International Political Economy Vocabulary

absolute advantage

the principle upon which Adam Smith first claimed that free trade benefits all countries; holds that a country benefits from trade when it produces a particular good at a lower cost (in terms of labor input) than it costs to produce the good in any other country

accelerationist principle

a central component of monetarist theories and first stated by Milton Friedman in the 1960s, it claims that a government can keep unemployment below the natural rate of unemployment only if it is willing to accept a continually increasing rate of inflation

antidumping

goverment investigations to determine whether a foreign firm is selling its products in international markets at a price that is below its cost of production

backward linkages

a term applied to the industrialization process that refers to instances when the creation of a domestic industry increases demand in domestic industries that supply inputs to the original industry

baker plan

proposed in 1985, this plan attempted to resolve the developing-country debt crisis through a combination of economic adjustment and additional lending

balance of payments

an accounting device that records a country’s international transactions; divided into two broad categories: the current account and the capital account

balance-of-payments adjustment

the use of government policies to correct a balance-of-payments deficit or surplus

big push

the state would plan and coordinate a substantial large investment to solve the market failures that structuralists believed inhibited rapid industrialization in developing societies

bilateral investment treaty

a legally binding agreement between two states that establishes the terms that govern private investment by residents of one state in the national jurisdiction of the other

brady plan

proposed in 1989, this plan attempted to bring the developing-country debt crisis to a close by encouraging commercial banks to negotiate debt reduction agreements with debtor governments

bretton woods compromise

a broad agreement among labor, business, and governments in the United States and Europe in which it was agreed to limit the extent of global market liberalism in order to provide greater economic security to industrial workers

bretton woods system

the international monetary system that was created in1944 at Bretton Woods, New Hampshire; based on fixed-but-adjustable exchange rates in an attempt to provide a stable international monetary system and at the same time allow governments to use monetary policy to manage the domestic economy

calvo doctrine

argues that no government has the right to intervene in another country to enforce the private claims of that government’s citizens

capital account

one of the two principal components of the balance of payments, it records all financial flows into and out of a particular country

central bank independence

the degree to which a country’s central bank can set monetary policy free from interference by the government; typically considered to be a function of three things: the degree to which the central bank is free to decide what economic objective to pursue, the degree to which the central bank is free to decide how to set monetary policy in pursuit of this objective, and the degree to which central bank decisions can be reversed by other branches of government

collective action problem

applies to instances in which the action of a number of individuals is required to achieve a common goal; the problem arises because people will not voluntarily invest time, energy, or money to achieve a common goal, but will instead allow others to bear those costs

comparative advantage

holds that a country has this in a good if it can produce that good more cheaply than it can produce other goods

complementary demand

a market failure structuralists believed would limit automatic industrialization

core labor standards

principles elaborated by the International Labor Organization that include the freedom of association, the right to bargain collectively, abolition of forced labor, non-discrimination in the workplace, and minimum employment age

current account

one of the two principal components of the balance of payments; it records all payments between the country and the rest of the world in connection with goods, services, income earned on foreign investments, royalties, licenses, unilateral transfer by private individuals, government expenditures on foreign aid, and overseas military spending

customs union

a form of regional trading arrangement in which member governments eliminate all tariffs on trade between members of the union and create a common tariff that is imposed on goods entering any member country of the union from countries outside the union

debt-service capacity

the ability of a country to make payments of interest and principal on foreign debt

debt-service ratio

the percentage of a country’s export earnings that must be devoted to payments of interest and principal on foreign debt

devaluation

a reduction in a currency’s value within a fixed or fixed-but-adjustable exchange-rate system

dollar overhang

foreign holdings of dollars and dollar-denominated assets in excess of U.S. holdings of monetary gold necessary to redeem foreign dollar holdings

domestic safeguards

clauses in the General Agreements on Tariffs and Trade that allow governments to temporarily suspend tariff reductions they have made previously when a domestic industry is being threatened by a sudden surge of imports

dual economy

an economy that is organized into two distinct sectors, one being a high-wage economy and one being a low-wage economy, that have very few connections between them

easy import substitution industrialization

the first stage of import substitution industrialization that focused on developing domestic capacity to produce consumer nondurable manufactured goods

economies of experience

the cost of producing a good fall as workers and managers gain the specific skills as a consequence of producing the good

economies of scale

reductions in the unit cost of producing a good caused by increases in the number of goods produced

efficiency-oriented investment

one of the three types of foreign direct investment by a foreign firm in the local economy made in order to use the locally abundant factor in production oriented toward the global market

enforcement problem

in the anarchic international state system, governments cannot be certain that other governments will comply with the trade agreements that they conclude

Engel’s law

law asserting that people spend smaller percentages of their total income on food and other primary commodities as their incomes rise

environmental Kuznets curve

a posited inverted U-shaped relationship between per capita income and environmental degradation

exchange rate misalignment

large and persistent gaps between the “correct” or equilibrium exchange rate and the actual (or market-determined) exchange rate

exchange-rate system

a set of rules that together specify the amount by which currencies can appreciate and depreciate in the foreign exchange market

exchange restrictions

government regulations controlling the private use of foreign exchange

Exon-Florio Amendment

an amendment to the United States 1988 Omnibus Trade Act that allows the executive to block foreign acquisitions of American firms for reasons of national security

export-oriented strategy

a development strategy in which emphasis is placed on producing manufactured goods that can be sold in international markets

export-processing zones

industrial estates where the government provides land, utilities, transportation infrastructure, and, in some cases, buildings to the investing firms, usually at subsidized rates; often established by developing countries to attract foreign direct investments by multinational corporations

export substitution strategy

a development stage in which labor-intensive manufactured goods produced as a consequence of easy import substitution industrialization take the place of primary commodities in exports

externality

market failures that arise when the parties to a given transaction do not bear the full cost of or realize the full benefit from their transaction; can be negative or positive

factor endowments

the amount of land, labor, and capital a country has available

factor mobility

the ease with which factors of production can move from one industry to another

factor model

a political model that argues that the politics of trade policy is characterized by competition between labor and capital

factor-price equalization (Stolper - Samuelson theorem)

in open economies, international trade will cause the price of the factors of production to equalize; in a two-country world, the price of each country’s scarce factor will fall, whereas the price of each country’s abundant factor will rise; eventually, the price of labor will be the same in both countries and the price of capital will be the same in both countries

factors

the basic tools of production, including labor, land, and capital

fast track

the domestic political process setting the terms under which the United States participates in international trade negotiations and ratifies the resulting agreements

fiscal policy

the use by the government of tax and spending policies to manage domestic demand; an expansionary one will boost domestic demand, thereby raising economic output; a restrictive one will reduce domestic demand, thereby lowering economic output

fixed-but-adjustable exchange-rate system

a system in which governments establish a central or official rate for their currency against some standard, as in a fixed exchange-rate system, but are also allowed to change the official rate occasionally, usually under a set of well-defined circumstances

fixed exchange-rate system

a system in which governments establish a central or official rate for their currency, usually expressed in terms of some standard

floating exchange-rate system

a system in which governments do not establish a central or official rate for their currency and are under no obligation to engage in foreign exchange market intervention to influence the value of their currency

foreign direct investment

a form of cross-border investment in which a resident or corporation based in one country owns a productive asset located in a seconf country

foreign exchange market

the market in which national currencies are traded

foreign exchange reserves

government holdings of other countries’ currencies

free-trade area

a regional trading arrangement in which governments eliminate all tariffs on goods imported from other members, but retain independent tariffs on goods imported from non-members

fundamental disequilibrium

imprecisely defined, the balance-of-payments conditions that must pertain in order for a government to alter its central parity against gold in the Bretton Woods system

General Agreement on Tariffs and Trade

an international agreement concluded in 1947 establishing rules that regulate national trade policies

Gini coefficient

a metric employed to estimate income inequality; ranges from 0 to 1, with higher values reflecting greater inequality

Heckscher - Ohlin model

a model of the determinants of comparative advantage that argues that comparative advantage arises from cross-national differences in factor endowments

hegemonic stability theory

a model that hypothesizes that the global economy will be open and stable when a hegemon exists and will tend toward protectionism, instability, and crisis when no hegemon exists

hegemony

a particular distribution of power in the international state system characterized by the existence of one country whose power capabilities are substantially greater than the next-most-powerful country or countries

horizontal integration

a form of industrial organization that occurs when a corporation creates multiple production facilities, each of which produces the same good or goods

hot money

financial capital held in short-term instruments that can be quickly liquidated at the first sign of financial trouble

industrial policy

an assortment of government policies used to channel resources away from some actors and industries and direct them toward those actors and industries the government wishes to promote

income inequality

broad term used to characterize how income generated by market activity is distributed across a given population

infant-industry case for protection

a theoretical justification for protection that applies to cases in which a country’s newly created firms (infants) could not initially compete against foreign producers in an established industry, but would be able to do so eventually if they were given time to mature

intangible asset

something whose value is derived from knowledge or from skills or production processes of a firm

intellectual property

creations of the mind used in commerce

intergovernmental bargaining

the process through which governments negotiate the agreements with which they regulate their interaction in the global economy

international investment position

the difference between the value of a country’s holdings of foreign assets and the value of its foreign liabilities

Keynesianism

an approach to macroeconomic policy that places primary emphasis on using fiscal and monetary policies to manage domestic demand in order to maintain full employment

liberalism

a traditional school of political economy that emergedin Britain during the eighteenth century as a challenge to mercantilism; asserts that the purpose of economic activity is to enrich individuals and that the state should thus play little role in the economic system

liquidity problem (or crisis)

situation that arises in financial markets in which a financial institution or other actor is solvent (assets are greater than liabilities) but cannot readily trade its assets for the cash required to settle a liability

locational advantage

country characteristics that create incentives for a foreign corporation to invest in the country

locational incentives

offered by governments to multinational corporations, they are designed to reduce the costs of, and thereby increase the return from, a particular investment

macroeconomic policy

the use of fiscal and monetary policy to influence aggregate economic activity in the national economy

macroeconomic stabilization

the correction, through various policy programs, of macroeconomic imbalances that are producing high and rising inflation

managed float

a form of floating exchange-rate system in which governments occasionally intervene in foreign exchange markets to try to influence the value of their currency

market liberalism

a core principle of the World Trade Organization that asserts that an open or liberal international trade system raises the world’s standard of living

market-oriented investment

one of the three types of foreign direct investment by a foreign firm in the local economy made in order to gain access to consumers (the market) within the host economy

Marxism

a school of political economy originating in the nineteenth-century work of Karl Marx; asserts that politics is dominated by distributional conflict between social groups, and that social groups are defined by economic structure

mercantilism

a traditional school of political economy dating from (at least) the seventeenth century; asserts that power and wealth are inextricably connected; argues that governments structure their international economic transactions in order to enhance their power relative to other states and domestic society

monetary policy

changes in the country’s money supply undertaken in an attempt to manage aggregate economic activity

monetary union

an exchange-rate system in which governments permanently fix their exchange rates and introduce a single currency

multinational corporation

a company that has ownership and manages production facilities in two or more countries

Nash equilibrium

an outcome in a game theoretic model in which none of the players has an incentive to change their strategy unilaterally

natural rate of unemployment

the economy’s long-run equilibrium rate of unemployment, or the rate of unemployment to which the economy will return after a recession or a boom

non-tariff barrier

any of a number of policy or structural impediments to trade other than tariffs

nontraded-goods sector

sector containing all economic activities that do not enter into international trade, either because the good is too costly to transport or because in some cases the good or service must be performed locally

obsolescing bargain

explains how a multinational corporation and a host country government divide the income generated by a multinational corporation’s investment in the host country; asserts that the multinational corporation has a bargaining advantage in the pre-investment negotiations

oligopoly

a market dominated by a few producers

Pareto suboptimal

a status quo in which at least one member of society can be made better off without making any other member of society worse off

percuniary externality

a market failure structuralists believed would limit automatic industrialization that arises from the interdependence of economic activities

performance requirement

a target imposed on the local affiliate of a multinational corporation by the host-country government in order to promote a specific economic objective

Phillips curve

curve that posits a tradeoff between inflation and unemployment

regional trading agreements

trade agreements in which tariffs discriminate between members and nonmembers

remittances

income or money that foreign workers send back to their country of origin

Ricardian Model

a model of gains from international trade in which comparative advantage arises from cross-national differences in labor productivity, differences that, in turn, are typically due to differences in technology

sectoral model

a political model that argues that the politics of trade policy is characterized by competition between import-competing and export-oriented industries