Chapter 9 - International Relations

Autarky

The separation of a country from the world economy.

Mercantilism

Efforts by many states in the 17th and 18th centuries to use trade attain gold.

Production possibilities frontier (PPF)

A graphical representation of the different combinations of goods that a country may produce during some period of time.

Opportunity cost

The cost of producing more of a certain good in foregone production of another good. These are crucial in considering comparative advantage and the possibility for mutual gains from trade.

Absolute advantage

A situation in which one state has a productive advantage over another in producing a good.

Comparative advantage

A situation in which one country is able to produce one more unit of a good by foregoing less of another good, relative to another country.

Terms of trade

The rate at which goods will be exchanged between two states.

Protectionism

A country restricts imports in an effort to protect a domestic industry.

Infant-industry protection

Imports of a particular good are restricted to allow for domestic productive capacity to come online.

Tariff

A tax collected by the government on goods coming into the country.

Non-tariff barrier (NTB)

Policies by which a state can control imports and import prices without imposing tariffs.

Foreign exchange market

The marketplace in which agents sell and buy foreign currencies.

Exchange rate

The amount of one currency needed to buy one unit of a foreign currency.

Flexible (or floating) exchange-rate system

Supply and demand determine a currency's exchange rate.

Fixed (or pegged) exchange-rate system

Government establishes and seeks to maintain the rate of exchange.

Demand curve

This specifies the quantity of a good that consumers wish to purchase at different prices.

Supply curve

This specifies how much producers are willing to offer of a good at different prices.

Currency market intervention

Government transactions in the foreign exchange market to support a fixed exchange rate.

Balance of payments

A summary of a country's international transactions.

Current account

The current account consists of the country's balance of trade in goods and services plus its income receipts.

Eurozone

The world's most prominent currency union, consisting of 19 countries in Europe all using the euro as a common currency.

Price inflation

A situation in which too much money is chasing too few goods, pushing up prices of goods and services.

Austerity

A policy by which governments raise interest rates or reduce government spending in an effort to reduce price inflation.

Multinational enterprise (MNE)

A firm that has its headquarters in one country and ongoing business operations in one or (more typically) several other countries.

National treatment

Included in key US-EU treaties, allows for American firms to be treated as though they are European firms.

Fixed capital

The value of assets a company utilizes in an ongoing way.

Gross fixed capital formation

Increase in fixed capital that occurs during a given period of time, usually a year.

Gross domestic product (GDP)

The total monetary value of all goods and services produced by all countries of the world during some period of time.

Intra-firm trade

A company's cross-country movement of different components that are put together at one or more final assembly plants in one or more countries.

Race to the bottom

A situation in which two or more countries put into place progressively lower policy rules and standards.

Regulatory chill

Strategy by MNEs to deter governments from generating strong regulations.

Pollution haven

Countries that maintain low environmental standards in order to attract foreign companies.

Bretton Woods system

The international system created in 1944 to encourage progressive trade liberalization and stable monetary relations between all the countries of the world.

International Trade Organization (ITO)

An ambitious scheme for global trade management proposed in 1947. It eventually failed because the United States refused to support it and was largely replaced by the less ambitious GATT.

General Agreement on Tariffs and Trade (GATT)

This was a post-ITO attempt by the US and other Western countries to lower their respective tariff rates and to establish a first set of rules to resolve international trade disputes.

World Trade Organization (WTO)

Since 1995 the successor body to the GATT, with more explicit rules and guidelines than the GATT and a more highly developed mechanism for resolving trade disputes.

International Monetary Fund (IMF)

An international institution created in 1946 to facilitate and reinforce the exchange-rate system created in the aftermath of World War II. It remains one of the world's most important international economic institutions.

World Bank

It was initially created to provide loans to countries to help them with economic recovery from World War II. Today it finances and manages projects to foster the economic growth of developing countries.

Washington Consensus

Controversial US-backed free-market policies set forth by the IMF as the necessary path to prosperity from the 1980s until the Great Recession of 2008-09.

Group of 7 (G-7)

Seven countries (United States, United Kingdom, France, Germany, Japan, Italy, and Canada) that sought to govern international economic relations after the collapse of the Bretton Woods system by coordinating their exchange rates and their domestic monetary and fiscal policies.

Group of 8 (G-8)

The Group of 7 (G-7) plus Russia. In the aftermath of the Cold War, Russia was added as a symbolic move. Russia was suspended from it in 2014 in response to its annexation of Crimea.

Group of 20 (G-20)

A grouping composed of the G-7 countries and newly rising economic powers