AP Macroeconomics Unit 6 Vocabulary

absolute advantage

the advantage conferred by the ability to produce more of a good or service with a given amount of time and resources; not the same thing as comparative advantage

appreciation

occurs when a currency becomes more valuable in terms of other currencies

balance of payments accounts

a summary of a country's transactions with other countries

balance of payments on goods and services

the difference between the value of a country's exports and the value of its imports during a given period

capital inflow

the total inflow of foreign funds minus the total outflow of domestic funds to other countries

capital intensive commodities

commodities that require relatively large amounts of money and other financial resources in its production

capital outflow

the movement of assets out of a country (considered undesirable)

comparative advantage

the advantage conferred by an individual if the opportunity cost of producing the good or service is lower for that individual than for other people (one of the reasons we have trade)

current account

a country's balance of payments on goods and services plus net international transfer payments and factor income

depreciation

occurs when the value of an asset is reduced by wear, age, or obsolescence or when a currency becomes less valuable in terms of other currencies

devaluation

a reduction in the value of a currency that is set under a FIXED exchange rate regime

(a _______ makes goods cheaper in terms of foreign currency=higher exports. Also makes foreign goods more $$ in terms of domestic currency; increases balance of payments on current account. increases AD and can reduce recessionary gap)

domestic price

the current price for a specific good or service in an economy

dumping

______ is, in international trade, the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market.

(as dumping usually involves substantial export volumes of the product, it often has the effect of endangering the financial viability of manufacturers/producers of the product in the importing nation)

equilibrium exchange rate

the exchange rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied

European Union (EU)

a group of European countries that participates in the world economy as one economic unit and operates under one official currency, the euro.

the EU's goal is to create a barrier-free trade zone and to enhance economic wealth by creating more efficiency within its marketplace

exchange market intervention

government purchases or sales of currency in the foreign exchange market (to keep the exchange rate fixed)

exchange rate regime

a rule governing policy toward the exchange rate (fixed or floating)

exchange rates

the prices at which currencies trade

financial account

the difference between a country's sales of assets to foreigners and its purchases of assets from foreigners during a given period

fixed exchange rate

an exchange rate regime in which the government keeps the exchange rate against some other currency (usually USD or euros) at or near a particular target

floating exchange rate

an exchange rate regime in which the government lets the exchange rate go wherever the market takes it

foreign exchange controls

licensing systems that limit the right of individuals to buy foreign currency (to hold exchange rate fixed)

foreign exchange market

the market in which currencies are traded

foreign exchange reserves

stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market (see exchange market intervention)

G-7 nations (G-8 when Russia's allowed)

______: a forum of the world's seven most industrialized economies (France, Germany, Italy, Japan, U.S., U.K., Canada)

___ officials meet periodically to discuss international economic and monetary issues, with the semi-annual meetings in particular being the focus of much media attention

general agreement on tariffs and trade (GATT)

a treaty created following the conclusion of World War II. The _____ was implemented to further regulate world trade to aid in the economic recovery following the war

_____'s main objective was to reduce the barriers of international trade through the reduction of tariffs, quotas and subsidies

import quota

a limit on the quantity of a good that can be imported within a given period

international monetary fund (IMF)

the ___ is an international organization created for the purpose of standardizing global financial relations and exchange rates

the ___ generally monitors the global economy, and its core goal is to economically strengthen its member countries

1. promotes global monetary and exchange stability.

2. facilitates the expansion and balanced growth of international trade.

3. assists in the establishment of a multilateral system of payments for current transactions.

labor intensive commodities

commodities that require a relatively large amount of labor to be produced

land intensive commodities

commodities that require a relatively large amount of land to be produced

north american free trade agreement (NAFTA)

a regulation implemented (1/1/94) in MX, Can, and the U.S. to eliminate most tariffs (esp. tariffs related to agriculture, textiles, and automobiles) on trade between these nations.

purpose: to encourage economic activity between participant countries

protectionism

the practice of limiting trade to protect domestic industries

purchasing power parity

(between two countries' currencies) the nominal exchange rate at which a given basket of goods and services would cost the same amount in each country (Big Mac index)

real exchange rate

exchange rates adjusted for international differences in aggregate price levels (to take account of the effects of differences in inflation rates)

revaluation

an increase in the value of a currency that is set under a fixed exchange rate regime

(decreases balance of payments on current account; lowers aggregate demand and can reduce an inflationary gap)

tariffs (protective tariff versus revenue tariff)

taxes on imports

protective: a duty imposed on imports to raise their price, making them less attractive to consumers and thus protecting domestic industries from foreign competition

revenue: a tariff imposed principally to raise government revenue rather than to protect domestic industries

terms of trade

indicate the rate at which one good can be exchanged for another

trade balance

the calculation of a country's exports minus its imports

(largest component of a country's balance of payments)

trade deficit

an economic measure of a negative balance of trade in which a country's imports exceeds its exports

represents an outflow of domestic currency to foreign markets

trade surplus

an economic measure of a positive balance of trade, where a country's exports exceeds its imports

represents a net inflow of domestic currency from foreign markets, and is the opposite of a trade deficit, which would represent a net outflow

world price

the current price at which an asset or service can be bought or sold (international (production?) prices)

world trade organization

an international organization dealing with the global rules of trade between nations. its main function is to ensure that trade flows as smoothly, predictably, and freely as possible