Chapter Two

Reality about capital movements

have replaced trade as the driving force of the world economy

Reality about production

has become “uncoupled” from employment

Reality about world economy

dominates the scene; individual country economies play a subordinate role

Reality about 100-year

struggle between capitalism and socialism that began in 1917 is largely over

Reality about growth of e-commerce

diminshes the importance of national barriers and forces companies to reevaluate their business models

7 billion people

estimate of people in the world that use smartphones

Market capitalism

individuals and firms allocate resources and production resources are privately owned

Centrally planned socialism

characterized by command resource allocation and state resource ownership; the state has broad powers to serve the public interest as it sees fit

Centrally planned capitalism

characterized by command resourced allocation and private resource ownership

Market socialism

characterized by limited market resource allocation within an overall environment of state ownership

Gross national income

measure of a nation’s economic activity that includes gross domestic product plus income generated by non-resident sources; serves as a basis for categorizing countries in the World Bank’s four-category classification system of economic development stage

Low-income countries

limited industrialization, high birth rates with short life expectancy, low literacy rates, political instability and unrest; $1,135 >

Low-middle-income countries

consumer markets here are expanding rapidly, relatively low-cost and high motivated labor forces; $1,136 to $4,465

Upper-middle-income countries

urbanization increases as people move to industrial sector, high literacy rates, strong educational systems, rising wages; $4,466 to $13,845

High-income countries

A.K.A industrialized or postindustrial countries, the service sector accounts for more than half of national output; > $13,846

Balance of payments

record of all economic transactions between the residents of a country and the rest of the world; current & capital accounts

Current account

record of all recurring trade in merchandise and services, private gifts, and public aid transactions between countries

Capital account

record of all long-term direct investment, portfolio investment, and other short-and-long term capital flows

Trade deficit

experienced by a country where the outflow of money to pay for imports exceeds the inflow of money from sales of exports

Trade surplus

experienced by a country where the inflow of money from exports exceeds the outflow of money to pay for imports

China

has more than $3 trillion in foreign reserves, the most of any nations

World production

since the end of WWII world merchandise trade has grown at a faster rate than this

Trade in services

globally, the fastest-growing sector of world trade

United States

nation that is the world’s leading services trader

Devaluation

decline in value of a currency relative to other currencies

Revaluation

strengthening of a country’s currency

Hedging

investment made to protect a company from possible financial losses due to fluctuating currency exchange rates

Forward market

mechanism for buying and sellling currencies at a preset price for future delivery

Put option

right to sell a specified number of foreign currency units at a fixed price, up to the option’s expiration date

Call option

right to buy a specified amount of foreign currency at a fixed price, up to the option’s expiration date