International Economics – Core Vocabulary Review

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A comprehensive set of vocabulary flashcards covering key concepts, models, and policies discussed in the International Economics lecture series, organized to aid English-language review and exam preparation.

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84 Terms

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International Economics

The study of how nations interact through trade in goods and services, money, and investment flows.

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Export

A good or service produced domestically and sold abroad.

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Import

A good or service produced abroad and purchased domestically.

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Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country’s borders in a given period.

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Gross National Product (GNP)

The market value of all final goods and services produced by a nation’s residents, regardless of location, in a given period.

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Comparative Advantage

A country's ability to produce a good at a lower opportunity cost than another country.

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Absolute Advantage

The ability of a country to produce a good using fewer resources than another country.

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Opportunity Cost

The value of the best alternative forgone when a choice is made.

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Production Possibility Frontier (PPF)

A curve showing all efficient combinations of two goods an economy can produce with given resources and technology.

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Unit Labor Requirement

The number of labor hours needed to produce one unit of output.

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Marginal Product of Labor (MPL)

The additional output produced by employing one more unit of labor.

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Relative Price

The price of one good in terms of another good.

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Gravity Model

A model that predicts bilateral trade flows based on economic size (GDP) and distance between countries.

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Economies of Scale

Cost advantages that firms obtain due to expansion of production.

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Specific Factor

A factor of production that is immobile across industries in the short run (e.g., land or specialized capital).

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Mobile Factor

A factor of production, such as labor, that can move freely between industries.

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Stolper-Samuelson Theorem

In the Heckscher-Ohlin model, a rise in the relative price of a good raises the real return to the factor used intensively in that good and lowers the real return to the other factor.

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Rybczynski Theorem

With constant prices, an increase in one factor of production increases output of the good using that factor intensively and decreases output of the other good.

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Factor Price Equalization

The prediction that free trade will equalize the returns to identical factors of production across countries.

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Heckscher-Ohlin (H-O) Model

A trade model in which comparative advantage is determined by countries’ relative factor endowments.

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Skilled-Biased Technological Change

Technological progress that increases the demand for skilled labor relative to unskilled labor.

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Effective Rate of Protection (ERP)

The percentage change in domestic value added per unit caused by a tariff structure.

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Ad Valorem Tariff

A trade tax calculated as a percentage of the good’s value.

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Specific Tariff

A trade tax levied as a fixed amount per physical unit of the imported good.

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Import Quota

A direct restriction on the quantity of a good that may be imported.

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Export Subsidy

A payment by the government to a firm or individual that ships goods abroad.

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Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay.

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Producer Surplus

The difference between the price producers receive and the minimum they would accept.

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Balance of Payments (BOP)

A country’s record of all economic transactions with the rest of the world.

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Current Account (CA)

The part of the BOP that records trade in goods and services, income receipts, and unilateral transfers.

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Financial Account (FA)

The part of the BOP that records transactions in financial assets between residents and non-residents.

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Capital Account

The BOP category that records transfers of non-produced, non-financial assets and debt forgiveness.

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Official Reserve Assets

Foreign currency, gold, and other assets held by central banks to manage exchange rates.

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Exchange Rate

The price of one currency in terms of another currency.

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Appreciation (Currency)

An increase in the value of a currency relative to others.

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Depreciation (Currency)

A decrease in the value of a currency relative to others.

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Spot Rate

The current exchange rate for immediate delivery of currencies.

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Forward Rate

An agreed-upon exchange rate for currency delivered at a future date.

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Covered Interest Parity (CIP)

Condition stating that returns on domestic and foreign deposits are equal when exchange rate risk is hedged with a forward contract.

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Uncovered Interest Parity (UIP)

Condition stating that expected returns on domestic and foreign deposits are equal without forward cover, implying expected exchange rate changes offset interest differentials.

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Carry Trade

A strategy of borrowing in low-interest currencies and investing in high-interest currencies.

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Money Supply (Ms)

The total quantity of money (currency plus deposits) in an economy at a point in time.

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Money Demand (Md)

The desired holding of financial assets in the form of money by the public.

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Liquidity

The ease with which an asset can be converted into a medium of exchange without loss of value.

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Interest Parity Condition

The equilibrium condition equating returns on domestic and foreign interest-bearing assets.

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Exchange Rate Overshooting

A short-run exchange rate change that exceeds its long-run response to a monetary shock.

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Sterilized Intervention

Central-bank purchase or sale of foreign currency offset by opposite domestic open-market operations to leave the money supply unchanged.

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Unsterilized Intervention

Central-bank purchase or sale of foreign currency that changes the domestic money supply.

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Devaluation

An official reduction in the par (fixed) value of a currency under a fixed-rate regime.

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Revaluation

An official increase in the par value of a currency under a fixed-rate regime.

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Capital Flight

Large and sudden capital outflows from a country, usually due to fears of devaluation or default.

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Optimum Currency Area (OCA)

A geographic region in which it is economically optimal to share a single currency.

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Monetary Efficiency Gain

The benefit from reduced transaction costs and exchange-rate uncertainty when joining a currency area.

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Economic Stability Loss

The cost of losing autonomous monetary and exchange-rate policy when joining a currency area.

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Quantity Theory of Money

The long-run proposition that changes in the money supply lead to proportional changes in the price level.

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Real Exchange Rate

The nominal exchange rate adjusted for relative price levels between two countries.

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Terms of Trade

The ratio of a country’s export prices to its import prices.

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Specific Factors Model

A short-run trade model where some factors are immobile between sectors, explaining income distribution effects of trade.

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Tariff-Rate Quota

A policy that applies a low tariff up to a quota amount and a higher tariff above it.

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Quota Rent

The extra profit obtained by holders of import licenses under a quota.

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Exchange-Rate Risk

The uncertainty about future currency values that affects returns on cross-border investments.

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Default Risk

The possibility that a borrower will fail to repay interest or principal on a loan.

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Risk Premium

The additional return demanded by investors to compensate for risk, often included in interest-rate differentials.

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Balance-of-Payments Crisis

A situation in which a country’s central bank lacks sufficient foreign reserves to maintain a fixed exchange rate, leading to devaluation.

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Marshall–Lerner Condition

The requirement that the sum of export and import demand elasticities (in absolute value) exceeds one for a depreciation to improve the trade balance.

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Current Account Deficit

When a country’s imports of goods, services, and transfers exceed its exports and income receipts.

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Capital Account Convertibility

Freedom from restrictions on cross-border movements of capital.

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Purchasing Power Parity (PPP)

The theory that the nominal exchange rate adjusts so that identical goods cost the same in different countries.

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Law of One Price

The principle that identical goods should sell for the same price in different markets when expressed in a common currency.

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Trade Creation

A welfare-enhancing increase in intra-bloc trade resulting from formation of a free-trade area or customs union.

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Trade Diversion

A welfare-reducing shift of imports from lower-cost non-members to higher-cost members after forming a preferential trade agreement.

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North American Free Trade Agreement (NAFTA)

The 1994 free-trade agreement among the United States, Canada, and Mexico, replaced by USMCA in 2020.

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USMCA

The 2020 United-States–Mexico–Canada Agreement that updated and replaced NAFTA.

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Service Offshoring

Relocation of service activities to foreign locations, often via electronic transmission.

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Exchange Controls

Government restrictions on the purchase and sale of foreign currency.

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Interest Rate Parity Puzzle

The empirical finding that uncovered interest parity often fails due to persistent excess returns on carry trades.

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Official Settlements Balance

The net change in a central bank’s foreign assets, reflecting intervention to balance payments.

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Money Market

The market where short-term funds and monetary assets are lent and borrowed.

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Futures Contract

A standardized agreement to buy or sell a specified amount of a currency at a predetermined price on a set future date.

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Options Contract

A contract that gives the holder the right, but not the obligation, to buy (call) or sell (put) a currency at a specified price before a certain date.

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Dutch Disease

Economic harm caused when a booming resource sector leads to currency appreciation and declines in other export sectors.

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Marshallian Elasticities Approach

Analysis of how devaluation affects the trade balance based on price elasticities of exports and imports.

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Loanable Funds Theory

The theory that the real interest rate is determined by the supply of saving and the demand for investment.

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Optimum Tariff

A tariff rate that maximizes national welfare by exploiting a country’s market power in world trade.