Global Economics Definitions

Exports

Goods and services produced domestically and sold to other countries.

Imports

Goods and services produced in other countries and purchased domestically.

Free Trade

International trade that takes place without government restrictions such as tariffs and quotas.

Specialization

When a country focuses its resources on producing the goods and services it can produce most efficiently.

Economies of Scale

The fall in the average cost of production per unit as the scale of output increases.

Absolute Advantage

The ability of a country to produce more of a good or service than another country using the same amount of resources.

Comparative Advantage

The ability of a country to produce a good or service at a lower opportunity cost than another country.

Protectionism

The use of government policies to shield domestic producers from foreign competition.

Tariff

A tax placed on imported goods and services.

Quota

A limit on the quantity of a good that can be imported in a given time period.

Subsidies (to domestic producers)

Financial assistance from the government to domestic firms that lowers their costs helping them compete against imports.

Export Subsidies

Financial assistance from the government to firms that sell goods abroad lowering their costs so they can sell at lower prices in world markets.

Administrative Barriers

Bureaucratic rules and regulations such as licenses and product standards that make importing goods more difficult and costly.

Embargo

A complete ban on trade with a particular country or of a particular good or service.

Welfare Loss

The reduction in social surplus caused by an inefficient allocation of resources such as when a tariff or quota distorts the market.

Infant Industries

New domestic industries that have not yet developed the scale or experience to compete with established foreign firms.

Dumping

The sale of goods in a foreign market at a price below their cost of production or below the price charged in the home market.

Trade War

A situation where countries repeatedly raise trade barriers against each other in response to retaliation harming trade for all sides.

Economic Integration

The process of countries becoming more economically interdependent and unified with each other.

Bilateral Trade Agreement

An agreement between two countries to reduce barriers to trade with each other.

Regional Trade Agreement

An agreement between countries in the same geographic region to reduce barriers to trade with each other.

Multilateral Trade Agreement

An agreement between many countries to reduce barriers to trade usually negotiated and overseen through the World Trade Organization.

Trading Bloc

A group of countries that reduce or remove trade barriers between themselves.

Free Trade Area

A trading bloc where members trade freely with each other but each member sets its own trade barriers on non-members.

Customs Union

A free trade area where members also impose a common external tariff on non-members.

Common Market

A customs union where factors of production such as labor and capital can also move freely between members.

Monetary Union

A common market where members also share a common currency and a common monetary policy.

Trade Creation

When the removal of trade barriers between members shifts purchases from domestic firms to more efficient producers in other member countries increasing trade.

Trade Diversion

When a trading bloc shifts trade away from more efficient non-member countries towards less efficient member countries because of the removal of trade barriers between members.

World Trade Organization

An international organization that sets and enforces the rules of global trade promotes trade liberalization and settles trade disputes between members.

Exchange Rate

The price of one currency in terms of another currency.

Foreign Exchange Market

The market where currencies are bought and sold.

Floating Exchange Rate

An exchange rate determined by the demand for and supply of a currency in the foreign exchange market without government intervention.

Appreciation

An increase in the value of a currency relative to another currency in a floating exchange rate system.

Depreciation

A decrease in the value of a currency relative to another currency in a floating exchange rate system.

Fixed Exchange Rate

An exchange rate set at a specific value against another currency by the central bank which buys and sells currencies to maintain it.

Managed Exchange Rate

An exchange rate that is allowed to float within a target range with the central bank intervening to keep it inside that range.

Central Bank Intervention

When a central bank buys or sells currencies in order to influence the exchange rate.

Speculation

The buying or selling of a currency in order to profit from expected changes in its value.

Imported Inflation

A rise in domestic prices caused by an increase in the price of imported goods such as when a currency depreciates.

Balance of Payments

A record of all financial transactions between a country and the rest of the world over a given period of time.

Credit Items

Payments received by a country from foreign consumers firms or governments bringing money into the economy.

Debit Items

Payments made by a country to foreign consumers firms or governments taking money out of the economy.

Current Account

The part of the balance of payments that records trade in goods and services income flows and current transfers.

Current Transfers

One-way payments between countries where nothing is received in return such as foreign aid and remittances.

Capital Account

The part of the balance of payments that records capital transfers such as debt forgiveness and the sale or purchase of non-produced assets such as land and intellectual property rights.

Financial Account

The part of the balance of payments that records flows of investment and lending between countries.

Foreign Direct Investment (FDI)

Investment by a firm in real assets in another country such as building a factory or buying a controlling stake in a foreign company.

Marshall-Lerner Condition

States that a devaluation or depreciation will improve the current account balance only if the sum of the price elasticities of demand for exports and imports is greater than 1.

J-Curve Effect

The tendency for a current account deficit to worsen before it improves after a depreciation or devaluation because demand for exports and imports is inelastic in the short run.

Expenditure Switching

Policy that encourages households and firms to switch their consumption of imported goods and services over to domestic alternatives.

Sustainable Development

Development that meets the needs of the present without reducing the ability of future generations to meet their own needs.

Social Sustainability

When an economy develops social systems that allow both its current and future populations to live better lives.

Economic Sustainability

When an economy allocates its scarce resources so that neither its current nor its future population is disadvantaged.

Environmental Sustainability

When an economy uses natural resources at a rate that does not disadvantage its current or future population.

Sustainable Development Goals (SDGs)

The 17 goals set by the United Nations in 2015 to be achieved by 2030 aimed at ending poverty protecting the planet and ensuring prosperity for all.

Economic Development

The improvement in the standard of living and wellbeing of people in a country including income health education and freedom.

Composite Indicators

Measures that combine several single indicators into one value to assess the level of economic development.

Human Development Index (HDI)

A composite indicator for measuring economic development with values from 0 to 1 that combines life expectancy years of schooling and GNI per capita at purchasing power parity.

Poverty Cycle

A self-reinforcing loop where low incomes lead to low savings investment and education which keeps incomes low over time.

Infrastructure

Public goods typically provided by the government that facilitate the production and consumption of goods and services.

Primary Sector Dependence

When an economy relies heavily on the production and export of raw materials leaving it exposed to volatile prices and low value added.

Informal Economy

Economic activity that is not registered taxed or regulated by the government.

Import Substitution

A strategy that reduces reliance on imports by producing goods domestically often protected by tariffs and subsidies.

Export Promotion

A strategy that grows the economy by encouraging exports using measures such as export subsidies and a competitive exchange rate.

Social Enterprise

A business that trades to achieve social or environmental goals reinvesting most of its profits into that purpose instead of paying owners.

Trade Liberalization

The reduction or removal of trade barriers such as tariffs and quotas.

Privatization

The transfer of ownership of state-owned firms to the private sector.

Deregulation

The removal or reduction of government rules that restrict how firms operate.

Foreign Aid

The transfer of money goods or expertise from one country or organization to another to support development.

Official Development Assistance (ODA)

Government aid given to developing countries to promote their economic development and welfare.

Debt Relief

The cancellation or reduction of the debt a country owes to foreign lenders.

World Bank

An international organization that provides loans and technical support to developing countries for development projects and poverty reduction.

International Monetary Fund (IMF)

An international organization that promotes global financial stability and lends to countries with balance of payments problems often with policy conditions attached.

Microfinance

The provision of small loans and other financial services to low-income households who cannot access traditional banking.