International Business: Regional Integration, Foreign Exchange, and the International Monetary System

Comprehensive vocabulary flashcards covering Regional Economic Integration (Chapter 9), The Foreign Exchange Market (Chapter 10), and The International Monetary System (Chapter 11) from International Business.

Regional Economic Integration

Agreements among countries in a geographic region to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other.

Free Trade Area

A level of economic integration in which all barriers to the trade of goods and services among member countries are removed, while each country retains the right to determine its own trade policies regarding nonmembers.

European Free Trade Association (EFTA)

A free trade area established among Norway, Iceland, Liechtenstein, and Switzerland that focuses on free trade in industrial goods.

Customs Union

A level of economic integration that eliminates trade barriers between member countries and adopts a common external trade policy toward nonmembers.

Common Market

A level of economic integration that has no barriers to trade among member countries, includes a common external trade policy, and allows factors of production (such as labor and capital) to move freely among members.

Economic Union

A level of economic integration that involves the free flow of products and factors of production among member countries, the adoption of a common external trade policy, a common currency, harmonization of tax rates, and the sacrifice of national sovereignty to a coordinating bureaucracy.

Political Union

A central political apparatus that coordinates the economic, social, and foreign policy of member states, representing the culmination of ever-closer economic integration.

Trade Creation

An economic outcome that occurs within a free trade area when high-cost domestic producers are replaced by low-cost producers within the trade bloc.

Trade Diversion

An economic outcome that occurs within a free trade area when low-cost external suppliers are replaced by higher-cost suppliers within the trade bloc.

European Commission

An EU governing body responsible for proposing EU legislation, implementing it, monitoring compliance, and policing competition policy by restricting anti-competitive mergers and acquisitions.

European Council

The ultimate controlling authority within the European Union, consisting of one representative from the government of each member state.

European Parliament

An elected EU body composed of 705 members that debates legislation proposed by the European Commission and forwarded to it by the European Council.

Court of Justice

The supreme appeals court for European Union law, consisting of one judge from each member country.

Single European Act

An agreement adopted in 1987 designed to establish a true single market by removing frontier controls, applying mutual recognition of product standards, opening public procurement, lifting financial barrier competition, and abolishing cabotage restrictions.

Maastricht Treaty

A treaty agreed to in 1991 that committed member states of the European Union to adopt a common currency, the euro.

Optimal Currency Area

A geographic region whose similarities in economic structure and activity make it feasible to adopt a single currency and a unified exchange rate as an instrument of macroeconomic policy.

North American Free Trade Agreement (NAFTA)

A 1994 free trade agreement between Canada, Mexico, and the United States that eliminated tariffs on 99 percent of goods traded, removed barriers to cross-border flows of services, and protected intellectual property rights.

United States–Mexico–Canada Agreement (USMCA)

The trade pact renegotiated to replace NAFTA, requiring automakers to produce 75 percent of vehicle content in North America, mandating that 40 percent of tariff-free vehicle parts come from high-wage factories, and opening the Canadian dairy market to U.S. producers.

Andean Community

A South American trade bloc formed in 1969 based on the EU model, comprising Bolivia, Colombia, Ecuador, and Peru, which signed an agreement in 2005 with Mercosur to restart negotiations for a free trade area.

Mercosur

A South American trade pact originating in 1988 between Brazil and Argentina, which expanded to include Paraguay and Uruguay, and later suspended Venezuela in 2016.

Association of Southeast Asian Nations (ASEAN)

A regional alliance established in 1967 comprising Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam aimed at fostering freer trade and industrial cooperation.

Foreign Exchange Market

A global electronic network of banks, brokers, and foreign exchange dealers used to convert the currency of one country into that of another and provide insurance against foreign exchange risk.

Spot Exchange Rate

The exchange rate at which a foreign exchange dealer converts one currency into another currency on a particular day, determined by the continual interaction of supply and demand.

Forward Exchange Rate

The exchange rate governing future transactions in which two parties agree to exchange currency and execute the transaction at a specified future date (typically 30, 90, or 180 days ahead).

Currency Swap

The simultaneous purchase and sale of a given amount of foreign exchange for two different value dates, commonly transacted as a spot exchange against a forward exchange.

Arbitrage

The practice of buying securities or currency in one market for immediate resale in another market to profit from an existing price discrepancy.

Law of One Price

The principle stating that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when expressed in terms of the same currency.

Purchasing Power Parity (PPP)

An economic theory stating that the exchange rate between currencies is in equilibrium when the price of an identical basket of goods is roughly equivalent in each country.

Fisher Effect

The economic hypothesis stating that nominal interest rates ($i$) in each country equal the required real interest rate ($r$) plus the expected rate of inflation ($I$): $i = r + I$.

International Fisher Effect (IFE)

The proposition that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in their nominal interest rates: $\frac{S_1 - S_2}{S_2} \times 100 = i_{\$} - i_{\yen}$.

Bandwagon Effect

A short-term currency movement driven by investor psychology where traders move like a herd in the same direction at the same time, triggering large shifts unrelated to macroeconomic fundamentals.

Efficient Market

A market in which prices reflect all available public information, implying that forward exchange rates are unbiased predictors of future spot rates.

Fundamental Analysis

An approach to exchange rate forecasting that relies on econometric models incorporating macroeconomic variables such as money supply growth, inflation rates, interest rates, and balance-of-payments data.

Technical Analysis

An approach to exchange rate forecasting that uses historical price and volume data to identify recurring past trends and waves that are predicted to continue into the future.

Freely Convertible Currency

A country's currency status when its government permits both domestic residents and nonresidents to purchase unlimited amounts of foreign currency with it.

Externally Convertible Currency

A currency status where the government places limitations on conversion, such as restricting who can convert holdings of domestic currency into foreign currency without limits.

Nonconvertible Currency

A currency status in which neither residents nor nonresidents are allowed by the government to convert domestic currency holdings into a foreign currency.

Capital Flight

A rapid conversion and outflow of domestic currency into foreign currencies by residents and nonresidents, typically precipitated by severe domestic currency depreciation or economic crisis.

Countertrade

A range of barter-like commercial agreements by which goods and services are directly traded for other goods and services to overcome currency nonconvertibility.

Transaction Exposure

The extent to which the income from individual international financial transactions is affected by fluctuations in foreign exchange values.

Translation Exposure

The impact of currency exchange rate fluctuations on the reported financial statements and consolidated balance sheet of a multinational corporation.

Economic Exposure

The extent to which changes in exchange rates affect a firm's long-term future international earning power and cash flows.

Lead Strategy

A technique to reduce transaction exposure by collecting foreign currency receivables early when that currency is expected to depreciate, or paying foreign currency payables early before that currency appreciates.

Lag Strategy

A technique to reduce transaction exposure by delaying the collection of foreign currency receivables if that currency is expected to appreciate, or delaying payables if the currency is expected to depreciate.

International Monetary System

The institutional arrangements and rules countries adopt to govern exchange rates across the global economy.

Floating Exchange Rate Regime

An international exchange rate regime in which the foreign exchange market and forces of supply and demand freely determine the relative value of a currency.

Pegged Exchange Rate

An exchange rate regime where the value of a currency is fixed relative to a reference currency, such as the U.S. dollar, moderating inflationary pressures.

Managed-Float System

An exchange rate regime where a currency's value is determined primarily by market forces but is managed through government intervention when the currency moves too rapidly; also known as a dirty-float system.

Fixed Exchange Rate

A system under which the values of a set of currencies are fixed against each other at a mutually agreed-on exchange rate, imposing monetary discipline and curbing inflation.

Dollarization

The process by which a nation completely abandons its domestic currency to adopt another country's currency (most commonly the U.S. dollar).

Gold Standard

A monetary standard dating back to 1880 in which currencies were pegged to gold and guaranteed convertibility into gold at a specified par value.

Gold Par Value

The specific amount of a given currency needed to purchase one ounce of gold under the gold standard.

Balance-of-Trade Equilibrium

A state achieved when the income a nation's residents earn from exports equals the money paid by residents for imports, automatically facilitated under the gold standard.

Bretton Woods System

A 1944 conference agreement that established a fixed exchange rate system centered on the U.S. dollar convertible to gold at $35\,\text{per ounce}$, created the IMF and the World Bank, and curbed competitive devaluations.

International Monetary Fund (IMF)

A multinational institution created at Bretton Woods tasked with maintaining order in the international monetary system, maintaining exchange rate discipline, and providing liquidity and loans to nations during financial crises.

World Bank

An international development bank founded at Bretton Woods to assist with post-World War II reconstruction of Europe and later shifted to funding long-term economic development projects in developing nations.

Jamaica Agreement

A 1976 international agreement that officially revised the IMF rules to declare floating exchange rates acceptable, abandoned gold as an official reserve asset, and increased IMF quotas to $41\,\text{billion}$.

Louvre Accord

An agreement reached in 1987 by major industrialized economies pledging to support the stability of exchange rates around current levels via coordinated government interventions.

Currency Board

A national monetary authority that commits to converting domestic currency on demand into another foreign currency at a fixed rate, backed by foreign exchange reserves equaling at least 100 percent of issued domestic currency.

Currency Crisis

A situation where a speculative attack on the exchange value of a currency results in sharp depreciation or forces authorities to expend large reserves and dramatically increase interest rates.

Banking Crisis

A financial condition characterized by a severe loss of confidence in the banking system, leading to bank runs as individuals and companies rush to withdraw their deposits.

Foreign Debt Crisis

A crisis occurring when a country cannot service its foreign debt obligations, whether incurred by the public sector or private corporations.

Moral Hazard

A situation in which individuals, banks, or governments behave recklessly or take excessive risks because they know they will be bailed out or protected if things go wrong.