Global Economy and Politics

Globalization

The increasing integration of national economies, societies, and cultures through trade, investment, migration, technology, and information flows.

Hyperglobalization

An intensified phase of globalization characterized by extremely high cross-border flows of goods, capital, and production fragmentation, often driven by low trade barriers and global supply chains.

Specialization

When countries or firms focus on producing goods or services they can produce most efficiently.

Comparative advantage

A country’s ability to produce a good at a lower opportunity cost than another country, even if it is absolutely less productive.

Price gap

The difference between the domestic price of a good and the international (world) price—often caused by trade costs or barriers.

Trade costs

All costs that make international trade more expensive than domestic trade (tariffs, transport costs, regulations, language barriers, etc.).

Arbitrage

Buying a good or asset where it is cheap and selling it where it is more expensive to profit from the price difference.

Globalization I and II

• Globalization I (1870–1914): First major wave driven by steamships, telegraph, gold standard, falling transport costs.

• Globalization II (post-1950): Second wave driven by trade liberalization, containerization, and global value chains.

Tariff

A tax on imported goods.

Trade deficit

A situation where a country's imports exceed its exports, meaning it buys more goods and services from other countries than it sells to them. This results in a negative balance of trade and can be influenced by factors like a strong domestic currency, high consumer demand, or appealing investment environments, but it does not automatically indicate economic weakness. 

Gains from trade

The economic benefits (higher consumption, variety, efficiency) that countries obtain by specializing and trading according to comparative advantage.

Current Account (CA)

A component of the balance of payments recording:
(1) trade in goods and services,
(2) income flows (interest, dividends, wages),
(3) transfers (aid, remittances).

CA deficit

When a country imports more than it exports (spending > income). It must borrow from abroad or sell assets.

CA surplus

When a country exports more than it imports (income > spending). It invests abroad or accumulates foreign assets.

Net capital flows

Financial flows between countries; the opposite of the current account:

• CA deficit → net capital inflow

• CA surplus → net capital outflow

Foreign direct investment (FDI)

Investment where the investor gains lasting control or influence over a foreign firm (≥10% ownership).

Foreign portfolio investment

Investment in foreign financial assets (bonds, stocks) without control over the enterprise.

Economies of agglomeration

Productivity advantages that arise when firms and workers cluster geographically (knowledge spillovers, shared suppliers, large labor pools).

Infant industries

New domestic industries that may need temporary protection because they are not yet competitive but have long-term potential.

Gini coefficient

A measure of income or wealth inequality (0 = equality, 1 = maximum inequality).

Market income

Income before taxes and transfers (wages, capital income).

Disposable income

Income after taxes and transfers; what households can spend or save.

Final income

Disposable income plus in-kind benefits (healthcare, education, public services).

Lorenz curve

A graphical representation of the distribution of income or wealth, showing cumulative share of population vs cumulative share of income.

Endowment

The initial resources households or individuals have (skills, assets, land, capital).

Labour market segmentation

When the labor market is divided into distinct groups (e.g., insiders/outsiders) with different wages, stability, and opportunities.

Predistribution

Policies aimed at influencing market outcomes before taxes and transfers (education, labor institutions, competition policy).

Redistribution policies

Policies that change income after the market outcome (taxation, social benefits, transfers).

Progressive policies

Policies where richer individuals pay proportionally more (e.g., progressive income taxes).

Regressive policies

Policies where poorer individuals pay a higher share of income (e.g., consumption taxes).

Categorical inequality

Inequality between defined social groups (gender, ethnicity, class origin) rather than individuals. 

Intergenerational elasticity (IGE)

A measure of economic mobility: the degree to which children’s incomes depend on their parents' incomes (high IGE = low mobility).

Inequality aversion

The degree to which individuals or societies prefer more equal income distributions.

Minimum wage

A legal floor under the wage rate that employers must pay.

Abatement

Reducing pollution or environmental harm through actions or technologies.

Abatement policies

Government measures that enforce or incentivize pollution reduction (carbon taxes, regulations).

Natural resources and reserves

• Resources: Total amount of a natural resource in existence.

• Reserves: The portion that is economically and technologically feasible to extract.

Global greenhouse gas abatement cost curve

A ranking of mitigation options by cost and potential emissions reduction.

Marginal productivity of abatement expenditures

The reduction in emissions gained from spending one more unit of resources on abatement.

Price- and quantity-based environmental policies

• Price-based: Taxes or fees that set the price of pollution (e.g., carbon tax).

• Quantity-based: Caps or limits on emissions (e.g., cap-and-trade).

Cap and trade

A policy that sets a total emission cap and allows firms to trade emission permits.

Contingent valuation

A survey-based method for estimating the value people place on non-market goods (e.g., clean air).

Hedonic pricing

Estimating environmental values using market price differences (e.g., housing prices near green spaces).

Discounting future generations’ costs and benefits

Adjusting future costs/benefits to present value; central to climate policy debates.

The polluter pays principle

The party responsible for pollution should bear the cost of managing and reducing it.

Tipping point, disequilibrium process

• Tipping point: A threshold after which environmental or economic outcomes shift dramatically.

• Disequilibrium process: An adjustment away from stable equilibrium (e.g., climate feedback loops).

Prudential policy

Policies designed to prevent or reduce systemic risks (financial, environmental, political) before they occur.

Government, governing elite

• Government: Institutions that hold political authority and make public policy.

• Governing elite: A small group of individuals with disproportionate political and economic power.

Economic accountability, political accountability, democratic accountability

• Economic accountability: Government is judged on economic outcomes.

• Political accountability: Leaders can be sanctioned or removed for poor performance.

• Democratic accountability: Citizens influence policy through elections and participation.

Political rents

Benefits (money, privileges, power) obtained through political influence rather than productive activity.

Median voter model

A theory that in majority voting, policy outcomes reflect the preferences of the median voter.

Short-termism

When political or economic decision-makers prioritize immediate gains over long-term benefits.

Economic feasibility, administrative feasibility

• Economic feasibility: Whether a policy’s benefits outweigh its costs.

• Administrative feasibility: Whether institutions have the capacity to implement and enforce it.