and liabilities of a foreign subsidiary into the parent company's currency.
Transnational corporation:
1. Same as multinational corporation, though for some reason this term seems to be preferred by those who don't like them.
2. A corporation whose national identity is a matter of convenience only, and that will move its headquarters readily in response to incentives.
Transparency: The clarity with which a regulation, policy, or institution can be understood and anticipated. Depends on openness, predictability, and comprehensibility. Lack of transparency can itself be a NTB (Nontariff barrier).
Transport cost: The cost of transporting a good, especially in international trade.
Treasury bills (T-bills): Short-term, non-interest bearing obligations of the US Treasury issued at a discount and redeemed at maturity for full face value.
Treasury bonds: Long-term (more than 10 years' original maturity) obligations of the US Treasury.
Treasury notes: Medium-term (2–10 years' original maturity) obligations of the US Treasury.
Treasury stock: Common stock that has been repurchased and is held by the issuing company.
Treasury Workstation: A software package implemented on a computer that treasurers use to run their cash management systems.
Treaty of Tordesillas: Treaty between Spain and Portugal that divided the South American continent (among other lands) between the two countries. Ratified in 1494, it originally gave Spain much more land than Portugal.
Triangular arbitrage: Arbitrage among three currencies. For example (letting x/y be the currency x per unit of currency y exchange rate), if $/¥ > ($/£)(£/¥), then an arbitrager can make a profit buying £ with $; buying ¥ with those £; and then selling those ¥ for $.
Triangular Currency Arbitrage: A sequence of foreign exchange transactions, involving three different currencies, that one can use to profit from discrepancies in the different exchange rates.
Triffin's dilemma: A flaw in the dollar-based international monetary standard created by the IMF: To provide the growing reserves that other central banks needed to sustain growing economies, the U.S. needed to run balance of payments deficits that would undermine confidence in the dollar as a reserve asset.
Trough point: The point in the business cycle when an economic contraction reaches its lowest point before turning up. It contrasts with peak.
Trust receipt: A security device acknowledging that the borrower holds specifically identified inventory and proceeds from its sale in trust for the lender.
Trustee: A bank or trust company that holds title to or a security interest in leased property for the benefit of the lessee and/or creditors of the lessor. A person or institution designated by a bond issuer as the official representative of the bondholders. Typically, a bank serves as trustee.
Turnkey contract: An agreement in which a contractor is responsible for setting up a facility from start to finish for another firm.
Twin deficits: Refers to the budget deficit and trade deficit of a country (in spite of the fact that, although they are related, they are far from being the same).
Two cone equilibrium: A free-trade equilibrium in the Heckscher-Ohlin Model in which prices are such that all goods cannot be produced within a single country, and instead there are two diversification cones. This, or a multi-cone equilibrium, will arise if countries' factor endowments are sufficiently dissimilar compared to factor intensities of industries. It is contrasts with one cone equilibrium.
Two gap model: A model of economic development that focuses on two constraints: the need for savings to finance investment, and the need for foreign exchange to finance imports.
Two-ness: The property of simple versions of many trade models that they have two of everything: goods, factors, and countries especially.
Two-tier tender offer: Tender offer in which the bidder offers a superior first-tier price (e.g., higher or all cash) for a specified maximum number (or percent) of shares and simultaneously offers to acquire the remaining shares at a second-tier price (e.g., lower and/or securities rather than cash).

Unbiased expectations hypothesis: The hypothesis that forward exchange rates are unbiased predictors of future spot rates. (See forward parity.)
Unbiased Nature of the Forward Rate (UFR): States that the forward rate should reflect the expected future spot rate on the date of settlement of the forward contract.
Uncertainty avoidance: The extent to which a society tolerates uncertainty and ambiguity.
Uncertainty: Lack of information. Failure to know anything that may be relevant for an economic decision, such as future variables, details of a technology, or sales. In models, uncertainty usually appears as a random variable and corresponding probability density function. But in practice, most international models, especially of trade, assume certainty.
Uncovered interest parity: Equality of expected returns on otherwise comparable financial assets denominated in two currencies, without any cover against exchange risk. Uncovered interest parity requires approximately that i = i* + a where i is the domestic interest rate, i* the foreign interest rate and the expected appreciation of foreign currency at an annualized percentage rate.
Underemployment: The employment of workers for fewer hours or in less desirable jobs than they would prefer and are qualified for.
Under-invoicing: The provision of an invoice that states price as less than is actually being paid. This might be done on an import in order to reduce the amount that will be collected by an ad valorem tariff. Or it might be done on an export to reduce apparent profit and thus taxes.
Under-valued currency: The situation of a currency whose value on the exchange market is lower than is believed to be sustainable. This may be due to a pegged or managed rate that is below the market-clearing rate, or, under a floating rate, it may be due to speculative capital outflows. It contrasts with over-valued currency.
Underwriting syndicate: A temporary combination of investment banking firms formed to sell a new security issue.
Underwriting: Bearing the risk of not being able to sell a security at the established price by virtue of purchasing the security for resale to the public; also known as firm commitment underwriting. The act by investment bankers of purchasing securities from issuers for resale to the public.
Unemployment Rate: The ratio of the total number of unemployed persons to the total number of persons in the labor force. The ratio of unemployment to the labor force of a country.
Unequal exchange: Trade in which the labor used to produce a country's exports is more than the labor used to produce its imports, as in the exchange between low-wage developing countries and high-wage developed countries.
Unfair trade:
1. Under the GATT this refers only to exports that are subsidized or dumped
2. Under U.S. law, this also includes various actions that interfere with U.S. exports.
3. Also used to refer to any almost any trade that the speaker objects to, sometimes including that based on low wages or weak regulations.
Uniform Commercial Code: The model state legislation related to many aspects of commercial transactions that went into effect in Pennsylvania in 1954. It has been adopted with limited changes by most state legislatures.
Unit contribution margin: The amount of money available from each unit of sales to cover fixed operating costs and provide operating profits.
Unit elastic: Having an elasticity equal to one. For a price elasticity of demand, this means that expenditure remains constant as price changes. For income elasticity it means that expenditure share is constant. Homothetic preferences imply unit income elasticities. It contrasts with elastic and inelastic.
Unit isocost line: An isocost line along which cost is equal to one unit of the numeraire, such as one dollar.
Unit isoquant: The isoquant for a quantity equal to one unit of a good. The unit isoquant is useful for relating the price of a good to the prices of factors employed in its production.
Unit labor requirement: The amount of labor used per unit of output in an industry; the ratio of labor to output. In a Heckscher-Ohlin Model this varies along an isoquant as different techniques are chosen in response to different factor prices. But in a Ricardian model, these are the constant building blocks for defining comparative advantage and determining behavior.
Unit of account: A basic function of money, providing a unit of measurement for defining, recording, and comparing value. I.e., one dollar signifies not only a one dollar bill, but also a dollar's worth of money in other forms (deposits), of wealth in other forms than money, and of any good or service with a market value.
United Currency Options Market (UCOM): Market set up by the Philadelphia Stock Exchange in which to trade currencies.
United Nations Organizations: The complex and extensive system of organizations that exist under the umbrella of the United Nations. Several of these, like the WTO and the IMF, play critical roles in the international economy.
Unit-value isoquant: The isoquant for a quantity of a good worth one unit of value. This is meaningful only if the nominal price of the good is given, for some specified currency or numeraire. Unit-value isoquants are central to the Lerner diagram for analyzing the Heckscher-Ohlin Model.
Universal Banking: Bank practice, especially in Germany, whereby commercial banks perform not only investment banking activities equity positions in companies.
Unlevered beta (systematic business risk): The beta (or systematic risk) of a project as if it were financed with 100 percent equity.
Unlevered cost of equity: The discount rate appropriate for an investment assuming it is financed with 100 percent equity.
Unnatural trading bloc: A trading bloc among countries that are not natural trading partners.
Unsecured loans: A form of debt for money borrowed that is not backed by the pledge of specific assets.
Unskilled labor: Labor with a low level of skill or human capital. Identified empirically as labor earning a low wage, with a low level of education, or in an occupational category associated with these; sometimes crudely proxied as production workers.
Unsterilized Intervention: Foreign exchange market intervention in which the monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions.
Unsustainable debt: A financial condition in which a country is unable to service its foreign (external) debt without decimating its economy.
Unsystematic (Diversifiable) Risk: Risks that are specific to a given firm, such as a strike. Risk that is specific to a particular security or country and that can be eliminated through diversification.
Unsystematic risk: The variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification.
Up-and-In Option: An option that comes into existence if and only if the currency strengthens enough to cross a preset barrier.
Up-and-Out Option: An option that is canceled if the underlying currency strengthens beyond the outstrike.
Upstream subsidization: Export of a good one of whose inputs has been subsidized.
Usury: The practice of charging or paying exorbitant interest on a loan or other transaction. Note: in Islamic societies, charging or receiving any amount of interest is considered usury.
Utility function: A function that specifies the utility (usefulness, well being) of a consumer for all combinations goods consumed (and sometimes other considerations). It represents both their welfare and their risk preferences.
Utility possibility frontier: In a diagram with levels of individual utility on the axes, a curve showing the maximum attainable levels of utility in a given situation, such as free trade or autarky.

Value added tax: A tax that is levied only on the value added of a firm. A VAT is usually subject to border tax adjustment.
Value added: The value of output minus the value of all intermediate inputs, representing therefore the contribution of, and payments to, primary factors of production.
Value Additivity Principle: The principle that the net present value of a set of independent projects is simply the sum of the NPVs of the individual projects.
Value chain: A value-added process in a firm to transform raw materials and other inputs to finished goods, which creates value to customers.
Value date: Date on which a foreign exchange contract is executed, i.e. seller delivers. The date on which the monies must be paid to the parties involved in a foreign exchange transaction. For spot transactions, it is set as the second working day after the date on which the transaction is concluded.
Value marginal product: Marginal value product
Value quota: A quota specifying value, price times quantity, of a good.
Value stocks: Stocks with low price/book ratios or price/earnings ratios. Historically, value stocks have enjoyed higher average returns than growth stocks , stocks with high price/book or PE ratios) in a variety of countries.
Value-added tax (VAT): A sales tax collected at each stage of production in proportion to the value added during that stage. Method of indirect taxation whereby a tax is levied at each stage of production on the value added at that specific stage.
Value-at-Risk (VAR): A calculation which allows a financial institution to estimate the maximum amount it might expect to lose in a given time period with a certain probability.
Value-Dating: Refers to when value (credit) is given for funds transferred between banks.
Variable costs: A cost that varies directly with volume and is zero when production is zero.
Variable levy: A tax on imports that varies over time so as to stabilize the domestic price of the imported good. Essentially, the tax is set equal to the difference between the target domestic price and the world price.
Variable returns to scale: The property of a production function that returns to scale may be increasing or decreasing, at different rates, at different levels of output.
Vehicle currency: The currency used to invoice an international trade transaction, especially when it is not the national currency of either the importer or the exporter.
Velocity of money: The rate at which money changes hands in an economy, usually defined by the equation of exchange.
Vent for surplus: The concept that a country -- especially a developing country -- may be able to gain by exporting the products of factors that would not be employed at all without trade.
Venture capital: An investment in a start-up business that is perceived to have excellent growth prospects but that does not have access to capital markets.
Vertical integration: Production of different stages of processing of a product within the same firm.
Vertical intraindustry trade: Intraindustry trade in which the exports and imports are at the different stages of processing. It contrasts with horizontal IIT.
Virtual corporation: A business organizational model that involves the large-scale outsourcing of business functions. Partnerships so close those two partners become a single firm for all operational purposes.
Virtual Currency Option: A foreign currency option listed on the Philadelphia Stock Exchange which is settled in U.S. dollars rather than in the underlying currency.
Visible: In referring to international trade, used as a synonym for good. Visible trade is trade in goods. It contrasts with invisible.
Volatility: The extent to which an economic variable, such as a price or an exchange rate, moves up and down over time.
Voluntary export restraint (VER): One country promises another country to limit its imports; this is often done when the promising country fears increased tariffs or quotas if it does not self-regulate. A restriction on a country's imports that is achieved by negotiating with the foreign exporting country for it to restrict its exports.
Voluntary import expansion: The use of policies to encourage imports, in response to pressure from trading partners.

Wage: The payment for the service of a unit of labor, per unit time. In trade theory, it is the only payment to labor, usually unskilled labor. In empirical work, wage data may exclude other compensation, which must be added to get the total cost of employment.
Wage-rental ratio: The ratio of the wage of labor to the rental price of either capital or land, whichever is the other factor in a two-factor Heckscher-Ohlin model. The ratio plays a critical role in this model since it determines the ratios of factors employed in both industries.
Waiver: An authorized deviation from the terms of a previously negotiated and legally binding agreement. Many countries have sought and obtained waivers from particular obligations of the GATT and WTO.
Walras' Law: The property of a general equilibrium that if all but one of the markets are in equilibrium, then the remaining market is also in equilibrium, automatically. This follows from the budget constraints of the market participants, and it implies that any one market-clearing condition is redundant and can be ignored.
Walrasian adjustment: A market adjustment mechanism in which price rises when there is excess demand and falls when there is excess supply. Strictly speaking, these excess supplies and demands are those that would obtain without any history of disequilibrium, as with a Walrasian auctioneer.
Walrasian auctioneer: A hypothetical entity that facilitates market adjustment in disequilibrium by announcing prices and collecting information about supply and demand at those prices without any disequilibrium transactions actually taking place.
Warehouse receipt: A receipt issued by a warehouse listing the goods received.
Warehouse-to-warehouse: An insurance policy that covers goods over the entire journey from the seller's to the buyer's premises.
Warrant: An option issued by a company that allows the holder to purchase equity from the company at a predetermined price prior to an expiration date. Warrants are frequently attached to Eurobonds. A relatively long-term option to purchase common stock at a specified exercise price over a specified period of time.
Water in the tariff: The extent to which a tariff that is higher than necessary to be prohibitive.
Weak form efficient market:A market in which prices fully reflect the information in past prices.
Wealth: The total value of the accumulated assets owned by an individual, household, community, or country.
Weight note: Document issued by either the exporter or a third party declaring the weight of goods in a consignment
Weighted Average Cost of Capital (WACC): The required return on the funds supplied by investors. It is a weighted average of the costs of the individual component debt and equity funds. A discount rate that reflects the after-tax required returns on debt and equity capital.
Welfare criterion: A basis, usually quantitative, for judging whether one state of the world or of an economy is better than another, for use in welfare economics and in evaluation of policies.
Welfare economics: The branch of economic thought that deals with economic welfare, including especially various propositions relating competitive general equilibrium to the efficiency and desirability of an allocation.
Welfare proposition: In trade theory, this usually refers to any of several gains from trade theorems.
Welfare state: A set of government programs that attempts to provide economic security for the population by providing for people when they are unemployed, ill, or elderly.
Welfare triangle: In a partial equilibrium market diagram, a triangle representing the net welfare benefit or loss from a policy or other change. In trade theory it often means the triangle or triangles representing the deadweight loss due to a tariff.
Welfare: Refers to the economic well being of an individual, group, or economy. For individuals, it is conceptualized by a utility function. For groups, including countries and the world, it is a tricky philosophical concept, since individuals fare differently. In trade theory, an improvement in welfare is often inferred from an increase in real national income.
Wharfage charge: A charge assessed by a pier or dock owner for handling incoming or outgoing cargo.
White knight: A friendly acquirer who, at the invitation of a target company, purchases shares from the hostile bidder(s) or launches a friendly counter bid in order to frustrate the initial, unfriendly bidder(s).
Willingness to pay: The largest amount of money that an individual or group could pay, along with a change in policy, without being made worse off. It is therefore a monetary measure of the benefit to them of the policy change. If negative, it measures its cost.
Wire transfer: A generic term for electronic funds transfer using a two-way communications system, like Fedwire.
Withholding tax: A tax on income that is levied at the source, thus diverted to the government before the recipient of the income ever sees it. Used in international tax treaties to assist tax collection. A tax on dividend or interest income that is withheld for payment of taxes in a host country. Payment is typically withheld by the financial institution distributing the payment.
Working capital management: The administration of the firm's current assets and the financing needed to support current assets.
Working capital: An accounting term that indicates the difference between current assets and current liabilities. The combination of current assets and current liabilities.
World Bank: A group of five closely associated international institutions providing loans and other development assistance to developing countries. The five institutions are IBRD, IDA, IFC, MIGA, and ICSID. As of July 2000, the largest of these, IBRD, had 181 member countries. International Bank for Reconstruction and Development. An international organization created at Breton Woods in 1944 to help in the reconstruction and development of its member nations. Its goal is to improve the quality of life for people in the poorer regions of the world by promoting sustainable economic development. See also International Bank for Reconstruction and Development.
World Fact Book: An excellent source of information about the countries of the world, including basic economic data.
World price: The price of a good on the world market, meaning the price outside of any country's borders and therefore exclusive of any trade taxes or subsidies that might apply crossing a border into a country but inclusive of any that might apply crossing out of a country.
World Trade Organization (WTO): The WTO is a multilateral organization that promotes free and fair trade among the nations of the world. It was created in 1995 by 121 nations at the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). The WTO is responsible for implementation and administration of the trade agreement. A global international organization that specifies and enforces rules for the conduct of international trade policies and serves as a forum for negotiations to reduce barriers to trade. Formed in 1995 as the successor to the GATT, it had 136 member countries as of April 2000.
Worldwide tax system: A tax system that taxes worldwide income as it is repatriated to the parent company. Used in Japan, the United Kingdom, and the United States.

X-efficiency: The ability of a firm to get maximum output from its inputs. Failure to do so, called X-inefficiency or technical inefficiency may be due to lack of incentives provided by competition. Improvement in X-efficiency is one hypothesized source of gain from trade.

Yankee Bonds: Dollar-denominated foreign bonds sold in the United States.
Yankee Stock Issues: Stock sold by foreign companies to U.S. investors.
Yield curve: A graph of the relationship between yields and term to maturity for particular securities.
Yield to maturity (YTM): The expected rate of return on a bond if bought at its current market price and held to maturity. The discount rate that equates the present value of interest payments and redemption value with the present price of the bond.
Yield: The amount of return on an investment; the interest rate

Zero balance account (ZBA): A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent.
Zero-coupon bond: A bond that pays no interest but sells at a deep discount from its face value; it provides compensation to investors in the form of price appreciation. Semi-strong form efficient market A market in which prices fully reflect all publicly available information.
Zero profit: A situation in which profit in an industry is zero, usually as a result of free entry and exit. It may, if firms are not identical, refer only to the marginal firm. And it always means zero excess profit, not that all returns to capital invested in the industry are zero.
Zero substitution: An elasticity of substitution of zero. In a production function, this means a Leontief technology.
Zero sum game: A game in which the payoffs to the players add up to zero, so that a gain for one is necessarily equaled by loss to others. It contrasts with positive sum game.

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