_axL_

(OMPREHENJIVE
[)ICTI()~Al2'"
~~~~(Jf~~~~

ECONOMICS
Chief Editor & Compiler:
Nelson Brian

~
ABHISHEK
All rights reserved. No part of this book may be reproduced in any
form, electronically or otherwise, in print, photoprint, micro film or
by any other means without written permission from the publisher.

ISBN : 978-81-8247-031-6
ISBN 8/ -8247-03 /-5

Copyright Publisher
First Edition 2009
2004

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Preface

Economics is the science that deals with the production,

distribution and consumption of wealth. It studies the
various problems oflabour, finance, taxation, etc. and tries
to find a solution or the best possible way to tackle these
problems. The subject not only deals with the present and
future growth of a country's economy at the micro level,
like the consumption of a household or an individual [trm,
but also studies the same at a bigger and more complex
level or the macro level, like the national income or the
production of an industry. The job of the economists is to
identify the economic problems of a country's economy
and find solutions for the same, thereby promoting a healthy
and smooth economic growth.
There are two schools of thoughts in economics, viz. the
Classical and the Modern. The economists belonging to
these two schools have contributed a lot in the field of
economics through a number of theories. But, as the hu-
man wants are endless, so are the economic problems un-
ending and therefore, economists are continuously work-
ing towards finding solutions for these new problems.
The dictionary is made with the intent of providing the
readers with a handy referral for the terminology used in
the subject. The dictionary covers almost all the terms
that form a part and parcel of economics in simple and
easily comprehensible language. In order to enhance the
readers knowledge and bring about more relevance, many
examples and pictures have been used along with the defi-
nitions of the terms.
II a foir trader / foir traders I accelera~t:lepreciation 5

- a fair trader / fair traders ~ and government) of a country,

contrasted with free trader, a ; in contrast to the total demand
fair trader is a holder of the ~ for that country's output.
point of view that one's country's : _ absorption approach
government must prevent ~or- ~ a way of understanding the fac-
eign companies from havmg ; tors of the balance of trade,
artificial advantages over do- : noting that it is equal to the
mestic ones. l b
: earnings '
less a sorptIon.
- abilene principle ~ _ abstinence
a description of a group's inabil- ~ the giving up of the current con-
ity to solve their disagreement. ; sumption in order to increase
Nobody wants to reach a par- : the future consumption. It is
ticular destination (Abilene), ~ often characterised by directing
for fear of offending or contra- ; the available resources towards
dicting each other. : the production of capital goods.
- absolute advantage ~ Due to this, the future produc-
1. a term used in the interna- ; tion of the consumer ...,goods will
tional trade theory, as per which ~ increase.
a country specialises in produc- : _ abundant factor
ing such goods and services that ~ the factor which is available in
it is able to produce more ~ffi- ~ abundant supply in a country
ciently (more output per urut of ; relative to other countries. Can
input) than any other country : be defmed both with respect to
2. the ability of a country to pr?- ~ quantity and price.
duce a good at lower cost, m i l d d . . tion
terms of real resources, than : - acce ~ra~e eprecla
th
ano er cuntryo . In a Ricardian I
. depreCIatlOn
. d ha new
of ' asseth
model, cost is in term of only ; over a peno t at ISalmTuch
Ia bour. . shorter
' . than the. norm.
th d I e
I firms operatIng m e eve op-
- absorption : ing areas usually. follow this
the sum-total of demands for :I method of depreCIatIOn. .

goods and services by all resi- I

dents (consumers, producers

Economics======= II
",,6===========~tinginJlatUm I accepting house II
• accelerating inflation
a sudden inflation rate increase.
It is the result of the
government's efforts to hold the
employment level below its
natural rate.
• acceleration principle;
accelerator
indicative of a relationship be-
.tween income and output and
the investment effects associ-
ated with the changing output.
The size of the accelerator de-
pends on the marginal capital/
output (C/O) ratio (i.e. how
much new investment is needed
in response to the changing de-
mand for output) and on a va-
riety of other factors influenc-
ing investment decisions.
• accelerator
the process in which demand
change for the consumer goods
leads to an even larger demand
change for the capital equip~
ment used to produce them.
II ========E&onomics
I • accelerator co-efficient
I states that any increase in the
output is always accompanied
by a corresponding increase in
I the capital, like machinery etc.,
that is used to produce it. The
incremented capital output ra-
I tio depicts the amount of capi-
tal that should be increased in
order to raise an additional unit
I of output.
I • accelerator principle
I states that the aggregate net
investment level is dependent
on the expected change in out-
I put .
I • acceptance credit
a way of payment in interna-
tional trade. In case the accept-
I ing house finds the credit of a
I foreign import merchant satis-
factory, it may open an accep-
I tance credit for him in say New
I York.
I • accepting house
the establishments whose busi-
ness is to accept or guarantee
I bills of exchange. Such establish-
ments may also be involved ·in
several other services and func-
I tions.
IIIICUSS / accessibility I accounts receiV:============7
• access / accessibility ~ cepted or endorsed to make
term expressing the ease with ; some cash available for a short
which a location can be reached : term, without receiving any
and interacted with from other ~ goods in return. The sole pur-
locations. ~ pose of this is of discounting

• acc~sion rate ; • accommodation endorse-

also known as the hiring rate, I ment
i.e. the total number of employ- : the endorsing of a note or any
ees added to the payroll in a ~ other bill of credit by one indi-
given period of time. It acts as ; vidual to another in order to
an important indicator of the : grant him the right to obtain a
future business conditions. I loan.

~ • accounts payable
I the amount that a business
: owes to its suppliers and other
~ parties, generally a period of 10
I to 90 days is taken as standard

. to pay for the goods already

transported .
... ---_
......
..... ... _-
~ ~ _1Aow. ..... c.- ___
Il" ""' ..... ,..- ...... __ "
: .: ~

....

• accessions tax
the tax on the receiver of gifts I

and inherited property, it is lev-

ied by the government.
• accommodating move-
ments
the transferring of gold and con- I • accounts receivable
vertible currency aboard by a ; the amount that a business is
country in order to meet its bal- : entitled to receive from its cus-
ance of payment deficits. ~ tomers, generally a period of
• accommodation bill ; 10 to 90 days is taken as stan-
that bill, which is drawn, ac- I: dard to receive payments for

E&onomics======= \I
8 accounts ;eiVIJble (finance) I active circulation "
the goods already transported.
• accounts receivable (fi-
nance)
the entitlement of a firm to re-
ceive application of money
from its debtors for obtaining
funds to fincnce the current op-
erating expenses or some other
expense.
• accrual basis
a method of accounting in
which the income and expenses
are not charged until the time
they are actually earned or in-
curred.
• accrued
the earnings, sales, expenses or
other items of income or expen-
diture, which are already made
or incurred and are outstand-
mg.
• accrued expenses
an accounting entry ,,,herein a
liability is recorded when the
cost of a service used but not
paid for is observed.
• accumulation
the acquisition of an increasing
quantity of something.
• ACP countries
a group of Mrican, Caribbean
II ========Eetmomies
I and Pacific less developed coun-
I tries that were included in the
Lome Convention and now the
I Cotonou Agreement.
I • across-the-board tariff
I changes
a change of all tariffs in a coun-
try. They are raised or lowered
I by an equal percentage.
I • action lag
I the delay between the formula-
tion of a policy decision and its
execution.
I • actionable subsidy
I a subsidy which is not prohib-
ited by the World Trade
Organisation (WTO), but that
I member countries are permit-
ted to levy compensating duties
agamst.
• active balance
a term to indicate a balance of
I payments that is favourable for
a country, when the revenue
earned from exports is higher
I than the expenditure incurred
on tl1e import of goods and ser-
VICes.
I
• active circulation
I at any given time, the part of
I the RBI's issue which is in cir-
culation.
1\ actiPe tnllritet I addition rule 9
*================
- active market ~ of its effects on trade, price or
market for a specific set of stock ; some other measure, to a non
or shares traded quite fre- :I tariff barrier.
quently and regularly. : - ad valorem tariff
_ activity rate : tariff defined as the percentage
the percentage of people in a of the value of an imported
I

given population age group that ~ good.

are employed, but not in the ~ - ad valorem tax
defence forces of the country. a t<LX or duty calculated on the
- actual protection rate I basis of the value of a transac-

implicit tariff. I tion. It is taken as a percentage

of price at the selling or produc-

_ actuals
tion stage.
the items that are bought with
the intention of immediate de- ~ - adaption & adoption
livery in a stock exchange. . dichotomy
a constituent of A.A. Alchian's
- ad valorem and Charles M . Tiebout's
1. in proportion to the value. A I rationalisation of classical eco-
term used to refer to the taxes nomic theory. The argument is
and duties levied on goods, etc. that active, deliberately optimal
as a percentage of their value. I (adaptive) behaviours are not
I needed for the viability of

.-
A. V.a--.Per Capita Ass. . . . .

• LN<f""""
: optimising theories, since eco-
""""" ;~ 'adopted'
0 80 'l"MTc:. eLtOt

nomic actors would be either

._'
0"""""""
.000000Y-...ot
by the competitive
.W5lPAUIIIItACH
0 .........
: environment or would fail.
I

2. per unit of value i.e. divided :I - addition rule

by the price. a rule for the determination of
I the derivative of a function with
- ad valorem equivalent respect to a variable, where the
the ad valorem tariff which function constitutes the linear
would be equivalent, in terms I sum of two or more different

Eeonomics======== II

""l=O=========ad=rjust;le
functions of the variable.
• adjustable peg
an exchange rate which is
pegged, but for which it is lID-
derstood that the par value will
be changed occasionally. Such
system can be subject to ex-
treme speculative attack and fi-
nancial crisis, as speculators
may easily anticipate these
changes.
• adjustment assistance
a government program to as-
sist those workers and/or firms
whose industry has declined,
l·r""~ ""'" ._ tlar f..mw¥
T'JlMAnm"JoY<2
(HR. "oo~.
f'~0¥.1'Yw.IO'
either because of competition
from imports (trade adjust-
ment assistance) or from other
causes. Such programs usually
have two (conflicting) goals,
which include, to lessen hard-
ship for those affected and to
help them change their
behaviour.
II = = = = = = = E & o n o m i & s
peg
I ad71ancedepositrequirement 1/
I • adjustment lags
I the time taken by a variable, like
I
ccpital stock to adjust to tje
changes in its determinants.
• adjustment mechanism
I the theoretical process through
which a market changes in dis-
equilibria, moving toward equi-
I librium if the process is stable.
I • administered protection
I protection resulting from the
application of anyone of sev-
eral provisions that respond to
I specified market circwnstances
or events, usually as determined
by an administrative agency.
• administrative lag
I a delay between the time of
I implementation and the effect
of a monetary policy. It refers
I to the elapsed time between the
recognition by the authorities
that action is necessary and the
actual implementation of the
I action. The duration of this time
depends upon how efficient the
authorities are in implementing
I the policies formulated.
I • advance deposit require-
ment
a requirement where a percent-
age of the value of imports or
II tulT1l1ncerefunding I Rtl!flomerlltWn ec:;m~:Y~~~~~~~~~~l~l
of import duties should be de- ~ of the view that the employees
posited prior to the payment, ; should be free to decide about
without competitive interest : joining a union or not and those
being paid. ~ who state that the employees
; should not be allowed to enjoy
- advance refunding : the benefits of a union without
to exchange those bonds whose ~ paying for them.
expiry date is approaching for I
new bonds on advantageous : - agenda 21
terms. ~ a plan of action adopted at the,
_ adverse selection ; Rio Summit for promoting sus-
: tainable development.
the tendency for insurance to be I
purchased only by those per- : - agglomeration
sons who are most likely to I 1. geographical concentration
need it, thus raising its cost and I of people and/or activities.
reducing its benefits. 2. a phenomenon of economic
_ adverse terms of trade activity congregating in or close
a term of trade which is consid- I to a single location, rather than
ered unfavourable relative to I being spread out uniformly
some benchmark or to past ex- I over space.
penence. : - agglomeration economies
I (of Scale or Scope)
- advice
note sent by one merchant to I benefits, savings or drop in av-
another, requesting him to de- : erage cost resulting from the
liver the ordered goods. ~ clustering of activities. Gener-
~ ally, the concept of agglomera-
- agency shop ; tion economies refers to savings
the mandatory requirement for : or benefits derived from the
a prospective employee joining ~ clustering of activities external
a firm to pay the union dues ; to the 'firm' and are therefore a
without being a part of the trade : part of 'external economjes'.
union. T~is kind of arrange- I
: - agglomeration economy
ment is generally found in the
US between the ones who are I any benefit which accrues to

Eeonomics======= II
=12=========='Wf'Y'iJ==a;concentration I"'IJ8"t94tetxpmditun II
economic agents as a result of ~ aggregate demand curve relates
having large numbers of other .
agents geographically close to
them, thus tending to lead to I
agglomeration.
• aggregate concentration
the state in which the goods
produced in one sector of the
economy or the whole is con- I
centrated around a few large the level of real national income
corpora tions. (GDP) demanded (the total
I quantity of goods and services
• aggregate demand demanded) to the price level (as
the total demand In the measured by the GDP defla-
economy. It takes into account I tor).
the total of all the desired ex-
penditure at any time by all I • aggregate expenditure
groups in the economy. The I in macroeconomic theory, ag-
main groups who spend are gregate expenditure is sum-to
Aggregate
consumers (consumption), Expenditure (AE)
firms (who spend on invest- I
E'
ment), government (govern-
ment expenditure) and over-
seas (exports). A'
t'
A.
Price level (P)

ADzPyR
o Yo Y1 RGDP
=C+ 1+ G + NX
I tal of the amount of desired
spending by consumers, gov-
ernments, private investors and
AD
.---+: I foreign buyers (net of spending
o VOR vf Reallncome on imports) at each level of real
('(II.. RGDp)
national income (GDP).
• aggregate demand curve
in macroeconomic theory, the

II ========B&onomks
II tI9!J1VJRte meRS'Un ofsupport I RllocRted cost
*==============~
• aggregate measure of
support
t h e measure of subsidy to ag-
riculture used by the WTO as
the basis for commitments to
reduce the subsidisation of
agricultural products . It in-
eludes the value of price sup-
ports and direct subsidies to
specific products, as well as
payments which are not prod-
uct specific.
• aggregate supply
it is the total quantity supplied
at every price level, i.e. the to
Price Lovel (P)
AS O
13
~ ing the same.
.
1 • aggregation
.
~ 1. the puttmg together of the pri-
1 mary data. For example, the ag-
: ~egate demand is an aggregate,
~ m ~on~~t with the demand of
~ an mdiVldual. .
. 2. the amalgatlon of two or more
~ ki~ds of an economic entity into
~ a sm~le category. For macroeco-
; no~c purposes, all goods and
: ~ervI~es are usually aggregated
1 mto Just one.
~ • aggregative model
; a model used in econometrics
: where the creation of variables
~ is. done by using groups of indi-
1 VIdual variables.

; • agio
: it refers to the fee that is paid
Real Income 1 •
(YR. RGDp) : for exchangmg one currency for
tal of ~ goods and services pro- ~ another, or for a foreign bill of
duced m an economy in a given ; exchange.
time period. ; • agistment
• aggregcte supply curve : to feed or take care of the cattle
in macroeconomic theory, the ~ with the intention of getting a
short run aggregate supply 1 reward.
c~rve relates the total quan- ; • allocated cost
my of goods and services sup- . th
piled and the price level (as; e.allocation of expenditures to
: vanous accounts.
measure d by the GDP defla- 1
tor) and with all else remain-

E&onomics======= II
14 alloctJrion I angel inPUtor II
=================*
• allocation
an assignment of economic ;
resources to uses. In general :
equilibrium, an assignment of ~
factors to industries produc- I

ing goods and services, to- ~

gether with the assignment of
resulting final goods and ser-
vices to consumers, within a
country or throughout the
world economy.
• allocative efficiency
the best possible allocation of ; of shares by the shareholder.
resources.
: distort production and trade.
I
• American Depository
Receipt (ADR)
I a document given to a share-
holder and issued by the US
. Bank in response to the deposit
I • amortisation

• allonge this term is U5ed in relation to

a sheet of paper to provide an the payment of a loan in ad-
additional space for endorse- I vance, over a specified time pe-

ments, usually attached to a bill
of exchange.
• all-or-none order (US)
a limited price order for buy-
ing or selling of shares and
stocks, with the condition of
being executed entirely or none
at all.
riod. Such fund can also be cre-
ated when equated instalments
I are deposited at regular inter-
I vals of time, so as to accumu-
late an amount equivalent to the
I
amount of debt including inter-
:
I est.
:
I • AMS

Aggregate Measure of Support.

• amber box
the category of subsidies in the
WTO Agriculture Agreement,
the total value of which is to be
reduced. It includes most do-
mestic support measures that
I • angel investor
a venture capitalist with a so-
I cial conscience. They are like
I other venture capitalists~ in the
sense that 'angels' are 'looking
for higq.growth potential with

II = = = = = = = ; ; ; ; : ; : ; ; ; : : ; : ; E & o n o m i c s
 15
*================
a five-to-ten-year cash-out. An- ~ - anticipation
gel investors often look for' 'psy- , in accounting parlance is, to
chic income' beyond just bal- : record the earnings or profit
ance sheet and income state- ~ before they are actually realised.
ment- the chance to help other
entrepreneurs, assist with inner ~ - antitrust legislation
city problems ... for example. ~ a law that targets healthy com-
; petition amongst all the players
- anglo-saxon bias : in a particular industry and thus
Walter Isard's characterisation ~ restricts monopolistic practices
of the 19th century in a spatial ; followed by a private b~iness.
economic theory in Britain, in
contrast to the 'Germanic Bias' ; - anti-trust policy
in the development of the clas- :, theli U.S. term for competition
: po cy.
sical location theory. ,
- annuity : -ANZCERTA
is a type of life insurance con- ~ Australia-New Zealand Closer
tract that gives periodic pay ; Economic Relations Trade

---
: Agreement.
··· ··1
,
: _APM

~---.. ,
I_"" '
. .. ~ Average Propensity to Import.
. ft

.-
: - appellate body
I ~ the standing committee of the
. . . . .. .. .. ill 'I. ca.
A .... .. .T_.. .. _II .. Q II .. . . • • .... .. .. - •
~~m~
······:'1·· ,.. "
ments to the insured at some , :::.:::?,/ .~-=.
future time, usually retirement. ""-:~~r"'·;
S;·l !(····
- antedate
earlier dating of a document,
fi~~F~
such as a life insurance policy, , -~!.l.
than what is current, so that it ~~~~1~;~:
matures or takes effect sooner.
~ WTO which reviews decisions

&tmomit:s======= II
16 applied economics I arbitrat'ion II
=================*
of dispute settlement panels.
Can You
Keep It?
• applied economics
a branch of economics that stud- I
ies practical problems and uses
the principles and tools of eco-
nomic analysis.
Is It a Buslaes.?
• applied tariff rate
the effective actual tariff rate at • appropriation
a country's border. in accounting, money or tnate-
I rials set aside or spent for a spe-
• appreciation cific purpose or allocating the
a rise in the value of a country's resources between the numer-
currency on the exchange mar- I ous uses.
ket, relative to a particular other
currency or to a weighted aver-
age of other currencies. The I
currency is said to appreciate.
• appreciative theory
(Nelson)
attempts to structure qualitative I
notions about the nature of a I
firm and its activities, in a man-
ner that is less straining but I • ar bOItrage
richer at the formal level. I the simultaneous buying of cur-

rency, securities or goods from

• appropriability problem
one market for the purpose of
problems associated with the
I selling in another market at a
ability of the firm to capture
higher price.
acceptable levels of benefits, I
associated with the exploitation • arbitration
of its own technological inno- is a way of settling a dispute
vations through confidentiality, I between two parties, by a third
patents, etc. I person who has interest in that

matter.

II = = = = = = = = E c o n o m i c s
\1 argumentforprotection I asymmetric;fo"",'"","tI."","'"",tion========"",1"",7

~ A has given a loan to Mr. B,

; then he can authorise another
: person to recover loan from
~ Mr. B.
~ • assignment problem
I this is aimed at using macroeco-
nomic policies to achieve both
internal balance and external
• argument for protection
I balance, specifically, with only
the reason given for restricting monetary and fiscal policies
imports by tariffs. available under fixed exchange .
• armington assumption rates.
the assumption in which inter- ~ • assimilative capacity
nationally traded products are I the ambit to which the environ-
differentiated by the country of : ment carl accommodate or tol-
ongm. I
: erate pollutants.
• articles of association I •
. • asslste d areas
an official document legally re- ~ those relatively backward areas
quired to be filed with the reg- ; which are recognised by the con-
istrar by the promoters of a
cerned administration or the
public limited company.
~ government as being eligible to
• ar~baito ; receive special assistance.
part-time work. ; • associated company
• asset stripping : the connection or relation of an
the selling of those assets by a ~ independent company with an-
company that are not required I other independent company.
in its day to day functioning. ~ • asymmetric information
• assignment ; the failure of two parties to a
the right of transference of : transaction to have the same
benefit of loan that a person I relevant information.
is entitled to receive from an- I
other person, for instance Mr.

Economus======= II
=1",,8=========== ;:mPtotic distribution I autarkyprice "
• asymptotic distribution
the probability distribution to-
wards which a statistic moves
or inclines at the point when
the sample size reaches infin-
ity. Generally used in econo-
metrics in assessing the large
sample properties of its esti-
mators.
• at best
in relation to the stock market,
an abbreviation used to indicate
the lowest possible price in re-
spect of a buying order, and 'the
highest possible price' in respect
of a selling order.
• at discretion
an instruction given by a client
to his stockbroker for buying or
selling stocks or shares and
granting the broker to exercise
his own judgement for the price
at which to buy.
• at limit
an instru'c tion given by a cli-
ent to his stockbroker for buy-
ing or selling stocks or shares,
but placing a limit on the high-
est price that may be paid or
the lowest price for making a
sale.
II ========Eeonomics
I • at sight
I the payment of a bill of eX-I
change or promissory note as
and when demanded.
I
• at the market
I an instruction given by a client
I
to his stockbroker for buying or
selling stocks or shares, and
I permitting the broker to buy or
I sell at a price that is around the
market price prevailing at the
time.
I
• ATe
I Agreement on Textiles and
Clothing.
• atomistic competition
market structure characterised by
I a large number of firms, who
I compete independently.
I • autarky
1. self-sufficiency and indepen-
dence of a nation in economic
I terms.
I 2. the situation of disengage-
ment in international trade, self-
sufficiency.
I • autarky price
I price in autarky, i.e. the price of
something within a country
when it is not traded by that
I country.
II"uthorised cllpitlllillutoregnssion * ==========1=9
• authorised capital I lined or can be avoided without

the maximum amount of capi- I any specific effon of the govern-

tal that can be raised by a pub- I ment.
lic limited company through the : • autonomous expenditures
public issue of shares. This
~ those expenditures which re-
amount is also stated in the
I main unaffected by the level of
memorandum of association,

~I~I)
which is filed along with the I
articles of association with the
registrar.
• authority constraints
as and when individual or
joint activities occur and who I
c:JJ-~B
can participate in such activi- t:-"\- ~(7
ties is constrained by author- t ~- - - I ~J

'-8.7
I
ity constraints, which are re- I
lated to who controls the par-
ticular piece of time-space:
working hours, land owners' I
property rights, zoning, cur- income, in the income expendi-
few, public transportation ture model. For example, gov-
schedules and routes, office I ernment expenditure, mvest-
hours of governments and I ment expenditure, etc.
organisations, etc. I • autoregression
• automatic stabiliser a set of data wherein the value
1. government spending pro- I of each observation is partially
grams that respond to changes I

in the level of national income in

such a way as to offset those
- .....
--
==--
' _ . . . . . . 01_

changes.
2. are the ways through which
the fluctuations in the different ". lie til ...... fit

I " 'ull
economic variables are stream-

&onomics======= II
 20 A11er;e Fixed Cost (APC) Ibackbonefirms
dependendent on the value of ~
the observation that immedi- ;
ately precedes it.
• Average Fixed Cost (AFC) I
1. The average flxed cost is in- I
versely proportional to the out- I
put. This is because as output
increases the fixed costs are
spread further and further.
2. in the theory of the flrm, I
flxed costs are the costs of pro-
duction that are constant, what-
ever the level of output. Aver- I
age flxed costs are total flxed
costs divided by the number of ~
units of output, that is, flxed I
cost per unit of output.
lBB
-- 0 5aa8
• average propensity to
import
is the ratio of the aggregate
value of goods and services that
a country impons in a year to
the national income.
• average revenue product
as per the theory of factor pric-
II = = = = = = = = & _ I & S
"
ing, average revenue product is
the total revenue divided by the
number of units of the factor
employed.
• average tariff
an average of a country's tar-
iff rates. It can be calculated
in several ways, none of which
I are ideal for representing how
protective the country's tariffs
are.
• Average Total Cost (ATC)
the amount spent for produc-
ing each unit of output. The
average cost is calculated by di-
viding the total cost by the num-
I ber of units produced. The av-
erage total cost comprises of
two elements, the average flxed
I cost and the average variable
cost .
• Average Variable Cost
(AVC)
I the variable cost per unit of out-
I put. It is obtained by dividing
I the average variable cost by the
number of units of output pro-
I duced.
I • backbone firms
Japanese concept to describe
medium-sized flrms which ex-
II backhaul transportation I balance of;~h.='IJ=nd=ue=·=trtule========2=1
hibit the effects of strong entre- I • backward linkages
preneurial leadership and vital- I linkages to suppliers of inputs. A
iry. In such firms, strategies are : useful concept to differentiate
shaped by technological innova- ~ direction of flows in complex
tion, marketing and attention I economies.
given to skilled and participa- ._.~_. __ ... __ _
tory workforces .
• backhaul transportation
utilisation of otherwise empty I
cargo space on the return trip,
after a primary transport ac-
tivity has taken place. Since I

the primary transport function I

may have paid for the partial

or full cost of return transpor- I

tation, the price of backhaul I • balance of merchandise

utilisation may be relatively
low.
• backward bending
a curve which reverses direc-
tion, usually if, after moving
out away from an origin or
axis, it then turns back to-
trade
the value of a country's mer-
chandise exports minus the
I value of its merchandise im-
I ports.
I

wards it. The term is used I 81Bion. of u.s. daHII,.

'OO~---- ____________ ~

most frequently to describe 50 ------ ~~-~-~--- . .----_

o . -~.-------,.-----.--.--,-----._-======_
supply curves for which the I

quantity supplied declines as

price rises above some point,
as may happen in a labour sup-
'1190 1911' 19112 19113 '9114 '_'_'997 1_
ply curve, the supply curve for I

foreign exchange, or an offer

curve.

Economics======= II
""22=====b""I1a=1IU=ofJ""paymen==""tS=tuijustmen==t",,mec=h="n=ism==,=bl=11=nced==budo==et=
• balance of payments
*.
adjustment mechanism
any proceSs, especially (any au-
tomatic one, by which a coun-
try with a payments imbalance
moves towards balance of pay-
ments equilibrium.
• balance of payments
argument for protection
a common reason for restrict-
ing imports, particularly under
fixed exchange rates, when a
country is losing international
reserves due to a trade deficit.
• balance of payments
surplus
a number summansmg the
state of a colmtry's international
transactions, usually equal to
the balance on current account
plus the balance on capital ac-
count.
• bal~nce on capital account
a country's receipts minus pay
CAPITAl. ACCOUNT BAlANCE
(lJ " , 0 _ C-1IIodYe)
- ..........-
-.-
ments for capital account trans-
actions.
II ========Economics
II
I • balance on current ac-
count
a country's receipts minus pay-
ments for current account
I transactions. It is equal to the
balance of trade plus net in-
flows of transfer payments.
kl.-a on o..n-ft'It Account.
<Itlliorw or DoU .. :r)
I
I • balanced budget
I such budget rises where the
government receives the same
I amoum of money from ta.xation
I as it is spending. Classical
I Balanced Budget Plan ~
I COMPOSrroNOfFMNCI&.LASSETS
1_ 2000 lIOCI2 200l 201M 3JCII 2010
economists argued that this
I should always be the aim of
I government policy. Keynesians
on the other hand said that in
I times of low economic activity,
I the government should run a
deficit (spending more than its
II balancedgrowth I Bayesiananalysis . . ==========",,2=3

revenue) to boost the economy ~ which acts as a bank for centrcil

and when the economy is I banks, fostering cooperation
booming, they can run a surplus among them and with other
(spending less than revenue). In I agenCies.
this wa); they can balance the l• b '
arrters to entry
budget in the long-run.
I factors that prevent firms from
• balanced growth entering a market, such as gov-
a macroeconomics model that ernment rules or patents
exhibits balanced growth if con- I
• base money
sumption, investment and capi-
t·al grow at a constant rate while I monetary base.
hours of work per time period I • basic balance
stays constant. lone of the more frequently used
• balanced trade measures of the balance of pay-
1. a balance of trade equal to ments surplus or deficit under
I pegged exchange rates, the basic
zero.
balance is equal to the current
2. the assumption that the bal- I
account balance plus the balance
ance of trade must be zero in
I of long-term capital flows.
equilibrium, as would be the case
with a floating exchange rate and I • basing-point pricing
no capital flows. I a pricing method in which

• Bank for International prices arc quoted to include

Settlements transportation from one (or
I more) given point(s), regard-
an international organisation
less of the location from
which actual shipment IS
I made.

I • Bayesian analysis
developed to provide a subjec-
tively- rational framework for
I decision-making under uncer-
I tainty.

Economi.s====================== II
,;,,24===========
Bayesian Analysis
poster1or IkeIhood
P(9,A.ix,I) = P(xI9,A.,I)P(9, A.II)
" J
P(xI9,A.,I)P(9,A.II)
8.A
mwglnllliza10n
P( ~ x,l) =JP( 9, A.I x,l)
1 is the prior Infennalon A
• beggar thy neighbour
for a country to use a policy for
its own benefit which harms
other countries. Examples are
optimal tariffs and, in a reces-
sion, tariffs and/or devaluation
to create employment.
• benign neglect
doing nothing about a problem,
hoping that it will not be seri-
ous or will be solved by others.
• bequest savings motive
people save so that they can
leave an inheritance to their chil-
dren.
• bicycle theory I • bill of exchange
;w ar
thy neighbqur I bill ofe:x:change II
I • bid price (or rent) func-
tion
pIIor a set of combinations of land
prices and distances, among
I which the individual (or firm)
is indifferent. It describes
prices which the household
I (firm) would be willing to pay
at varying locations and for
varying amounts of land, in
I
order to achieve a given level
I of satisfaction (utility/ prof-
its) .
I
• bid/ask spread
the difference between the
I price which a buyer must pay
on a market and the price that
I
a seller will receive for the
I same thing. The difference
covers the cost of and provides
profit for the broker or other
I intermediary, such as a bank
I on the foreign exchange mar-
ket.

with regard to the process of : a contract entitling an exporter

multilateral trade liberalisation, I to receive immediate payment
the theory which if ceases to I in the local currency for goods
move forward (i.e., achieve fur- that would be shipped else-
ther liberalisation), will collapse I where.
(i.e., past liberalisation will be I
reversed).

"II = = = = = = = = E & o n o m i c s
II Bts Iinuleet surplus
.
• BIS
--
_ _ _ c.. ....
ro.......nc
Bank for International Settle- ;
ments.
• blue box
a special category of subsidies
permitted under the WTO I
Agriculture Agreement. It in- I
eludes payments which are
linked to production but with I
provisions to limit production
through production quotas or
requirements to set aside land
from production.
• border tax adjustment
rebate on indirect taxes ' (taxes
on other than direct income,
such as a sales tax or VAT) on
exported goods and levying of
them on imported goods.
• broker's fee
the fee for a transaction charged
by an intermediary in a market,
E&tmomics===================== II
25
*================
~ such as a bank in a foreign-ex-
; change transaction.
; • bubble economy
~ term for an economy where
: the presence of one or more
I bubbles in its asset markets is
: a dominant feature of its per-
formance. Japan was said to
~ be a bubble economy in the
; late 1980s .
• budget deficit
: the negative of the budget sur-
I
: plus, thus the excess of expen-
I diture over income.
~ ..~-.­
..,
..
; • budget surplus
: in general, an excess of income
I dO
: over expen lture, but usually
~ refers specifically to the govern-
; ment budget, where it is the
: excess of tax revenue over ex-
~ penditure (including transfer
; payments).
",,26============*businesscycle I capability constraints II
I cable or telegraph rather than
BillionNOK
through mail. The payee is then
120 120

80 80
notified about the arrival of the
.0 .0 I payment by the correspondent
I bank.
-40 -40

-80
a4 88 sa liM) 82 8.C eEl 88 00 02
-80 • CACM
..... MII... Central American Common
• business cycle Market. Founded in 1960, pre-
the pattern followed by macro- I ceded by Organisation of Cen-
economic variables, such as GDP I tra! American States.
and unemployment that rise and • cain rule
fall irregularly over time, relative a rule used to determine the
to trend. I derivative of a function in rela-
Boom
I tion to a variable, where the
function consists of another
C\,VP u~swing
/
''. \ Dov\'nswing
function.
• call
I in the stock exchange terminol-
ogy, an option to purchase a
• business services specific amount of some stock
services that are forwardly I at a quoted price, known as the
linked to other business activi- I striking price, within a specified
ties. Such services tend to per- period of time.
form functions, which are more I

efficiently 'externalised' by the I

• call loan
dient firms, i.e. cannot be effi- a loan that can be concluded or
ciently performed in-house. I 'called' at any point of time by
For example banking, lfiSur- I
the creditor or the debtor.
ance, etc. • capability constraints
• cable transfer constraints on human activities
in the context of foreign trade, I in time and space, imposed by
a bank draft which is sent by I
nature or available tools. Part
of Hagerstrand's time-geo-

II = = = = = = = = E c o n o m i c s
II capital I capital structure 27
*================
graphic conceptualisation. I tion than in labour.
• capital ~ • capital intensity
1. monetary capital: the money I the amount of capital per unit
used for investment purposes. of labour input.
2. real or invested capital: the A._... l_~"_eo.kII"""-"""
,......-......
capital goods needed for the I
production of goods and ser-
vlCes.
• capital account
, .... ~ . . . .. . . . - - . . . . . . . . . . A •• ' . . . . . . . _.. ••

.,
a part of the balance of pay-
ments where flows of savings, I

investment and currency are

recorded.
• capital consumption I • capital market
in national accounts, capital con- I the market in which savings are
sumption is the amount by I made available to investors.
which gross investment exceeds • capital ratio
the net investment. It is the I
a measure of a bank's capital
same as replacement lllvest- I strength used by the U.S. regu-
ment. latory agencies.
• capital deepening Banks' core capital ratio
an addition in capital intensity,
14 •
Dc __ rcW . . . . . . 1M1. . .....
" "
normally in a macro context, I "
I
where it is measured by some-
I
thing analogous to the capital I
stock available per labour hour I :I
" " 85 " .7 •• H H '1.

spent. In a micro context, it I ..... _ ...

could mean the amount of capi-
tal available for a worker to use, I • capital structure
but this use is rare. Capital I of a firm is broadly made up of
deepening is a macroeconomic its amounts of equity and debt.
concept, of a faster-growing
magnitude of capital in produc- I

&onomics======= II
28
=================*
• capitation
a system of payment for each
customer served, rather than by
the service performed.
• causation
relationship which results when
a change in one variable is not
only correlated with, but actu-
ally causes the change in an-
capi-tatUm I chaebol II
I early 1970s by Eugene Fama
I among others. The data there
was so much more convenient
I than alternatives that it drove
I the study of security prices for
decades afterward. It did not
I
have volume data, which meant
I that volume/volatility tests were
rarely done.
I

other one. • certainty equivalent

the amount of payoff (e.g .
• CBI I money or utility) which an
Confederation of British indus- agent would have to receive, to
try. be indifferent between that pay-
.CD I off and a given gamble is called
Certificate of Deposit I that gamble's 'certainty equiva-
lent'. For a risk averse agent (as
most are assumed to be), the
I certainty equivalent is less than

---
-
the expected value of the

--
- -
--- I
gamble because the agent pre-
fers to reduce uncertainty.

---
---
---- I • ceteris paribus

---
~ ~........
• Center for Research in
Security Prices (CRSP)
all other things remaining the
same.
• chaebol
one of a small number of very
I large, highly diversified and

a standard database of finance I centralised Korean firms,

information at the University of : owned and controlled by the
Chicago. It has daily informa- I founding patriarch's family by
tion of NYSE, AMEX, and a central holding company.
NASDAQ stocks. Started in

II ========E&tmomics
II chained I eIF 29
*================
Still go rging ".'. " . ~ tions or customs can or should
\ ", , ,,,,, ~ :" .. t·
; maintain the value of money,
: not intrinsic content of valuable
~ metal.
~ • chi-square distribution
; a continuous distribution, with
• chained : natural number parameter r. It
an index number which is fre- I
quently reweighted . An ex-
, .
ample is an inflation index . . . .

~
.:
made up of prices weighted by
the frequency with which they I
are paid and the frequent re-
• '

computation of weights makes

it a chained index.
.
---
is the distribution of sums of
• chaotic ~ squares of r standard normal
a description of a dynamic sys- I variables. Mean is r, variance is
tem which is very sensitive to ~ 2r, and moment-generating
initial conditions and may : function (mgt) is (1-2 t) -r/2 .
evolve in wildly different ways, I .
from slightly different initial : • chOIce
conditions. ~ economic choices involving the
; alternative uses of scarce re-
• characteristic equations : sources.
a polynomial whose roots are I
eigenvalues. : • choke price
~ the rock bottom price where the
• characteristic roots ~ quantity demanded is zero.
is a synonym for eigenvalues.
l.elF
• chartalism ~ Cost, Insurance and Freight. A
also known as 'state theory of : price quotation which covers the
money' - 19th century mon- ~ merchandise cost, the shipping
etary theory, formulated more ; insurance and the freight
on the idea that legal restric- : charges to a particular landing
I

E&unomu:s=~=~=~~ II
30 circuit I cluster II
=================*
place. I • Clayton Act
I a 1914 U .S. law on the subject
• circuit
of antitrust and price discrimi-
description of a network with I
nation.
one or more loops, creating al-
ternative paths between nodes
and thus creating network re- I

dundancy.

• circular flow
the manner in which funds
move through the capital,
labour and product markets
between households, firms, the
government and the foreign
sector.
• clears
in this context it is a verb. A
I market clears if the vector of
I prices for goods is such that the
excess demand at those prices
is zero. That is, the quantity
I demanded of every good at
those prices is met.
• cliometrics
the study of economic history.

·
Houu··
holds
-
The Circular Flow
·.................... .
In(:omes

.
I
• closed I/O model
an input-output model is ei-
ther open or closed with re-
spect to certain sectors or ac-
•

• classical
-
·....................... .
[Kpend i1ur~$"

according to Lucas (1998), a

I
tivities.
• cluster
a concept associated with
Michael Porter's work, a 'clus-
classical theory would have no I
ter' is a geographically proxi-
explicit reference to prefer-
I mate group or geographic con-
ences.

II = = = = = = = = & o n o m i c s
II coase theorem Icoefficient ofspecialisa;
centration of interconnected
companies, specialised suppli-
ers and service providers, firms
in related industries and as-
sociated institutions linked
by commonalities and
complementarities . The geo-
graphic scope of a cluster can
range from a single city or
state to a country or even a
group of neighbouring coun-
tnes .
ti- - .... - _ ~ ---
• coase theorem
informally, the theorem says
that in the presence of complete
competitive markets and the
absence of transactions costs, an
efficient set of inputs to produc-
Econornics======================
31
I tion and outputs from produc-
I tion will be chosen by agents,
regardless of how property
I rights over the inputs were as-
I signed to the agents.
I • Cobb-Douglas Production
Function
I
relate s the productivity of
I labour to the capital intensity
I (capital-labour ratio) under the
condition of a constant profit
wage ratio.
• Cochrane-Orcutt Estima-
tion
I an algorithm aimed at estimat-
I ing a time series linear regres-
sion in the presence of auto cor-
related errors. The implicit ci-
I tation is to Cochrane-Orcutt
(1949) .
• coefficient of specialisation
this coefficient is calculated just
I like the coefficient of
I localisation, except that regions
become industries and indus-
I tries become regions.
II
 .ient ojllamtWn I concentratWn ratio
""3""2==========""C,,,,oeffic= II
• coefficient of variation I • collusion
an attribute of a clistribution, I an agreement between parties
i.e. its standard deviation di- to refrain in participating in an
vided by its mean. activity which they normally
Coefficient of Variation I would in order to reduce com-
%CV Definition = Sl.Dc\' x 100
petition and gain higher prof-
MEAN its.
/\CV=l O
( \ • com~act sets
I'
\ CV=.l.O
!;.~
a closed and bounded set.
: LM~N J" "-
I

Crucial in establishing: I • competitive equilibrium

• Ahgmnent
• AUldic st.'1 bility price
• SlalOmJ!' of cell,
the price at which the quantity
• cohort supplied and the quantity de-
a group of persons experienc- I manded are equal to each other.
ing the Sartle event during the I • complement
I a good for which demand de-
creases when the price of a
I closely related good increases.
I • concavity of distribution
functions
a property of a distribution fimc-
same period of time. Cohort I tion-utility function pair. The
analysis traces those persons I assumption is to hold in some
born during the same time pe- principal-agent models so as to
riod, as they age and live make certain conclusions pos-
through common time-specific I sible.
experiences and life stages. The
most important experiences of ~ • concentration ratio
an aging cohort are the cohort I a way of measuring the concen-
birth rates and cohort death tration of market share held by
rates. particular suppliers in a market.
I It is the percentage of total
market sales accounted for by

II = = = = = = = = = E & o n o m i & s
II conceptual framework for economicge:;aphy I conditional foetor demands 33

a given number of leading I the smallest characteristic

firms. I root is S (both being pre-
• conceptual framework for sumed to be positive here, that
I is, the matrix being diagnosed
economic geography
I is presumed to be positive
the structure that serves to hold definite), then the condition
the conceptual parts (concepts) I number is:
together and within which the
I gamma = (L/S)·s
ideas, facts, principles, insights
and circumstances of Economic ; Values larger than 20, according
Geography exist and are related : to Greene (93), are observed if
to each other. ~ and only if the matrix is 'nearly
I singular' .
• condition number
a measure of how close a ma- I • conditional
trix is to being singular. Rel ; it has a special use in finance,
,--------
Condition
--------, : when used without other
It., v • . S Ize f.r '1ul.u • .,1.
HUla

~ modifiers. Often means 'con-

; ditional on time and previous
: asset returns'. In that context,
~ one might read 'returns are
; conditionally normally distrib-
1_.,•. 110000 10000 1000 100 10 I : uted.'
L===========~I
evant in estimation if the ma- : • conditional factor de-
I
trix of regressors is nearly sin- mands
gular, the data are nearly col- I a collection of functions which
linear and (a) it will be hard to ; give the optimal demands for
make an accurate or precise in- : each of the several inputs as a
verse (b) a linear regression will ~ function of the output expected
have large standard errors. ; and the prices of inputs. Often
The condition number is cal- : the prices are taken as given and
culated from the characteris- ~ incorporated into the functions
tic roots or eigenvalues of the ; and so they are only functions
matrix. If the largest charac- : of the output.
I
teristic root is denoted Land

Economiel========= II
 ",,34===========* conformable I consumer strPereignty II
• conformable I and local opinion indicates that
generally used in conjunction I there is support for the compo-
with matrices . A matrix may nent areas.
not have the right dimension or
shape to fit into some particu-
lar operation with another ma-
I I
trix. Take matrix addition - the
matrices are supposed to have I _N--
. the same dimensions to be
summed. If they don't, we can -
• • - * - - - - - - - - -
@!!!!!!.... I

say that they are not conform- I • Constant Relative Risk

able for addition. The most I Aversion (CRRA)
common application of this :
term comes in the context of ~
a property of some utility func-
tions, also said to have isoelastic
multiplication.
form. CRRA is a synonym for
• consistent estimators ICES.
an estimator for a parameter is I • constant returns to scale
consistent if the estimator con-
when all inputs are increased
verges in probability to the true I
value of the parameter. by a certain proportion, out-
I put increases by the same pro-
• Consolidated Metropoli- I portion.
tan Statistical Area Capital

an(:~:~hiCh meets the re- 1

quirements for recognition as a
;:
300 _. -~-~400
".
:t ~r~:
: ~::H
'Metropolitan Statistical Area' 200 _~. : B. _~ __ :_ : _.:
, , " X - JOO
(MSA) and also has a popula- I 100 . 'A.. :. __ , '. -~ . . :
: ' : X-l , X-200
tion of one million or more can I 0 100 200 400 600 LUor

be recognised as a CMSA if : • consumer sovereignty

separate component areas can I when resources are allocated as
be identified within the entire I per the wishes · of consumers,
area by meeting statistical cri- i.e. in a perfectly free market.
teria specified in the standards, I

II ========Economics
II consumer surplus I contractionary7=ry""P""OI""ic""'=======,,,,3=5
• consumer surplus ~ • contingent valuations
the difference between what a ; the use of questionnaires about
person would be willing to pay : valuation, to estimate the will-
and what he actually ha,s to pay ~ ingness of respondents to pay
for buying a certain amount of I for public projects.
a good. I • contract curve

• consumption the same as the Pareto set, with

the individuals and corporations the implication that it is drawn
which buy products and ser- I in an Edgeworth box.
vices. In economics, consump- I • contractionary fiscal policy
tion refers only to consuming
that involves a monetary trans- I a government policy of reduc-
actIon. ing the spending and raising
taxes.
• consumption function Visual
Contractlonary Fiscal Polley
the relationship between dis-
posable income and consump-
LRAS SRAS
tion.
Q

CI
--.. -
: : : . . : : : . ' : '..-:- .....

~~"':.~_
0,,_ .......... ..., ....
::.."';'.'!"'~ <---
...................
~- ........ -
""'~---
r.~:'!.~=---
AD, AD,

Real NatloNl OUtput (GOP)

• contingency theory US!.nd describe ,Iv. . .clion"he government

could take in order Co decrease aggregate denW'ld
regards the design of an effec _ I from AD, AD, 1.0

tive organisation, as necessarily • contractionary monetary

having to be adapted to cope policy
with the 'contingencies' that ~ a government policy of raising
derive from the circumstances I interest rates charged by the
of environment, technology, : central bank. In the texts of
scale, resources, work task and I some ftrst courses in macroeco-
other factors. I nornics, it shifts the LM curve

II
~3~6===========.
(liquidity/money curve) to the
left.
-::::"l'-.
A ~. ~---- Jk~
. I."_
I'.~· ~.
-.. .. &M;" ~ _
:~~
. sion results are similar with-
• control variables
a variable in a model controlled
by an agent in order to optimise
something.
• convergence in quadratic
mean
a kind of convergence of random
variables. If Xc converges in qua-
dratic mean, it converges in prob-
ability but it does not necessarily
converge.
• convolution
the convolution of two functions
U(x) and V(x) is the function:
U*V(x) = (integral from 0 to X
of) U(t)V(x-t) dt.
• ~CHJk's I>istance
a metric for determining
whether a particular point
alone affects regression esti-
mates much. After a regres-
sion is run, one can consider,
II = = = = = = = &__us
controlvariabJes I corporatewelfon II
I for each data point, how far it
I is from the means of the in-
dependent variables and the
I dependent ·variable. If it is far
I from the means of the inde-
pendent variables, it may be
very influential and one can
I consider whether the regres-
out it.
I
I
12 3
-
458789101112
• cCHJperative game
a structure where the players
I have the option of planning as
a group, in advance of choos-
ing their actions.
• corporate welfare
I when a government gives
I money or a monetary break
(like tax cuts or subsidies) to a
I business. Governments give
I money to businesses which are
very profitable to keep them
from moving to other provinces
I or countries.
11 Co'stAndFmght(CAF) Icountenrad:~~~~=~~~~~3~7
_ Cost And Freight (CAF) ~ _ costate variables
a price quotation that includes I a Lagrangian multiplier or
both the merchandise cost and ~ Hamiltonian multiplier.
the freight charges- for its ship-
ment to a given destination.
: , - cost-of-living index
: measures the changing cost of
- cost curve ~ a constant standard of living.
a graph of total COStS of produc- ; The index is a scalar measure
tion as a function of total quan- : for each time period. Usually,
tity produced. ~ it is a positive number, that
Toral Cost Curves ; rises over time to indicate that
:I there was inflation..
Two in-
: comes can be compared across
I time by seeing whether the in-
; comes changed as much as the
~ index did.
oMlCMc.e. .............
_ , ___ __ . ______ :I!"_~~ ------- .. ---

- cost function
a function of input prices and I
output quantity. Its value is the I
cost of making that output,
given those input prices. ~ - cost-push inflation
; inflation whose initial cause is
: a rise in production costs.
C = "\)X I
: - countable additivity
~ property
0,
. ~ the third of the properties of a
; measure.
~ - countertrading
: the bilateral international trad-
y, l'> y, Y. Y ~ ing relationships between com-
I parnes.

Eeonomics======= II
38
=================,*================
• countervailing power
J.K.Galbraith' thesis of the ten- I
dency of market (monopoly) I
countrrvailing power I Cowles CommissUm II
I functions are assumed to be the
same for all firms.
• covariance stationary

power to be reduced by the a stochastic process is covari-

emergence of countervailing I
groups and forces.
• coupling constraints
the need to join with other .:
people, organisations ' or capital .:
investments (as 'bundles') to I
accomplish an objective.
ance stationary, if neither its
mean nor its autocovariances
I depend on the index t.
Covariance Stationary
I . Class of processes X(t}, t .. o. 1, 2 • .. _. that have::
.•. ;.~:::::~::, . I'~~: .ur]
.. ""~"".".."jkl · ElIX,·",(X..• ·"}J·F.I,,~, · ,,rJ
(11.11 ;.I,.'!:~ud • .-rJly 011 I.:
. We mume the oulocorrel.tion ho, the form
,\k l - It; f l!ti.;:)us I. - .,,~ ,

• Cournot Duopoly
a pair of firms which split a • Cowles Commission
market, modelled as in the I a: 1950s panel on econometrics,
Cournot Game. that focused attention on the
Coumot Duopoly
• In the Coumolmodd each of the two finnspick
Ihe quantities 'i and Q2 to ~ pro.tJced
• Each finn laIC .. the other linn' s oUlpul as giva!
and choo ... the ootput Ulf rriaxidtizes its profits
• The price lhat emerges clears the market (demand
=supply) •

• Cournot Models
a generalisation of the Cournot
Game, for describing the indus- IlIlulfllarthcSo..',oIls..:"-'fft.'eRuIJdinllh:• . IQ4" rtlprvw: J ....nbColKft.

try structure. Each of the N I ~::;;:., K",1oIY ""',"" row ..... ""'~ Kkm.""'" f<""'. I.e"

firms will choose a quantity of ; problem of simultaneous equa-

output. Price is a commonly-
known decreasing function of
total output. All firms know N
and take the output of the oth-
ers as given. Each firm has a cost
function cj(q} Usually, the cost
functions are treated as com-
mon knowledge. Often the cost
: tions. In some tellings of the
~ history, this had an impact on
; the field - other problems such
as errors-in-variables (mea-
surement errors in the indepen-
I dent variables), were set aside
or given lower priority else-
where too because of the pres-

II-==========&onomics
II Cronbach'sAJpha I currmtaccount;~nc=e==========3~9
tige and influence of the Cowles
Commission.
• Cronbach's Alpha
a test for a model or survey's
internal consistency. It is some-
times called .a 'scale reliability
coefficient'. Cronbach's alpha
assesses the reliability of a rat-
ing, summarising a group of
test or survey answers, which
measure some underlying fac-
tor (e.g., some attribute of the
test-taker). A score is computed
from each test item and the
overall rating called a 'scale' is
defined by the sum of these
scores over all the test items.
Then reliability is defined to be
the square of the correlation
between the measured scale
and the underlying factor that
the scale was supposed to mea-
sure.
• cross-section data
is the parallel data on many
units such as individuals, house-
holds, firms or governments.
• cross-validation
a way of choosing the window
width for a kernel estimation.
The method is, to select, from a
set of possible window widths,
one that minimises the sum of
&onomit:s======= II
I errors made in predicting each
I data point, by using a kernel
: regression on the others.
I
: .CSO
~ Central Statistical Office.
I
.• CTT
~ Capital Transfer Tax.
I • current account
I a part of balance of payments,
where payments for the pur-
I chase and sale of goods and ser-
I vices are recorded.
I • current account balance
I the difference between a
country's savings and its in-
I vestment. If the current ac-
I count balance is positive, it
measures the portion of a
I country's saving invested
I abroad and if it is negative, it
measures the portion of the
domestic investment financed
I by foreigners' savings.
I
Developmenta in the CUITODt IIOOOOII1t belance,
..
Ig overnment net lending and real dispooable income
_ c..ntf'lllk"COl.... ~. pefttnl.1gl"'GOP
ElJ ",,*MC!Of . ~~ d GCP t.
t.
14
t.
I
t ... 2000
40
=================*
• current ba1anc~
difference between total exports
and total imports.
• CWO
Cash With Order.
• de minimis
a legal term for an amount
which is small enough to be ig-
nored, too small to be taken
seriously. Used to restrict legal
provisions, including laws re-
garding international trade, to
amounts of activity or trade that
" ally sm all .
are not tflVl
• deadweight loss
the net loss in economic welfare
which is caused by a tariff or
other source of distortion, de-
fmed as the total losses to those
who lose, minus the total gains
to those who gain. Usually iden-
tified in a supply-and-demand
diagram in terms of change in
consumer and producer sur-
plus, together with government
revenue. The net of these ap-
pears as one or two welfare tri-
angles.
• decision rules
1. a function which maps from
the current state to the agent's
II ========&onomics
current balance I deductive II
I decision or choice.
I 2. a mapping from the ex-
pressed preferences of each of
a group of agents to a group
I decision.
The first is more relevant to
decision theory and dynamic
I optimisation, while the second
I is relevant to game theory.
I • decouple
I
provision of support to an en-
terprise, usually a farm, in a
I manner that does not provide
an incentive to increase produc-
tion . Farm subsidies that are
I decoupled are included in the
I green box and are therefore
permitted by the WTo.
I • deduction
I
also known as deductive reason-
I ing. A process of inference,
which leads from general prin-
I
ciples or universal premises via
I logical reasoning to expecta-
tions or conclusions about par-
I
ticular cases.
• deductive
I characterises a reasoning pro-
I cess of logical reasoning from
I the stated propositions.
II deep itltror4tUm I de-itulustrialisatUm.. ==========",,4=1
- deep integration ~ - deficit ,
economic integration which I in the balance of payments or
goes well beyond the removal : in any category of international
of formal barriers to trade and ~ transactions within it, the defi-
includes various ways of reduc- I cit is the sum of debits minus

ing the international burden of ~ the sum of credits or the nega-

differing national regulations, tive of the surplus.
such as mutual recognition and I
harmonisation. Contrasts with I 2DO r--------------------IL---
I _ ..- -. . . . . . . " . .. . . . . . . .

:f==~~!:~~~~~=~====!~
shallow integration.
- deep markets 400 -4r--'
11111-
_r--r--,-
_ 1_ _11 _ _ 11
-i--" I 71_
'l-;---r-r'
! i \

a capital market may be said to

be deep if it has great depth. I
I = I::::. Ci . . . . .
May less formally be used to : - degressive
describe a market with a large ~ going down with income or
total market capitalisation. lover time. A degressive income
~ tax takes a smaller fraction of
- default
: higher incomes. Degressivity in
failure to repay a loan. Interna- ~ trade policy might be a tariff,
tional loans by governments ; the ad valorem size of which is
and private agents lack mecha- : scheduled to decline over time,
nisms to deal with default, com- ~ or a quota that is scheduled to
parable to the legal mecha- ; expand faster than demand for
nisms that exist within coun- : lmports.
tries. I
: - de-industrialisation
- deficiency payment
: a decrease, over time, .in the
payment to a producer of an I share of the manufacturing in
amount equal to the difference : an economy, usually accompa-
between a guaranteed price and :I nied by growth in the share of .

the market price, with the lat- ~ services. Typically, accompanied

ter often determined on the ; by an increase in manufactured
world market. A form of sub- : imports.
sidy to production. I

E&tmOmics======= II
""4,,,,2=========== :i17eredprice I demographic transition
• delivered price
the price which includes freight
charges to the location of the
buyer.
• delta
is used with respect to options.
The rate of change of a finan-
cial derivative's price with re-
spect to changes in the price of
the underlying asset. Formally,
this is a partial derivative. A
derivative is perfectly delta-
hedged if it is in a portfolio with
a delta of zero. Financial firms
make some effort to construct
delta-hedged portfolios.
• demand curve
the graph of quantity de-
manded, as a function of price,
normally downward sloping,
straight or curved and drawn
with the quantity on the hori-
wntal axis and price on the ver-
tical axis.
• demand deposit
a bank deposit which can be
withdrawn 'on demand'. The
term usually refers only to
checking accounts, even though
depositors in many other kinds
of accounts may be able to write
cheques and regard their depos-
its as readily available.
II = = = = = = = E e o n o m i c s
II
I • demand elasticity
I normally, the price elasticity of
demand.
• demand price
the price at which a given quan-
I tity is demanded. The demand
I curve viewed from the perspec-
tive of price as a function of
~ quanuty.
;
• demand schedule
I a list of prices and correspond-
ing quantities demanded or the
graph of that information.
I Thus, a demand curve.
I • demand set
I in a model, the set of the most-
preferred bundles of goods that
an agent can afford. This set is
I a function of the preference re-
lation for this agent, the prices
of goods and the agent's en-
I dowment.
I • demographic transition
model of population change
based on European experi-
I ences. The model describes
I the effects of changes in fer-
tility and mortality, associated
I with industrialisation,
I urbanisation and health care
lmprovements.
II dependency theory I deriveddematul .. =========4~3
The Demographic Transition ~Thus, the relationship is often
; expressed as: a dependent vari-
..
Rata_ ,er 1101

I\. ...........
: able is a function of one or more
~ 'independent' variable(s).
. ~ ~MFt...
,
DnthRak
......... ~ ~ • depth
SOote SOote 2 SOot·, an attribute of a market. In se-
SOote I
curities markets, depth is mea-
• dependency theory sured by the size of an order
~ flow innovation, required to
the theory that states that the
less developed countries are ; change prices by a given
: amount.
poor because they allow them- I
selves to be exploited by the : • derivatives
developed countries through ~ securities whose value is de-
international trade and invest- I rived from the some other
ment.
"
•" DependenclI Theorv
~.
..
: time-varying quantity. Usually,
~ that other quantity is the price
I of some other asset such as

~
'-. . Blami"« Ille sYSlem bonds, stocks, currencies or
,110. • Glullal cconomv la~ors rIch COUlilfles
... "" • G10hal economu cKPloils 11001 natIOns
commodities. It could also be
~ ~ • RIch nahons mlclillonalfy keep lIoor I an index or the temperature.
~ 113110ns llOor
~ . RIch lIallOlIS eKlllolfS natural resources I • derived demand
.. and labor to tloor coUnltteS
.. - . . Core· SeIDl pentl/wry·· Periphery
the demand that arises or IS
ActIvIty
• dependent variable
the variable to be 'explained'
with the help of 'independent
variables'. These independent I

variables serve as the 'explana- I

tory' variables, however, the
extent to which this relationship I

or 'explanation' actually implies I

'causality' varies. It may merely defined indirectly from some

refer to a statistical relationship. I other demand or underlying

Economics======= II
",,44===========* de-skilling I digital nervous system II
behaviour. I ics specialising in the processes
I of long term growth and
• de-skilling
change, especially in the case of
a decrease in the level and scope I
of skills within a local/regional
labour market, resulting from I. the less developed economies.
DFS Model
mainly two corporate strate- lone of the continuum-of-goods
gies: (1) mechanisation and models of Dornbusch, Fischer,
computerisation of production and Samuelson (1977, 1980).
and office activities (2) trunca- I
• differentiated product
tion of corporate acti vi ties
I 1. a firm's product which is not
within the region.
I identical to the products of
• destabilising speculation other firms in the same indus-
speculation which increases the try. Contrasts with homoge-
movements of the price in the I neous product.
market where the speculation 2. sometimes applied to prod-
occurs. Movement may be de- ucts produced by a country, even
fined by amplitude, frequency I though there are many firms
or some other measure. within the country whose prod-
• deterioration ucts are the same, if buyers dis-
I tinguish products based on the
the process or occurrence of an
asset's declining productivity as ~ country of origin. This is called
it ages. This is a component of ; the Armington assumption.
depreciation. . • digital nervous system
• deterministic functions the digital processes which en
and variables
not random. A deterministic I
function or variable often
means one that is not random,
in the context of other variables I

available.
• development economics
a sub-discipline within econom-

II ========&cmomics
II directfoetor content I discrete choice l~r mmlels 45

able a company to perceive and ~ the expiry date of the bond. In

react to its environment, to : difference to coupon bonds, dis-
sense competitive challenges . COWlt bonds only pay the bearer
and customer needs, and to ~ once, when the bond expires.
organise timely responses. ~ • discount factor
• direct factor content I in a multi-period model, agents
a measure of factor content may have different utility func-
which includes only the factors tions for consumption (or other
used in the last stage of produc- ~ experiences) in different time
tion, ignoring factors used in ; periods. Usually, in these mod-
producing intermediate inputs. : els they value future experi-
• direct-plus-indirect factor ~ ences, but to a lesser degree
content ; than present ones. For simplic-
: ity, the factor by which they dis-
a measure of factor content ~ count next period's utility may
Which includes factors .used in ; be a constant between zero and
producing the intermediate in- : one and if so, it is called a dis-
puts and so forth. That is, it in- ~ count factor.
cludes all the primary factors
that contributed, however indi- .•
I di scount rate
rectly, to the production of a the interest rate at which an
I
good. ; agent discounts future events in
: preferences, in a multi-period
• discoUnt bonds
~ model. Often denoted as 'r'. A
a bond perchased at a discount
; present-oriented agent dis-
or at a price less than its face : counts the future heavily and so
Bents Issued at a [lscomt ~ has a 'High' discount rate.
I:; ~. I CIIIII
Ua _ _ _. U - t
",149
3,151

_PllJlltk 111,_
~ • discrete choice linear
1<14 11llC,ooo o!
.~~hd... N .lAg
models
~ Pr(Yj=!) = F(Xj'b) = ~'b.
fR.~to!'bRi, $1",_
I.t.JV=_)ri&:.
t'"l:.c:a . . . . .
:
.u~at
.
...JW!
~, ~.
an econometric model in which
value. The face value is the ~ the actors are presumed to have
amount of money that the ; made a choice from a discrete
holder of the bond receives at : set. Their decision is modelled
I

&onomi&s=====~= II
""46=~=======d""isC""rete,,,,'=r;es.rion mmiels Idispute settlement body
as endogenous. Often the
choice is denoted Yi.
• discrete regression models
econometrics models in which
the dependent variables assume
discrete values.
• discrete time
the division of time into indi-
visible units. In economic mod-
els, these units represent peri-
ods, such as days, quarters or
years .
• diseconomies of scale
similar to economies of scale,
but with the implication that
they are negative, so larger scale
would increase the cost per unit.
ATC I I I I
t-- Olseconomin occur
f--- whon output gO"
beyond the minimum
I-- point of tho long run
t-- average cost curve
-
t-,..
• diseconomies of scale,
scope or agglomeration
cost increases or other disadvan-
tages associated with ¢.e scale
or scope of operation or with
the agglomeration of popula -
" ========Economics
11
1 tion or economic activities.
I • disembodied technological
change
alters the production function
without requiring gross invest-
I ment to carry it into place.
I • disintermediation
the prevention of banks from
flowing money from savers to
I borrowers as an effect of regu-
I lations.
I • dismal science
refers to economics, which be-
cause it is so often used in ref-
I erence totradeoffs, is widely
thought to be depressing to
study.
• dispute settlement
I I in the GAIT, the adjudication
Imr.m. I of disputes among parties. In
--r-
i-"'" the WTO this is done by the
V ,I
/' dispute settlement mechanism.
• dispute settlement body
I the entity within the WTO
Output
which formally deals with dis-
putes between members. It con-
I sists of all WTO members
I meeting together to consider
reports of panels and the Ap-
I pellate Body.
I
II dissaving I dumestic
• dissaving
when individuals or households
spend more than their current
income.
• dissipate rent
to use up, in real resources, the
full value of the economic rents
that are being sought by rent
seeking.
• distance decay
47
*================
I eludes taxes and subsidies, tar-
I iffs and NTBs, externalities, in-
complete information and im-
I perfect competition.
I • Dixit-Stiglitz utility
I the Dixit-Stiglitz function used
as a utility function.
• dollar standard
an international financial sys-
I tem in which the U.S. dollar is

the diminishing level of inter- I used by most' countries as the

action or value of a variable, primary reserve asset, in con-
with increasing distance, largely . trast to the gold standard m
resulting from the effect ofvari- I which gold played this role.
ous forms of distance-sensitive I • dollarisation
transaction costs on demand or
official adoption by a country
cost patterns or functions.
ou~er than the United States of
• distance elasticity of I the U.S. dollar as its local cur-

demand I rency.

the relative response of effec- • Domar Aggregation

tive demand to a change in the
the principle where the growth
distance (or transport costs) I
rate of an aggregate is the
which a consumer (or consum-
I weighted average of the growth
ers) has (have) to overcome, in
rates of its components, where
order to purchase a good or ser- I
each component is weighted by
vice at a given price.
I the share of the aggregate it

• distortion makes up. The idea comes up

any departure from the ideal of in the context of national ac-
perfect competition which in- I counts and national statistics.
terferes with economic agents, I • domestic
maximising social welfare when
; within one's own country. A
they maximise their own. In- domestic producer is one that

&onomics====================== II
""4""8=========,,,,dome.=:: content requirement I dual economy II
produces inside the home coun-
try. A domestic price is the price
inside the home country. Oppo-
site of 'foreign' or 'world'.
• domestic content require-
ment
a requirement where goods sold
in a country contain a certain
minimum of domestic value
added.
• domestic credit
credit extended by a country's
central bank to domestic bor-
rowers, including the govern-
ment and commercial banks. In
the United States, the largest
component by far is the Fed's
holdings of U.S. government
bonds, but it also makes some
short-term loans to banks to use
as their reserves.
3D
'"
10
--_ ... --- --- ----
·1.
-20 ...... _ ............
....,.
·lD
... 1/01 4/01
- eom.ucO"MlIt
___ •
• dominant designs
after a technological innovation
and a subsequent era of ferment
in an industry, a basic architec-
1/ ========&anomics
I ture of a product or process
I which becomes the accepted
market standard. Dominant
I designs may not be better than
I the alternatives nor can it be
promised that they will be in-
novative. They have the bench-
I mark features to which subse-
quent designs are compared.
I
• double coincidence of
wants
I a problem that is generally re-
I lated to the Barter System. Re-
fers to a situation where the
I supplier of good X wants good
I Y and the supplier of good Y
wants good X.
I
• drawback
rebate of import duties when
I the imported good is re-ex-
ported or used as input to the
production of an exported good.
... --- ...
• dual economy
I an economy that is supposed to
I consist of two relatively distinct
parts, in terms of specific dis-
7/01 10/01 tinguishing attributes. In the
.. - -
Non·~credtt
NIt~tD~
I development literature, numer-
ous theories use this proposed
dualism to isolate relationships
I between the two parts, which
are suggested to reinforce the
I
dualism.
II duallabourmarket I dynamicgainsfromtrade
DualF.ronomy \fOO.I: RuralAgrladturalSeclor
Q.-q.... utyora,product
1
1,."1 .1'0'
• dual labour market
a segmented labour market in
~vhich one part is, usually and
I~ broa~ terms, characterised by
high skills and wages, job secu-
rity and desirable working and
car~er development conditions,
WhIle the other part has low
wages, no or inferior benefits,
a temporary or unstable nature,
no or little chance of advance-
ment and otherwise poorer
working conditions.
• dummy variables
In an econometric model a
variable which marks or ~n-
codes a particular attribute. A
dummy variable has the value
zero or one for each observa-
tion, e.g. 1 for pass and 0 for
fail .
• Durbin's h test
an algorit~m ~or detecting
autocorrelanon ill the errors of
a time series regression. The
EconomiCS=======1I
49
*===============
~ implicit citation is to Durbin
I (1 ~70). The h statistic is asymp-
: toncally distributed normally, if
~ the hypothesis is that there is
I no autocorrelation.
I • Durbin-Watson statistic
~ a test for first-order serial cor-
: relation, in the residuals of a
~ time series regression. A value
; of 2.0 for the Durbin-Watson
: statistic indicates that there is
~ no serial correlation. This re-
; sult is biased towards the find-
: ing that there is no serial corre-
~ lation if lagged values of the
~ regressors are in regression.
; • dynamic effects
;. certain effects of trade and trade
: I i beralisation that are poorly
~ un d erstood, including both
; multilateral and preferential
: trade agreements, that extend
~ beyond the static gains from
I trade. Such dynamic effects are
: thought to make the gains from
~ trade substantially larger than
I in the static model.
; • dynamic gains from trade
~ the hoped-for benefits from
: trade which accrue over time
~ in addition to the conventional
; static gains from trade of trade
"",50======dyna="",m"",ic"",m"",ul=tiP"",I=ier~ Economic Overhead Capital (EOC)
theory. Sources of these gains
are not well understood or
documented, although there
exist a variety of possible theo-
retical reasons for them and
some empirical evidence that
countries have benefited more
than the static gains alone
would suggest.
• dynamic multipliers
the impulse responses in a dis-
tributed lag model.
• dynamic optimisations
the maximisation problems to
which the solution is a function.
• dynamic programming
the study of dynamic
optimisation problems through
the analysis of functional equa-
tions like value equations. This
phrase is normally used, analo-
gously to linear programming,
to describe the study of discrete
problems.
• early harvest
a term, in trade negotiations,
for agreeing to accept the re-
sults of a portion of the nego-
tiations, before the rest of the
negotiations are completed.
• econometrics
the application of statistical
" __====================Economics
1\
I methods to the empirical esti-
I mati on of economic relation-
ships. Econometric analysis is
I used extensively in international
I economics, to estimate the
causes and effects of interna-
tional trade, exchange rates and
I international capital move-
ments .
• Economic and Monetary
Union (EMU)
I a currency area formed in 1999,
I as a result of the Maastricht
Treaty. Members of the EMU
I
share the common currency, the
I Euro.
I • economic freedom
freedom to engage in economic
I
transactions, without govern-
I ment interference, but with the
support of the government in-
I
stitutions necessary for that
I freedom, including rule of law,
I sound money and open mar-
kets.
• Economic Overhead
I Capital (EOC)
I economic infrastructure, such as
roads, railways, port facilities,
I
power facilities.
II economic rent I e.ffictive protection .. ============5=1

• economic rent I diseconomies of scale, which

any rerum which a factor 0 f pro- I: occur when an increase in all the
duction receives, in excess of its : inputs brings about a less than
opporrunity cost. ~ proportionate increase in out-
O'scoa.. dUfldltota""bI.andbed
tdIKCftClmfCrWpne....
I put.
q,tot........ iDUI ...... o1qlfot.
·
I • economy, economIes
.
: two meanings of 'economies'
~ need to be distinguished:
I 1. the economies of regions (as
"'::.. %,,::'v aggregates of interrelated eco-
• economic union nomic activities).
a common marke.t with the I 2. in the sense of economising,
added feature that additional I savings, cost reductions, etc. as
policies: monetary, fiscal, wel- used in agglomeration econo-
fare, are also harmonised across : mies, scale economies,
the member countries. ~ localisation economies.
• economies of flexibility I • effect of trade
the advantages accruing to a ; the effect of a change in some
producer with many plants of : policy or other exogenous vari-
different sizes, in allocating in- ~ able which will increase the
creases or decreases in opera- ; quantity of trade. Since in trade
tions to that plant whose size is : models trade itself is endog-
such as to handle the total out- ~· enous , the effects associated
put change of the producer I with a change in trade depend
most efficiently. ~ on what caused it.
• economies of scale ~ • effective protection
if all the inputs in a production : the concept in which the protec-
process are increased and the ~ tion provided to an industry
output increases proportion- ; depends on the tariffs and other
ately, by more amount than the : trade barriers on both its inputs
increase in the inputs, econo- ~ and its outputs, since a tariff on
mies of scale are being realised. I inputs raises cost. Measured by
There may also be · the effective rate of protec-

Economics======= II
",,52=========Effec=ti;Rate ofProteetion (ERP) I eltuticity II
tion. I efficient, which in turn implies
I that future exchange rates can-
- Effective Rate of Protec-
tion (ERP) not profitably be predicted.
a measure of the protection - elastic
provided to an industry by the having an elasticity greater than
entire structure of tariffs, tak- lone. For price elasticity of de-
ing into account the effects of ~ mand, this means that expen-
tariffs on inputs, as well as on diture rises as price falls. For
outputs. I income elasticity, it means that
EtTectIVera!eofprotectJon.ERP expenditure share rises with in-
VIII_..wcd(__ pn"'").vaI...~dcd.w..n<lpneu)
..........._.._.. -_ ....-........_......._........ _......_..····.M
vllluc-addcd: (world pncel)
come, a supenor good . •

EN' jh:!'!L:[}!,:2d ~ M~+.. ~:",,(1+~}-( 1',,-__"") ., [,,,to:"'!.

~- ~~ ~~
- elastic offer curve
P4' p"" ....... 4Dmctflc _ _ldpm:coJGUtpul.
<Ii:!, c", _abe UIlIf colt ofmt.-dullc luputr II """nclt,,: oDd
I an offer curve along which im-
-td pnM' , .. ,cctn'dy. "'"
~. t,........ t.nffr1k oarput Mid..,( mtermcdaatc II!pl,lls ,..pedavdl·
o."lIIi"'lbyp.. ",ddf*IIaomd.lntcm.etlll,n,h"lltpUlClldficwnti "
I port demand is always elastic.
ERP ~ !'2!!::"'-C.:!!!. = ~,: ~{J_~. It is therefore not backward
Pw·C... l'~a,

bending.
- effective tariff
effective rate of protection. - elasticity
I 1. when used without a modi-
- efficient allocation fier (such as 'cross' or 'income'),
an allocation where it is impos- elasticity usually refers to price
sible unambiguously to im- I elasticity, that is the percentage.
prove upon, in the sense of pro- I change in the quantity de-
ducing more of one good with- manded of a good or service,
out producing less of another. I divided by the percentage
- efficient market I change in its (own) price.
a market in which, at a mini- I
2. a measure of responsiveness
mum, current price changes are of one economic variable to an-
independent of past price I other. Usually, the responsive-
changes or, more strongly, price I
ness of quantity to price along
reflects all (publicly) available a supply or demand curve -
information. Some believe the I comparing percentage changes
foreign exchange markets to be I
(%D) or changes in logarithms
(d In).

II = = = = = = = = E c o n o m i c s
II elasticity ofdemandfor exports I emPl~t argumentfor protection 53

• elasticity of demand for ~ ticity with respect to their price

exports .1 ratio.
the price elasticity of demand ; - elasticity of supply
for exports of a country, either : the (price) elasticity of supply
for a single industry or for the
~ is the percentage change in the
aggregate of all imports.
1 quantity supplied of a good or
Equals the rest of world's elas-
~ service divided by the percent-
ticity of demand for imports. : age change in its (own) price .
• elasticity of demand for 1
: - embeddedness
imports
1 the idea that economic
this is normally the price elas-
1 behaviour is influenced by the
ticity of demand for imports of
dominant norms, institutions
a country, either for a single in- 1
and social practices which, in
dustry or for the aggregate of
1 turn are culturally embedded.
all imports. The latter plays a
critical role in determining how ; - empirical finding
the country's balance of trade ~ something which is observed
responds to the exchange rate. from real-world observation or
1 data, in contrast to something
- elasticity of substitution
that is deduced from theory.
the elasticity of the ratio of two 1
inputs to a production (or util 1 • employment argument for
L
protection
the use of a tariff or other trade
1 restriction to promote employ-
ment, either in the economy at
large or in a particular indus-
1 try. This is a second best argu-

ment, since other policies, such

K as a fiscal stimulus or a produc-
ity) function, with respect to the ~ tion subsidy, could achieve the
ratio of their marginal products ; same effect at lower economic
(or utilities). With competitive cost.
demands, this is also the elas-

Economics======== II
54
=================*
• enabling clause
the decision of the GAIT in
1979 to give developii!lg coun-
tries special and differential
treatment.
• endogenous growth
economic growth whose long-
nm rate depends on behaviour
and/or policy.
• endogenous protection
protection which can be ex-
plained as the outcome of eco-
nomic and/or political forces.
• endogenous variable
an economic variable which is
determined within a model. It
is therefore not subject to direct
manipulation by the modeller,
since that would override the
model. In trade models, the
quantity of trade itself is almost
always endogenous.
• endowment
the amount of something which
a person or country simply has,
rather than their having some-
how to acquire it. In the H-O
Model of trade theory, endow-
ments refer to primary factors
of production, ignoring the fact
that some of them, especially
capital and skill, are deliberately
II = = = = = = = & o n o m i c s
enabling clause I mmplltmule 1/
I accumulated.
I • Engel's Curve
I a general reference to the line
that shows the relationship be-
tween various quantities of a
I good that a consumer is willing
to purchase at varying income
levels (ceteris paribus).
I With rising incomes, the share
I of expenditures for food prod-
ucts declines. The resulting shift
I
in expenditures affects demand
I patterns and employment struc-
tures. It suggests that consum-
ers increase their expenditures
I for food products at a percent-
age rate, which is lower than
that of their increases in in-
I come. Poorer families will
I spend a larger share of their
total expenditures on food than
I the wealthier families.
I • engine of growth
I sometimes used to describe the
role that exports may have
played in economic develop-
I ment, both of some of the re-
gions of recent settlement in the
nineteenth century and of
I today's NICs.
I • entrepot trade
I the import and then export of a
good without further process-
II en:'Pelope I etJ.uilibriutnlJuantity 55
*================
ing, usually passing through an ~ a situation in which there is no
entrep6t, which is a storage fa- I tendency for change. For ex-
cility from which goods are dis- : ample, in the Keynesian expen-
tributed. ~ diture model, the equilibrium
; condition is that planned spend-
• envelope : ing just equals the current level
the outermost points traced out ~ of national income. Once that
by a moving curve. I condition is satisfied, there is no

• envelope eurve : tendency for the level of na-

a curve enclosing, by just touch- ~ tional income to change.
ing, a number of other curves. ~ • equilibrium price
• environmental dumping I a price at which the quantity

export of a good from a coun- ; supplied equals the quantity

try with weak. or poorly enforced : demanded. At this price, there
environmental regulations, re- ~ is no excess of quantity de-
flecting the idea that the ; manded or supplied, nor is
exporter's cost of production is : there any deficiency of either
below the true cost to society, ~ and consequently, the price will
providing an unfair advantage I remain at this level.
in international trade. Also
called eeo-dumping.
I
l '
• Environmental Kuznets L
Curve i
an inverse V-shaped relation- I

ship hypothesised between per

capita income and environmen-
tal degradation. Named after I
the Kuznets Curve dealing with
inequality.
~ • equilibrium quantity
• equilibrium condition
; the quantity of a good de-
a condition that must be satis-
: manded and supplied at the
fied for the equilibrium to ex-
~ equilibrium price.
ist, equilibrium being defmed as

&onomit;s======= II
56 equivalent variation I Europeal1. Free TradeAssociation (EFTA) II
~==============*===============
- equivalent variation I country, denominated in a
the amount of money which, I eurocurrency.
paid to a person, group or _ Europe Agreement
whole economy, would make an agreement between the EU
them as well off as a specified I and each of the ten Eastern
change in the economy. Provides I European countries (starting
a monetary measure of the wel- with Hungary and Poland in
fare effect of that change, which I 1994), creating free trade areas
is similar to, but not in general I and establishing additional
the same as the compensating forms of political and economic
variation. cooperation in the preparation
- escape clause I for these countries' eventual
1. the portion of a legal text ~ membership in the EU.
which permits departure from ; _ European Economic
its provisions in the event of: Community (EEC)
specified adverse circum- I a customs union formed 111
stances. I 1958 by the Treaty of Rome,
2. the US statute (section 201,. I
among six countries of Europe:
1974 trade act) that permits Belgium, France, Germany,
imports to be restricted, for. a I Italy, Luxembourg, and Neth-
limited time and on a nondls- erlands.
criminatory basis, if they have
caused injury to US firms or I _ European Free Trade
workers. Association (EFTA)
I a free trade area, comprising of
- Euro Interbank Offered countries in Europe that did not
Rate (EURIBOR) join the European Economic
a euro-denominated interest I Community. EFTA was estab-
rate charged by large banks, I lished in 1960 among Austria,
among themselves, on euro- Denmark Norway, Portugal,
I '
denominated loans. Sweden, Switzerland and the
_ eurobond I United Kingdom. As of 2000,
a bond which is issued outside I
it includes Iceland,
of the jurisdiction of any single Liechtenstein, Norway, and

Il=======E&onomics
II EftropeanMonetaryAgreement ~ ~I~=ch"",a"",no"",e"",ma=~"",ket======"",5~7

Switzerland. I in relation to its deposit liabili-

I ties and the amount it actually
- European Monetary
Agreement (EMA) holds.
I

an intergovernmental organisation, - excess supply

:
administered by the OEeD which ~ 'supply minus demand. Thus, a
facilitated settlement of balance of I country's supply of exports of a
payments accounts among its homogeneous good is its excess
member states from 1958 to supply of that good.
1972. It replaced the EPU and I
- exchange control
its functions were taken over by
I rationing of foreign exchange,
the IMF in 1972.
I usually used when the exchange
- excess demand rate is fixed and the central
demand minus supply. Thus, a bank is unable or unwilling to
country's demand for imports I enforce the rate by the ex-
of a homogeneous good is its change-market intervention.
excess demand for that good.
- exchange market
- excess profit 1. the market on which national
the profit of a firm over and I currencies are exchanged for
above what provides its owners one another.
with a normal return to capital. 2. the actual exchange market,
_ excess reserves ~ which exists primarily among
the difference between the I large international banks. Oth-
amount of cash which a bank I ers, who wish to exchange cur-
rencies, do it through these
111 _ _ _ I banks .
.-----------~r_--,1~

I 3. the theoretical representation

1~ of the exchange market as, ei-
1500 \----+ I ther the interaction of supply
I and demand arising from ex-
100(1 change-market transactions, or
as an asset market equilibrium
·""""A_ _ _ Seo01 $11Obr.IIn_~03~~
wlsnes or IS reqwrea to nolO, I between currencies.

&onomics======= II
58 exchangerateuvershooting l&XOgenousgt'l1Wth
"'---------~==*
• exchange rate overshoot-
ing
the response of an excha~ge
rate to a shock, by first movlllg
beyond the point where it will
ultimately settle. Thought to
help explain exchange rate vola-
tility, this was first modelled by
Dornbusch (1976).
• exchange rate regime
the rules under which a
country's exchange rate is deter-
mined, especially the way the
monetary or other government
authorities do or do not inter-
vene in the exchange market.
Regimes include floating ex-
chano-e
b
rates, pegged exchange
1.
rate, managed float, craw mg
peg, currency board, and ex-
change controls.
• exchange risk
II
I eign currency.
I • exchange stabilisation
fund
a government institution some-
I times used to handle exchange
I market intervention, charged
with the explicit function of
I smoothing exchange rate fluc-
I tuations.
I • exchange-market interven-
tion
usually done by a country's cen-
tral bank, this is the purchase
and sale of the country's cur-
rency on the exchange market,
I in order to influence or fully
determine its price. These
I
transactions, unless they are
sterilised, change the monetary
I base of the country and thus, its
money supply.
I • exogenous growth

uncertainty about the value of : economic growth that occurs

an asset, liability or commit- I without being the result of de-
ment, due to uncertainty about liberate policy or behaviour. T~e
the future value of an exchange term arises because neoclassl-
rate. Unless they cover them- I cal growth models converge to
selves in the forward market, I a steady state, in which per
traders, with commitments to capita income is constant ~ver
payor receive foreign currency I time. Growth, then reqUlres
in the future, bear exchange I exogenous technical progress.
risk. So do holders of assets and
liabilities denominated in for- I

II =======Eeonomics
II exogenous varillble I export bias
• exogenous variable
a variable which is taken as
given by an economic model. It
therefore is subject to direct
manipulation by the modeller.
In most models, policy vari-
ables such as tariffs and par val-
ues of pegged exchange rates
are exogenous.
• expectation
the expectation of a variable is
the same as its expected value I
and is also used with both ;
meanings. : Probabilities peeted Value
• expected value
maximisation pr.·nc.·ple
the most widely professed rule
in decision theory. It suggests
that the option with the larg-
est expected value should be
chosen-. Calculation of the ex-
Rectedvalue of a decision op-
tIon requires the availability of
the probabilities attached to
each possible environmental
state (e.g. probability of any
specific action taken by the
co~petitor out of all possible
actlons). Thus, the EV is the
s,:m of the products of ~ ~n-
vIron~ental states multIphed
~y theIr respective probabili-
ties.
&onomics=======
59
*================
~ The EV principle actually con-
; sists of a family of principles.
: These principles differ by the
~ way probabilities and the val-
; ues (or payoffs) are generated
: or interpreted (namely either
~ objectively or subjectively).
~ Thus, the following possibili-
; ties are there:
Objective Subjective
Payoffs Payoffs
Objective Objectivdy Ex- Expected
Utility (EU )
I (OEV )
: Subjl"Ctive Subjectively Ex- Subjectivdy
I Probabilities peetl-d Value Exp<."Cted Utility
(SEq -
: (SEV)
I
~ • experience good
~ a product whose value can be
; better ~own after having con-
: sumed It. Producers of expe.ri-
~ ence goods. may temporanly
; char~e a pnce lo:wer than the
: margmal cost, to mduce buyers
~ to try the pr~uct. Done with
I an e~port, this w~uld be legally
~ conSIdered dumpmg.
: - export bias
~ any bias in favour of exporting.
; Most often applied to growth
: that is based disproportionately
I
: on accum ulatlon
. of·the factor
II
60
================*
used intensively in the export
industry and/or technological
progress favouring that indus-
try.
• export credit
a loan to the buyer of an export,
extended by the exporting firm
when shipping the good prior
to payment or by a facility of
the exporting country's govern-
ment. In the latter case, by set-
ting a low interest rate on such
loans, a country can indirectly
subsidise exports.
• export credit insurance
a program to guarantee pay-
ment to exporting firms who
extend export credits.
• export limitation
any policy which restricts ex-
ports.
• export multiplier
the multiplier for a change in
exports, i.e., the increase in
GDP caused by one-unit m-
crease ill exports.
• export pessimism
the view that efforts to expand
exports by the LDCs will lead
to a decline in their terms of
trade because of an inability
(due to weak demand) or un-
II ========&cmomics
exportcrr:dit I e.xpurtrequirement II
I willingness (expressed via pro-
I tection) of developed countries
to absorb these exports.
• export platform
describes the role of a host coun-
I try; as a production location de-
signed to serve international
markets, possibly including the
~ home market of the parent
firm.
• export price index
I
I
price index of the goods which
a country exports.
• export promotion
I a strategy for economic devel-
I
opment which stresses on ex-
panding exports, often through
I policies to assist them, such as
export subsidies. The rationale
is to exploit a country's com-
I parative advantage, especially in
I the common circumstance,
where an over-valued currency
I would otherwise create bias
I
.
agamst exports.
• export requirement
a requirement by the govern-
ment of the host country for
I FDI, where the investor should
export a certain amount or per-
~
centage of its output.
;
I t$JHIrt fUhstitutilm-IF Distributilm / F-Distributilm
I;
• export substitution
a shift to the export of increas-
ingly processed products. The
export of more or less- pro-
cessed raw materials is substi-
tuted for the export of raw or
relatively unprocessed materi-
als contributing to local (or na-
tionaf) employment and the
creation of value added.
• external balance
1. balance of payments equilib-
num.
2. any target value for the bal-
ance on current account, bal-
ance on capital account or bal-
ance of payments.
• external economies of scale
a form of increasing returns to
scale, in which productivity and
thus , costs of individual firms
depend on the output of ~eir
entire industry, rather than Just
their own. Unlike more con-
ventional (internal) scale econo-
mies , these are consistent with
perfect competition.
• externalities
a benefit or cost associated with
an economic transaction, that is
not taken into account by those
directly involved in making it.
A beneficial or adverse side ef-
Eeonomics=======
61
*==============
~ fect of production or consump-
I llon.
; • externality
: an effect of one economic
~ agent's actions on another, such
I that one agent's decisions make
: another better or worse off, by
~ changing their utility or cost.
I Beneficial effects are positive
: externalities, while the harmful
~ ones are negative externalities.
~ • F Distribution / F-Distri-
bution
; defined in terms of two inde-
: pendent chi-squared variables.
~ Say u and v be independently
I
I
2 .. 6
2.35 3.31
~ distributed chi -squared vari-
: abIes with u l and VI degrees of
~ freedom, respectively.
; Then, the statistic: F =(u/u l ) /
~ (v/vl ) has an F distribution with
·· (u l' v) degrees of freedom.
I
~ As can be computed from the
; definition of the t distribution,
: the square of a t statistic may
be wntten:
.
·I
I
",,62======~=== .. F Test/ F-Tests I foctorofproductiun II
t 2=(z2/1)/(v/v 1) I • factor endowment

where Z2, being the square of a I the quantity of a primary fac-

standard normal variable, has a tor available in a country.
chi-squared distribution. Thus,
• factor intensity
the square of a t variable with I
v1 degrees of freedom is an F I the relative importance of one
variable with (l,vJ degrees of : factor versus others in produc-
freedom, that is: I
tion, in an industry, usually com-
pared across industries. Most
t 2 =F(1,v 1)· I commonly defined by ratios of

• F Test/ F -Tests I factOr quantities employed at

a test for the joint hypothesis common factor prices, but

where a number of coefficients sometimes by factOr shares or
are zero. Large values generally I by marginal rates of substitu-
reject the hypothesis, depend- tion between factors.
ing on the level of significance • factor intensity reversal
required.
a property of the technologies
• factor abundance I for two industries such that their

this is fundamental to the H -0 I ordering of relative factor inten-

Model, the abundance or scar- sities is different at different
city of a primary factor of pro- I factor prices. For example, one
duction. Because, in the short I industry may be relatively capi-
run at least, the supplies of pri- tal intensive compared to the
mary factors are more or less other at high relative wages and
fixed, this can be taken as given I labour intensive at low relative
for determining much about a wages.
couiltry's trade and other eco- • factor intensity uniformity
nomic variables. the absence of factor intensity
• factor augmenting I reversals.
a technological change or tech- I • factor of production
nological difference, if produc- I the input or resource that is
tion functions differ by scaling combined with other factOrs of
of a factor input only.
production in a production pro-

II = = = = = = = = & o n o m i c s
II foetor price Ifoetor share 63
*===============
cess, to produce a good or ser- ~ wages, are driven towards
Vlce. ; equality in the absence of bar-
: riers to trade. This happens
• factor price I am on er other reasons because
the price paid f?r the services ~ price ~centives cause countries
of a unit of a pnmary factor of : to choose to specialise in the
production per unit time. It ~ production of goods whose fac-
takes into consideration the I tors of production are abundant
wage or salary of labour and t~e : there which raises the prices of
rental prices of land and capI- ~ the factors towards equality,
tal. Does not normally refer to I with the prices in countries
the price of acquiring owner- : where those factors are not
ship of the factor itself, which ~ abundant.
might be called the 'purchase I .
price'. : • factor price frontier
~ a curve in fact or space s~ow-
• factor price equalisation ; iner the minimum combinations
ilieorem : ofb factor prices consistent WI.th
one of the major theoretical re- ~ the absence of profit in produc-
sults of the Heckscher-Ohlin ; ing one or more goods, given
Model, with at least as many : their prices. Since, with perfect
goods as factors, shewing th~t ~ competition, profit implies dis-
free and frictionless trade WIll I equilibrium, this shows a lower
cause factor price equalisation ~ bound on equilibrium factor
between two countries, if they : prices.
have identical, linearly homoge- I

neous technologies and their '. • factor proportions model

factor endowments are suffi- ~ the Heckscher-Ohlin model of
ciently similar to be in the same ; trade.
diversification cone. ; • factor share
• factor price equalisation : the fraction of payments to
an effect observed in models of ~ value added, in an industry, that
international trade - that the ~ goes to a particular primary fac-
prices of inputs to pr?duc~on ; tor.
in different countnes, hke

.& : o n o m u s = = = = = = = II
64
"'----------~= *
• factor space
a graph in which the axis mea-
sure the quantities of factors .
• factor-price space
a graph with factor prices on
the two axis.
• factor-saving
disproportionately in favour of
using less of a particular fac-
tor.
• factor-using
biased in favour of using more
of a particular factor.
• factory systems
the idea where factories may
have been more efficient by re-
ducing transactions costs.
• fads
the conjecture that market
prices for securities take long
swings away from their funda-
mental values and tend to re-
turn to them.
• Fama-MacBeth Regression
a panel study of stocks to esti-
mate CAPM or APT param-
eters.
.FAS
Free Alongside Ship. Same as
FOB, but without the cost of
II = = = = = = = B c o n o m i c s
factor space I Fed Funds Rate II
I loading onto a ship.
I • fast track
a procedure adopted by the US
Congress, at the request of the
President, committing it to con-
I sider trade agreements without
amendment. In return, the
President must adhere to a
I specified timetable and other
procedures.
• fat-tailed distributions
describes a distribution with
I excess kurtosis.
I • favourable exchange rate
I an exchange rate different from
the market or official rate, pro-
vided by the government on a
I transaction as an indirect way
of providing a subsidy.
• Feasible Generalised Least
Squares (FGLS)
I the generalised least squares es-
I timation procedure, but with an
estimated covariance matrix, not
an assumed one.
• Fed Funds Rate
I the interest rate at which US
banks lend to one another, their
excess reserves held on deposit
I at the US.
~
II Federal In.tornu:tion Processing St4~rtls (PIPS) Ifirst mover iUl'PllnttlBe 65

• Federal Information ~ • final good

Processing Standards • a good which requires no fur-
(FIPS) : ther processing or transforma-
these are encodings defined ~ tion, to be ready for use by
by the US government and ~ consumers, investors or gov-
used to encode some data ; ernment.
(like states and counties) 10 ..• • financial capital
US data sets.
: financial assets, such as stocks,
• fiat money ~ bonds, bank deposits, etc., as
1. a money whose usefulness ; opposed to real assets such as
results, not from any intrinsic : buildings and capital equip-
value or guarantee that it can •· ment.
be converted into gold or an-
~ • financial intermediary
other currency, but only from a
~ an institution which provides
government's order (fiat) that
it must be accepted as a means ; indirect means for funds from
of payment. : those who wish to save or lend,
~ to be channelled to those who
2. money which is intrinsically
; wish to invest or borrow. Ex-
useless and is used only as a
: amples include banks and other
medium of exchange.
~ depository institutions, mutual
• filters ; funds and some government
a way of treating or adjusting programs.
:
data before it is analysed. :• • FIR
More exactly, a filter is an al-
~ Factor Intensity Reversal.
gorithm or mathematical op-
eration that is applied to a :• - first degree homogeI1eous
time series sample to get an- ~ homogeneous of degree 1.
other sample, often called the
~ • first mover advantage
'filtered' data. For example, a
filter might remove some ; the advantage which a firm may
high-frequency effects from : derive from being the first to
the data. ~ enter a market or from being
• the first to use a new technol-
~ ogy, advertising technique, etc.

Eetmomics======= II
66 First Order Condition (FOC) I ;her Consiste1u:y I Fisher Consistent ...
• First Order Condition
(FOC)
one of the mathematical neces-
sary condi tions for
maximisation, used routinely in
solving economic models. Typi-
cally, it consists of setting equal
to zero the derivative of the
function being maximised (or
its Lagrangian), with respect to
a variable that can be con-
II
I • fiscal policy
I any macroeconomic policy in-
volving the levels of govern-
ment purchases, transfers or
I taxes, usually implicitly focused
on domestic goods, residents or
firms. A fiscal stimulus is an
I increase in purchases or trans-
fers or a cut in taxes.
• fiscalist view
I

trolled. an extreme Keynesian view,

that money doesn't matter at all
• first welfare theorem of I as aggregate demand policy.
economics / first theorem Assumes that investment dc-
of welfare economics mand does not respond to in-
the statement which states that I terest rate changes. Relevant
a Walrasian equilibrium is only in depression conditions.
weakly Pareto optimal. Such a
• Fisher Consistency / Fisher
theorem is true in a large and I
Consistent Estimation
important class of general equi-
librium models (usually static I a necessary condition for maxi-
ones). The standard case is if ~ mum likelihood estimation to
every agent has a positive quan- ; be consistent. Maximising the
tity of every good and every likelihood function L gives an
agent has a utility function that I estimate for parameter b that
is convex, continuous and I is Fisher-consistent if:
strictly increasing, then the First E[d(ln L)jdb]=O at b=b o,
Welfare Theorem holds. I where b is the true value of b.
o
I Another interpretation or
• first-order stochastic phrasing: 1\n estimation proce-
dominance
dure is Fisher consistent if the
usually means stochastic domi- I parameters of interest solve the
nance. population analog of the esti-
mation problem.'

" ======================;;;;Economics
II Fisher Effict Ijk&ibility strategy 67
.==============~
_ Fisher Effect ~ - Fisher Information
the theory where a change in the ; an attribute or property of a
expected rate of inflation will : distribution with known form
lead to an equal change in the ~ but uncertain parameter values.
nominal interest rate, thus I It is only well-defined for dis-

keeping the real interest rate ~ tributions satisfying certain as-

unchanged. : sumptions.
I
: - Fisherian Criterion
~ for optimal investment by a
; firm - that it should invest in
Io<INnl';;.I.~ R"';;;:;l'=:tl')(;k
: real assets until their marginal
"- PI'IOCl, (Fal ir\

~ internal rate of return equals the

UwUMIIMJ Ic..- ~lCounIl"et. t:>f
U")I'")I) l..Iturecesn tIo.... ->

I appropriately risk -adjusted rate

- Fisher Equation : of return on securities.
I
nominal rat~ of interest = real : - Fixed Effects Estimator /1
interest rate + inflation
~ Fixed Effects Estimation
- Fisher Hypothesis (FE)
the real rate of interest is con- a linear regression in which cer-
stant. Hence, the nominal rate tain kinds of differences are sub-
moves with inflation. The real ~ tracted out, so that one can es-
rate of interest would be de- ; timate the effects of another
termined by the time prefer- : kind of difference.
ences of the public and tech- I
: - flexibility strategy
nological constraints deter- I
mining the return on real in- : could be considered a strategic
vestment. ~ 'response to uncertainty'. A flex-
; ible firm, investment, set of
- Fisher Index : skills, residential arrangement,
is a price index, calculated for a ~ etc. is more responsive to un-
given period by taking the ; predictable futures than a rigid
square root of the product of the : firm, etc. Pursuing a flexibility
Paasche index value and the ~ strategy would mean to build
Laspeyres index value. ; appropriate flexibilities into
: projects and organisations, '
I '\

Economics==~==== II
68 • .flexible exchange rate I FOB pricing /I

even if that means higher I jobs, whereas the other part of

project or organisational costs, I the labour force can be hired and
as long as the benefits of pos- fired with ease or employed
sible future adjustments out- I with variable hours as needed.
weighs these costs. I _ flexible-accelerator model

- flexible exchange rate a macro model where there is a

I

same as floating exc hange rate. variable relationship between

the growth rate of output and
- flexible specialisation I
the level of net investment. The
a company- level strategy of : relation between the change in
'permanent innovation', 'accom- I output and the level of net in-
modation to ceaseless change' I vestment is the accelerator prin-
(rather than to control it). This I ciple.
strategy is based on flexible
multi-use equipment, skilled I-FOB
workers and the creation, the price of a traded good ex-
through politics, of an industrial cluding the transport cost. It
community that restricts the I stands for 'free on board', but
forms of competition to those is used only as these initials. It
favouring innovation. means the price after loading
I onto a ship, but before shipping,
- flexible work for.ce
thus not including transporta-
a work force that can be I tion, insurance and other costs
adapted to changing circum- I needed to get a good from one
stances. In the context of seg- I country to another. Contrasts
mented, dual labour markets, with elF and FAS.
it's been suggested that a flex- I
ible work force may have two - FOB pricing
meanings: One part of the Free On Board Mill base pric-
labour force is given the chance I ing. A pricing system in which
to be flexible itself, i.e. to be prices are quoted for delivery at
considered functionally suffi- the point of production, with
ciently diversified so that em- I the buyer to pay freight from
ployees can be used for differ- that point.
ent functions or in different

II ========Bcon"",ies
II FOGS Negotiations l.fi:weigndirectin~==t========"",6~9
• FOGS Negotiations .~ • foreign asset position
in ilie Uruguay Round, this por- I the amount of assets which resi-
tion of the negotiations dealt ~ dents of a country own abroad.
with the functioning of the : Also used to mean the net for-
GAIT System and resulted ul- ~ eign asset position.
timately in the formation of the ~ • foreign direct investment
wro and its dispute settlement
; 1. acquisition or construction of
mechanism.
: physical capital by a firm from
• footloose activity ~ one (source) country in another
an activity that is viable at many ; (host) country.
different locations. It does not

----...
SlIUCRlllEalRIIITOCIlIlCRYlll_tLCMIM _ _

depend on any specific location ..............

factor. An industry is footloose I
if its long run profitability is the
same for any location in an
economy. I
: 2. investments undertaken by
• footloose factor ~ multinational firms in pursuit of
a factor which can move easily I their own organisational objec-
across national borders, in con- ; tives
trast to one that, due to inclina-
: 3. a component of a country's
tion or constraints, cannot.
~ national fmancial accounts. For-
Footloose factors are some-
; eign direct investment is the
times thought to have an advan-
: investment of foreign assets into
tage in a globalised economy.
~ domestic structures, equipment
• footloose industry I and organisations. It does not

an industry which is not tied to : include foreign investment into

any particular location or coun- ~ the stock markets. Foreign di-
try and can relocate across na- I rect investment is believed to be
tional borders, in response to ; more useful to a country than
changing economic conditions. : investments in the equity of its
Many manufacturing industries ~ companies because equity in-
seem to have this characteris- ; vestments are potentially 'hot
tic. : money' which can leave at the
I

Beonomies======= II
70 foreign investment af3;mentfor protecticm Iforward linkages
first sign of trouble, whereas
FDI is durable and generally
useful whether things go well
or badly.
• foreign investment argu-
ment for protection
the use of protection, to attract
FDI from abroad. It does work,
since much FDI has been moti-
vated by firms trying to get be-
hind a tariff wall to sell their
products. In an otherwise
nondistorted economy, how-
ever, the cost in terms of more
expensive goods is higher than
the benefit from additional capi-
tal.
• foreign repercussion
the feedback effect on a domes-
tic economy, when its macro-
economic changes cause large
enough changes abroad for
those in turn to cause further
changes at home. Most com-
monly, a rise in income stimu-
lates imports, causing an expan-
sion abroad that in turn raises
demand for the home country's
exports.
• Foreign Sales Corporation
(FSC)
a provision of the US tax code
which grants income-tax re-
II ========E&cmomics
II
I bates to American exporters, if
I they form what may be a largely
artificial foreign subsidiary
I called an FSC. This has been the
I subject of a trade dispute with
the EU which complained to the
WTO that this constitutes an
I illegal export subsidy.
I • foreign trade zone
an area within a country where
imported goods can be stored
I or processed without being sub-
I ject to import duty. Also called
a 'free zone', 'free port', or
I 'bonded warehouse'.
I • formula approach
I a procedure for organising mul-
tilateral trade negotiations, us-
ing a formula for tariff reduc-
I tions as a starting point.
I • forward
I on the forward market.
I • forward discount
opposite of forward premium.
I
I
• forward linkages
linkages between a producer or
I supplier and their customers.
As different from backward
linkages, forward linkages are
I output-oriented and, in the ma-
I trix-context of input-output
analysis, are conventionally
II forward market Ifree entry
traced in rows.
- forward market
a market for exchange of cur-
rencies in the future. Partici-
pants in a forward market en-
ter into a contract to exchange
currencies, not today, but at a
specified date in the future,
typically 30, 60 or 90 days from
now and at a price (forward
exchange rate) that is agreed
upon today.
_ forward premium
the difference between a for-
ward exchange rate and the spot
exchange rate, expressed as an
annualised percentage return on
buying foreign currency spot
and selling it forward.
- forward rate
also called the forward exchange I
rate, this is the exchange rate on
a forward market transaction.
_ four-firm concentration
ratio
the percent of an industry's sales I
which accrue to the largest four
firms, a measure of industrial ~ the assumption where new
concentration.
- fragmentation
the splitting of production pro- ; with free exit, it implies that
cesses into separate parts which : profit must be zero in equilib-
Economics=======
71
*================
~ can be done in different loca-
; tions, including in different
: countries.
I
: - free cash flow
~ cash flow to a firm, in excess of
I the req uirement to fund all
~ projects that have positive net
: present values when discounted
~ at the relevant cost of capital.
; Free cash flow can be a source
: of principal-agent conflict be-
~ tween shareholders and manag-
I ers, since shareholders would
: probably want it paid out in
I
: some form to them and man-
I agers might want to control it,
~ e.g. to use it for unprofitable
: projects, for perquisites, to
~ make acquisitions, to create jobs
; for friends and allies' and so
: forth.
: - free enterprise
I a system in which economic
I agents are free to own property
and engage in commercial
transactions.
: - free entry
; firms are permitted to enter an
: industry and can do so without
~ any costs whatsoever. Together
I
II
72 .free entry condition l.free trade II
========*
num. I • free reserves
• free entry condition I excess reserves minus borrowed
reserves.
an assumption posted in d. I
search and matching model of : • free rider
. I.
a market. The assumption 1S : someone who enjoys the ben-
that there is no institutional con-
I efits of a public good without

straint on firms entering the ~ bearing the cost. An example,

market (e.g. to hire workers).
There is no fixed number of
firms. The number of firms is
determined in equilibrium, by
the costs of starting up.
: in trade policy, is that trade
~ liberalisation benefits the ma-
; jority of consumers without
their lobbying for it. This may
I tip the policy in the direction of

• free exit I protection, for which there are

the assumption where firms are I fewer free riders.

permitted to leave an industry • free spatial demand curve
and can do so costlessly. demand schedule (pricejquan-
I tity of demand function) of con-
• free good
goods that are unlimited in sup- I sumers, distributed in space
with varying distances from a
ply and which therefore have no
I given, central location, aggre-
opportunity cost.
gated for a supply location with
• free market economy / free 'price' (in the mind of consum-
market economies I ers) to include transport costs

an economy in which the allo- I from this location to the con-

cation for resources is deter- sumers.
mined only by their supply and • free trade
the demand for them. This is I
a situation in which there are no
mainly a theoretical concept as
I artificial barriers to trade, such
every country, even capitalist
ones, places some restrictions I as tariffs and NTBs. Usually
used, often only implicitly, with
on the ownership and exchange
I frictionless trade, so that it im-
of commodities.
I plies that there are no barriers
to trade of any kind. For a

II =======Bconomks
II Free TradeArea (FrA) 1JUture-orien:"",RO""e'1""Jt=========7=3
traded homogeneous product, ~ - frictionless trade
it follows that domestic and ; the absence of natural barriers
world price must be equal. : to trade, such as transport
I
- Free Trade Area (FTA) : costs.
a group of countries which ~ - Friedman Rule
adopt free trade (zero tariffs ~ in a cash-in-advance model of a
and no other restrictions on ; monetary system, the Friedman
trade) on trade among them- : rule for monetary policy is to
selves, while not necessarily ~ deflate so that it is not costly for
changing the barriers that each ; those, who have money, to con-
member country has on trade : tinue to hold it. Then, the cash-
with the countries outside the ~ in-advance constraint isn't bind-
group. I ing on them.

- Free Trade Area of the ; - Full Information Maxi-

Americas (FTAA) mum Likelihood (FIML)
a preferential trading arrange- ~ an approach to the estimation
ment being negotiated among ~ of simultaneous equations.
most of the countries (all but
Cuba) of the western hemi- ~ - functional I functionals
sphere. ; a mapping from paths of func-
: tions to the reals (e.g. a value
- frequency ~ function defmed by a mapping
the speed of the up and down ~ from possible paths of choices.
movements of a fluctuating eco-
nomic variable, that is, the num- ; - functional distribution of
ber of times, per unit of time, I income
which the variable completes a : how the income of an economy
cycle of up and down move- ~ is divided among the owners of
ment. ; different factors of production,
: into wages, rent, etc.
- frictional unemployment •
unemployment which comes : - future-oriented agent
from people moving between ~ discounts the future lightly and
jobs, careers and locations. • so has a low discount rate or
; equivalently a high discount fac-

&onomics==-====== II
74 futures market I General~eement on Tariffi and Trade (GATT) "
tor.
- futures market
a market for exchange (of cur-
rencies, in the case of the ex-
change market) in the future.
i.e., participants contract to ex-
change currencies, not today,
but at a specified calendar date
in the future, and at a price (ex-
change rate) that is agreed
upon today.
- gains from trade theorem
the theoretical proposition
where (in the absence of distor-
tions) there will be gains from
trade for any economy that
moves from autarky to free
trade, as well as for a small open
economy and for the world as a
whole if tariffs are reduced ap-
propriately.
- game
a theoretical construct in game
theory in which players select
actions and the payoffs depend
on the actions of all the play-
ers.
- game theory-
the modelling of strategic inter-
actions among agents, used in
economic models where the
numbers of interacting agents
(firms, governments, etc.) is
II = = = = = = = = B c o n o m i c s
I small enough that each has a
I perceptible influence on the oth-
ers.
I
- gamma index
a measure of the connectivity of
I a network comparing (through
a ratio) the actual number of
links with the maximum num-
I ber of possible links (edges) in
this network.
Gamma Index Formula =
actual number of links
------------
I half the number of nodes
(number of nodes - 1)
- gastarbeiter
I
a guest worker.
_ GATT Articles
I the individual sections of the
I GAIT agreement, convention-
ally indentified by their Roman
numerals. Most were originally
I drafted in 1947, and are still
I
included in the WTo.
_ General Agreement on
Tariffs and Trade (GATT)
I a multilateral treaty entered
I into in 1948 by the intended
members of the International
I Trade Organisation. The pur-
I pose of the same was to imple-
I
ment many of the rules and ne-
II GeneralAgreementon Trade in
gotiated tariff reductions that
would be overseen by the ITO.
With the failure of the ITO to
be approved, the GATT be-
came the principal institution
regulating trade policy, until it
was subsumed within the wro
in 1995.
_ General Agreement on
Trade in Services (GATS)
the agreement, negotiated in
the Uruguay Round, which
brings international trade in
services into the wro. It pro-
vides for countries to provide
national treatment to foreign
service providers and for them
to select and negotiate the ser-
vice sectors to be covered un-
der GATS.
- general equilibrium
equanimity of supply and de-
mand in all markets of an
economy simultaneously. The
number of markets does not
have to be large. The simplest
Ricardian model has markets
only for two goods and one
factor, labour, but this is a
general equilibrium model.
Contrasts with partial equilib-
rium.
:&onomics=======
Servic; (GATS) I Gini Coefficient 75
~ - generalised system of
; preferences
: tariff preferences for develop-
~ ing countries, where some de-
I veloped countries let certain
~ manufactured and semi-manu-
: factured imports from develop-
~ ing countries enter at lower tar-
; iffs than the same products
: from developed countries.
I
: - gentrification
~ the widespread emergence of
I middle-and upper middle-class
: enclaves in formerly deterio-
~ rated-inner-city neighbourhoods.
I
: _ geobase
I database or index of the inter-
; national literature of geography,
: ecology, earth science and ma-
~ rine science.
~ - Giffen good
I a good which is so inferior and
: so heavily consumed at low in-
I .
: comes that the demand for It
I rises when its price rises. The
~ reason is that the price increase
: lowers income sufficiently that
~ the positive income effect (be-
; cause it is inferior) outweighs
: the negative substitution effect.
I
: - Gini Coefficient
~ a measure of income inequal-
II
76 global Igloba/isation "
=================*
ity within a population, rang- , interdependencies.
ing from zero for complete I • global competitiveness
equality, to one if one person
has all the income. It is de- I competitiveness applied inter-
fined as the area between the I nationally.
Lorenz Curve and the diago- • global optimum
nal, divided by the total area an allocation that is better, by
under the diagonal. I some criterion, than all others

or rec- a¥aUabie
lb DCAF
possible.
GW c.wl'lkk., aMI GDP po-r ~.plbo
(latnt
~ teIedtd
)'far)
~

i :: : ":."
3
111
_
r, 1 : I ~
It measures the degree to
which two frequency (percent-
age) distributions correspond.
The Gini coefficient is a num-
ber between 0 and 100 (or 0
and 1), where 0 means perfect
equality (exact correspondence,
e.g. everyone has the same in-
come) and 100 (or 1) means
perfect inequality (one person
has all the income, everyone else
earns nothing).
• global
the world-wide presence of a I
phenomenon or a world-wide I
spatial pattern of locations of an
organisation and/or a pattern of ~
• globalisation
1. the increasing integration of
world markets for goods, ser-
I vices and capital that attracted
~ (. ' I • ill II I~ 11 14
special attention in the late
1990s.
I 2. also used to encompass a va-
I riety of other changes that were
perceived to occur at about the
I same time, such as an increased
I role for large corporations
(MNCs) in the world economy
I and increased intervention into
I domestic policies and affairs by
international institutions such as
I the IMF, WTO and World
I Bank.
I 3. among countries outside
the United States, especially
developing countries, the
term sometimes refers to the
domination of world economic
affairs and commerce by the
I United States.

1/ ========Eeonomics
II gold standard I Grandfotherclause . . =========="",7=7

• gold standard
a monetary system where both
the value of a unit of the cur-
rency and the quantity of it in
circulation are specified in terms
of gold. If two currencies are
~ and analysed.
~ • government procurement
; purchase of goods and services
: by government and by state-
:I owned enterpnses.
.
I
: • government procurement
. practice
; the methods by which units of
: government and state-owned
~ enterprises determine from
; whom to purchase goods and
: services. When these methods
~ include a preference for domes-
I tic firms, they constitute an
: NTB.
I

both on the gold standard, then : • graduation

I
the exchange rate between : termination of a country's eli-
them is approximately deter- ~ gibility for GSP tariff prefer-
mined by their two prices in ; ences, on the grounds that it has
terms of gold. : progressed sufficiently, in terms
~ of per capita income or another
• good
; measure, that it is no longer in
a product which can be pro- : need to special and differential
duced, bought and sold and that ~ treatment.
has a physical identity. Some-
times said inaccurately to be ~ • Grandfather clause
anything that 'can be dropped I a provision in an agreement,
on your foot' or, also inaccu- ~ including the GATT but not the
rately, to be 'visible'. Contrasts : WTO, which allows signatories
with service. Trade in goods is ~ to keep certain of their previ-
much easier to measure than ; ously existing laws that other-
trade in services and thus much : wise would violate the agree-
more thoroughly documented ~ ment.

Economies======= II
"",78=========B"",ra"",VJ='ty~ I Gross National Product (GNP) II
• gravity model
a model of the flows of bilat-
eral trade based on analogy
with the law of gravity in phys-
ics : T.'J = AY.Y./D
'J
.. , where
'1
T i · is exports from country i to
c6untry j, Yi,Y. are their na-
tional incomes,' D .. is the dis-
'J
tance between them and A is a
constant. Other constants as
exponents and other variables
are often included.
• grey area measure
a measure whose conformity
with existing rules is unclear,
such as a VER under the GAIT
prior to the wro.
• green box
category of subsidies permitted
under the WTO Agriculture
Agreement includes those not
directed at particular products,
direct income support for farm-
ers unrelated to production or
prices, subsidies for environ-
mental protection and regional
development.
• green field investment
FDI which involves the con-
struction of a new plant, rather
then the purchase of an exist-
ing plant or firm.
II ========Economics
I • Gross domestic product
I (GDP)
1. the total value of new goods
and services produced in a given
I year, within the borders of a
I country, regardless of by whom.
It is referred as 'gross' in the
I sense that it does not deduct
depreciation of previously pro-
duced capital, in contrast to
I NDP.
I 2. value of all the goods and ser-
vices produced by workers and
capital located with a country
I (or region), regardless of na-
tionality of workers or owner-
I
ship.
• Gross National Product
(GNP)
1. the total value of new goods
I
and services produced in a given
I
year by a country's domestically
I owned factors of production,
regardless of where. It is 'gross'
I
in the sense that it does not de-
I duct depreciation of previously
produced capital, in contrast to
NNP.
I 2. total value of all fmal goods
I and services produced for con-
sumption in society during a par-
I ticular time period. The GNP
I includes allowances for depre-
ciation and indirect business
II gross output I GutfCooperation cou;l~r"",GC=C"",J========"",7"",,9
taxes such as' those on sales and I central banks have met on the
property. ~ occasion of the bimonthly BIS
3. it is the output of labour and ~ meetings.
property of a country's n~tion- : _ growth accounting
als, regardless of the locatlon of ~ decomposition of the sources of
the labour and property. Gr<:>ss I economic growth into the con-
National Product includes m- : tributions from increases in
come earned by the factors of ~ capital, labour and other factors.
production (assets and la.bour) I What remains, called the Solow
owned by a country's resIdents ~ residual, is usually attributed to
but excludes income produced : technology.
within the country's borders by I •
factors of production owned by : - Grubel-Lloyd mdex
nonresidents. ~ the measure of the intra-indus-
; try trade suggested by Grube!
- gross output : and Lloyd (1975). For an indus-
the total output of a firm, in- ~ try i with exports X, and impor~s
dustry or economy without de- I M. the index IS
ducting intermediate inputs. ~ I :: [(X;+M) IX,M,IPOOj
For a firm or industry, this is : (X, +M). This is the fractlon of
laraer
b than its value . added, I total trade in the industry,
which is net of its own mterme- : X +M. that is accounted for by
I , "
diate inputs. For an economy, : IIT (times 100).
gross output is greater than net ~. _ Gulf Cooperation Council
output which deducts the
amount' of the good itself, used I (GCC)
as an intermediate input. ; an agreement among six. coun-
: tries of Persian Gulf regIon -
- group of ten
~ Bahrain, Kuwait, Oman, Qatar,
a group of ten countries, mem-
; Saudi Arabia and the United
bers of the IMP, which, together : Arab Eri1irates - in 1981, with
with Switzerland, agreed to ~ the aim of coordinating and in-
make resources available out-
~ t~grating their economic poli-
side their IMF quotas. Since
; Cles.
1963, the governors of the GI0

Economics======= II
80 H Index (The Herftn;hl-HirSChman Index) I Hat algebra 1\

• H Index (The Herfindahl- I to the decrease in real income

Hirschman Index) and therefore that a real depre-
It stands for Herfindahl- ciation will cause an increase in
Hirschman index, which is a I real expenditure.
way of measuring the concen- I • harmonisation
tration of market share held by I the change in government regu-
particular suppliers in the mar- lations and practices, as a result
keto The H index is the aggre- I of an international agreement,
gate of squares of the percent- I to make those of different
ages of the market shares held countries the same or more
by the firms in a market. If ~ compatible.
there is a monopoly, i.e. one ;
firm with all sales, the H index • Harmonised System (HS)
is 10000. If there is perfect I an international system for clas-
competition, with an infinite I sifying goods in international
number of firms with near-zero trade and for specifying the tar-
market share each, the H index iffs on those goods. It was
is approximately zero. Other I adopted at the beginning of
industry structures will have H 1989 and it replaced the previ-
indices between zero and ously used schedules in over 50
10000. I countries.

• Harberger triangle I • Harrod neutral

the triangular area or areas in a
supply and demand diagram
that measure the net welfare
loss or dead-weight -loss due to
a market distortion or policy,
such as a tariff.
• Harberger-Laursen-
Metzler Effect
the conjecture or result that a
terms of trade deterioration will
cause a decrease in savings due
I a particular specification of
technological change or techno-
I logical difference that is labour
I augmenting.
I • Hat algebra
the Jones (1965) technique for
comparative static analysis in
I trade models. By totally differ-
entiating a model in the loga-
rithms of its variables, a 'linear
I system is obtained relating

II = = = = = = = = E c o n o m k s
II Havana ~harter I Heckscher-ohlin-;muelSlmMOdel (HOSModel) 81

small proportional changes (de- I across countries and differences

noted by carats (A), or 'hats') I in relative factor intensities
in terms of various elasticities across industries. It sometimes
and shares. ~ refers only to the textbook or
; 2x2x2 model, but more gener-
• Havana Charter
: ally includes models with any
the charter for the never-imple- :I numbers of factors, goods, and
mented International Trade I countries. Model was originally
Organisation. The draft was . formulated by Heckscher
completed at a conference in I (1919), fleshed out by Ohlin
Havana, Cuba, in 1948. I (1933), and refined by
• Headquarters services Samuelson (1948,1949,1953).
the activities of a firm which ~ • Heckscher-Ohlin Theorem
typically occur at its main loca- (HOT)
tion and that contribute in a ~ the prOpOSItlOn of the
broad sense to its productivity ; Heckscher-Ohlin Model that
at all of its locations and plants. : countries will export the goods
These may include manage- ~ that use relatively intensively
ment, accounting, marketing, I their relatively abundant fac-
and R&D. . tors.
I
• Heavily Indebted Poor : • Heckscher-Ohlin-
Countries (HIPC) I
. Samuelson Model (HOS
the na~e g~ven to those poor; Model)
countnes. ~1.th .large ~ebts, the. ~ usually synonymous with the
target
. of lilltlatlVes bemg to for- .. H ec ksc h er- Ohl·n1 M 0 d e,I a-
1
gIVe
.. that
d 1debt as a means of as- I thou h
. g som etl·mes th t .
e erm IS
SIStmg eve opment. ; used to distinguish the more
• Heckscher-Ohlin Model : formalised, mathematical ver-
(H-O Model) ~ sion that Samuelson used from
a model of international trade I the more general but less well-
in which comparative advantage : defmed conceptual treatment of
derives from differences in ~ Heckscher and Ohlin.
relative factor endowments I

Economics======== II
82 Heckscher-Ohlin-*,mk Model (H;V) I high-tech imlustries or activities "

• Heckscher-Ohlin-Vanek I • Hicksian Demand Func-

Model (HOV) tion
the Heckscher-Ohlin Model for denoted h(p,u) and it refers to
the case of identical techniques the amount of a good that is
of production, used to derive I demanded by a consumer given
the strong prediction about the that it costs p per unit and that
factor content of trade, known the consumer will have utility u
as the Heckscher-Ohlin-Vanek I from all goods, where h(p,u) is
Theorem. the cost-minimising amount.
• Heckscher-Ohlin-Vanek • high dimens~on
Theorem in trade theory, this refers to
the prediction of the H-O-V having more than two goods,
Model where a country's net I factors, and/or countries, or to
factor content of trade equals its having arbitrary numbers of
own factor endowment minus : these. Contrasts with the two-
its world-expenditure share of I ness of the 2x2x2 Model.
the world factor endowment. .
I • high powered money
That is, for country i, P = VI_
SIVW, whe~e pi is the factor con- I 1. same as monetary base, in
tent of its trade, Vi,VW its and the sense of currency plus com-
the world's factor endowment, I mercial bank reserves.
and Si its share of world expen- I 2. the monetary base or the to-
diture. tal of currency in circulation and
commercial bank deposits with
• hedge I the central bank.
to offset risk. In the foreign
exchange market, hedgers use I • high-tech industries or
the forward market to cover a I activities
transaction or open position and the identification of those indus-
thereby reduce exchange risk. I tries considered to be high-tech
The term applies most com- I has generally relied on a calcu-
monly to trade. lation comparing R&D inten-
sities. R&D intensity, in tUl'n,
I has typically been determmed by
comparing industry R&D ex-

II ========Economics
II HilbertSpace/HilbertSpaces I homo~ofdegreezero 83

penditures and/or numbers of ~ where multiplying all argu-

technical people employed (i.e., ; ments by a constant changes the
scientists, engineers, techni - : value of the function by a mono-
cians) to industry value added ~ tonic function of that constant:
or to the total value of its ship- ; F (DV) = g( D) F (V), where F (-)
ments. : is the homogeneous function, V
is a vector of arguments, 0>0
• Hilbert Space / Hilbert
I is any constant, and g( .) is some
Spaces
strictly increasing positive func-
a complete normed metric I tion. Special cases include ho-
space with an inner product. So I mogeneous of degree X and lin-
the Hilbert spaces are also Ba- early homogeneous.
nach spaces. L 2 is an example I
of a Hilbert space. Any Rn with I • homogeneous of degree 1
n finite is another. : the same as linearly homoge-
• hinterland ~ neous and, for a production
; function, constant returns to
tributary (factor-supply or : scale.
product-market) area of a I
heartland, central region, city or ~ • homogeneous of degree X
port. A hinterland is delineated a homogeneous function where
by the inter-dependency rela- I the monotonic function is the
tionships with the core region. ; constant raised to the exponent
: X: F(OV)=OXF(V).
• home bias I
a preference, by consumers or : • homogeneous of degree
other demanders, for products I zero
produced in their own country, ; the property of a function
compared to otherwise identi- : whose value if you scale all ar-
I
cal imports. This was proposed : guments by the same propor-
by Trefler (1995) as a possible I tion, does not change. In the H-
explanation for the mystery of ~ 0 Model, CRTS production
the missing trade. : functions imply that marginal
~ products have this property,
• Homogeneous function
; which is critical for factor price
a function with the property equalisation.

&tmomics======= II
84 homogeneous product I horiz6ntal intraindustry trade II
================*
• homogeneous product I selves literally homothetic.

the product of an industry in I • homothetic preferences

which the outputs of different together with identical prefer-
firms are indistinguishable. ences, this presumption is used
Contrasts with differentiated I for many propositions in trade
product. theory, in order to assure that
• homohypallagic I consumers with different in-
having a constant elasticity of : comes but facing the same
substitution. One of the inven- ~ prices will de~and goods in the
tors of the CES function tried ; same proportlons.
to christen it this in Minhas • horizontal integration
(1962), where he also explored
production of different vari~t­
its theoretical and empirical
ies of the same product or dif-
implications for the Heckscher- ferent products at the same
Ohlin Theorem, but the name level of processing, within a
did not catch on. I single firm. This may, but need

• homothetic not, take place in subsidiaries in

a function of two or more ar- I different countries.
guments is homothe~c if ~ ra- • horizontal integration
tios of its first partlal denva- corporate mergers inv?lving
tives depend only on the ratios I competing firms producmg the
of the arguments, not th~ir lev- same or similar production at
els. For competitive consumers the same stage of production.
or producers optimising subject I Such mergers tend to reduce
to homothetic utility or produc- I competition in the market.
tion functions, this means that :
ratios of goods demanded d e- I • horizontal intraindustry
.
pend only on relative pnces, not I trade . .
on income or scale. : intraindustry trade m which the
• I exports and imports are at the
• homothenc demand : same stage of processing.
demand functions derived from ~ Likely due to product differen-
homothetic preferences. The I tiation. Contrasts with vertical
demand functions are not them- ; IIT. _

II = - - = = = = = = = = E e o n u r n i c s
II Huber- White Standard Errors I iden;"",lP"",'"",'ife7='C1"",u:es======="",8=5
• Huber-White Standard I principal-agent maximisation

Errors problem for a contract that

the standard errors that have meets various criteria, the IC
been adjusted for specified as- ~ constraints are those that re-
sumed-and-estimated correla- ; quire agents to prefer to act in
tions of error terms across ob- : accordance with the solution. If
servations. I the IC constraint were not im-

I posed, the solution to the prob-

• human capital : lem might be economically
1. the stock of knowledge and ~ meaningless, insofar as it pro-
skill, embodied in an individual I duced an outcome that met
as a result of education, train- ~ some criterion of optimality but
ing and experience which makes : which an agent would choose
them more productive. I not to act in accord with.
2. the stock of knowledge and
~ • iceberg transport cost
skill embodied in the popula-
tion of an economy. ; a cost of transporting a good
: that uses up only some fraction
• human capital accumula- ~ of the good itself, rather than
tion I using any other resources.
the attributes of a person which : Based on the idea of floating an
are productive in some eco- ~ iceberg, which is costless except
nomic context. Often refers to I for the amount of the iceberg
formal educational attainment, ~ itself that melts. It is a very trac-
with the implication that edu- : table way of modelling trans-
cation is investment whose re- ~ port costs since it impacts no
turns are in the form of wage, ; other market.
salary, or other compensation.
; • idempotent matrix
These are normally measured
and conceived of as private re- : a matrix M is idempotent if
turns to the individual but can ~ MM=M. (M times M equals
also be social returns. 1M.)

• Ie Constraint ; • identical preferences

stands for 'incentive compatibil- ~ the assumption that individuals,
ity constraint'. When solving a :I either within a country or in dif-

Eetmomics======= II
""8,,,,6===========*
ferent countries, have the same
preferences. To be useful, since
individuals' and countries' in-
comes may differ, the assump-
tion is often used together with
homothetic preferences.
_ identity matrIX.
a square matrix of any dimen-
sion whose elements are ones
on its northwest-to-southeast
diagonal and zeroes everywhere
else. Any square matrix multi-
plied by the identity matrix with
those dimensions equals itself.
One usually says 'the' identity
matrix, since in most contexts
the dimension is unambiguous.
It is standard to denote the
identity matrix by 1.
- Illiquid Assets
assets which are not easily and
quickly converted into money.
_ ILS / Indirect Least
Squares
ILS stands for Indirect Least
Squares, an approach to the es-
timation of simultaneous equa-
tions models. Steps:
a. Rearrange the structural
form equations into reduced
form.
b. Estimate the reduced form
parameters.
II = = = = = = = = & o n o m i c s
identitymll;trix I implicit contract II
I Solve for the structural form
I parameters in terms of the re-
duced form parameters, and
I substitute in the estimates of
I the reduced form parameters to
get estimates for the structural
ones.
- immiserising growth
I economic growth which makes
the country worse off.
Bhagwati (1958) coined the
I term for growth that expands
I exports and worsens the terms
of trade sufficiently that its real
I income falls. Johnson (1955)
I had shown that a market dis-
torted by a tariff could lose from
growth and had also, indepen-
I dently, worked out conditions
for Bhagwati's result.
- imperfectly competitive
refers to an economic agent
I (firm or consumer), group of
agents (industry), model or
analysis that is characterised by
I
imperfect competition. Con~
I trasts with perfectly competi-
tive.
- implicit contract
a non-contractual agreement
I which corresponds to a Nash
I equilibrium, to the repeated bi-
lateral trading game other than
II implicitpricedejlator I importpenetr:on
the sequence of Nash equilib-
ria, to the one-shot trading
game. In the labour market, an
implicit contract is formally rep~
resented by a series of games
in which the firm pays a salary
and the employee works effec-
tively because they expect to
play the game again (continue
the agreement) if it goes well,
not because they have an ex-
plicit, enforceable contract.
- implicit price deflator
a broad measure of prices de-
rived from separate estimates
of real and nominal expendi-
tures for GDP or a subcategory
of GDP. Without ql!alification,
the term refers to the GDP de-
flator and is thus an index of
prices for everything that a
country produces, unlike the
CPI, which is restricted to con-
sumption and includes prices of
imports.
- implicit tariff
1. tariff revenue on a good or
group of goods, divided by the
corresponding value of imports.
Often lower than the official or
statutory tariff, due both to
PTAs and due to failures in cus-
toms collection.
&01Iomics======== II
87
I 2. the difference between the
I price just inside a border and
: the price just outside it, espe-
~ cially in the case of a good pro-
; tected by an import quota.
; - import bias
~ ~. any bias in favour of import-
: mg.
~ 2. applied to growth, it tends to
; mean a bias against importing,
: and against trading more gen-
~ erally. Thus, growth that is
I based disproportionately on ac-
cumulation of the factor used
I intensively in the import-com-
I peting industry and/or techno-
logical progress favouring that
industry.
I
: - import demand elasticity
~ the elasticity of demand for im-
; ports with respect to price.
; _ import elasticity
: usually means the import de-
~ mand elasticity.
~ _ import penetration
I a measure of the importance of
I imports in the domestic
economy, either by sector or
~ overall, usually defined as the
; value of imports divided by the
: value of apparent consumption.
I
88 .. importpriceindex I inadmissibility II
• import price index I in a two-good model with trade,

price index of the goods that a lone good is the export good and
country imports. the other is the import-compet-
I ing good.
• import substitute
a good produced on the domes- I • impossibility theorem
tic market that competes with lone of a class of theorems fol-
imports, either as a perfect sub- lowing Arrow (1951), showing
stitute or as a differentiated that social welfare functions
product. I cannot have certain collections
of desirable attributes in com-
• import substituting mon.
industrialisation(ISI)
a strategy for economic devel- • impulse response function
opment based on replacing im- a graph of the response of the
ports with domestic production. I system over time after a shock
(lSI) is known an impulse response
function graph. One use is in
• import substitution I models of monetary systems.

a strategy for economic devel- One graphs for example the

opment that replaces imports I percentage deviations in output
with domestic production. It I or consumption over time after
may be motivated by the infant I a one-time one percent increase
industry argument, or simply by in the money stock.
the desire to mimic the indus- I
trial structure of advanced coun- • Inada conditions
tries. Contrasts with export pro- I a function f() satisfies the Inada
motion. conditions if: f(O) = 0, f'(0) =
infinity and f'(infInity) = O. fO
• import surveillance is usually a production function
the monitoring of imports, usu- I in this context.
ally by means of automatic li-
I • inadmissibility
censmg.
a possible action by a player in
• import-competing a game may be said to be inad-
refers to an industry which I
competes with imports. That is,

1/ ========&onomies
II income eJfoct I indiJforence curve 89
*================
missible if it is dominated by I tity demanded divided by the
another feasible actions. The I percentage change in income.
term comes with view of a game I • incomplete specialisation
as a math problem. .An action
is or is not admissible as a can- I production of goods that com-
didate solution to the problem petc with imports.
of choosing a utility- • indebtedness
maximising strategy for the I the amount that is owed, thus
game player. I the amount of an entity's (indi-

• income effect : vidual, firm, or government's)

1. the effect of a change in in- I financial obligations to credi-
come on the quantity of a good I tors.
or service consumed. I • indemnity payment

2. that portion of the effect of a kind of insurance, where pay-

price on quantity demanded ment is made (often in previ-
that reflects the change in real I ously determined amounts) for
income due to the price change. injuries suffered, not for the
Contrasts with substitution ef- costs of recovery. The indemnity
fect. I payment is designed not to be

a dependent on anything the

• income elasticity
patient can control. From the
1. normally, the income elas- I point of view of the insurer, the
ticity of demand; that is, the
I indemnity mechanism avoids
elasticity of demand with re-
the moral hazard problem of
spect to income. I victim spending too much in
2. when used without another I recovery.
referent, income elasticity ap-
pears to mean 'of consumption'. I • indicator variable
That is for income I and con- in a regression, an indicator
sumption C: income elasticity variable is a variable that is one
= (l/C) (dC/dI)
1t I if a condition is true, and zero

if it is false.
• income elasticity of de-
mand ; • indifference curve
the percentage change in quan- a means of representing the

Economics======= It
""9",,O==========ind=~e theory I industrialcuncentration II
preferences and well being of ~ person who pays them.
consumers. Formally, it is a ;
• indirect utility function
curve which represents the
combinations of arguments in I denoted v(p, m) where p is a
a utility function that yield a I vector of prices for goods, and
given level of utility. m is a budget in the same units
I as the prices. The indirect util-

ity function takes the value of

the maximum utility that can be
I achieved by spending the bud-

get m on the consumption

goods with prices p.
• indifference theory
the analysis of consumer de-
mand using inditTcrence curves
and an income constraint to
demonstrate the reason for the
inverse relations hi p between
price and quantity demand. An
alternative to the older marginal
utility explanation of this phe-
nomenon.
• indirect taxes
taxes levied on a producer that
the producer then passes on to
the consumer as part of the
price of a good. Distinguished
from direct taxes, such as sales
taxes which are visible to the
• individually rational
allocation
I an allocation is individually ra-
tional if no agent is worse off
in that allocation than with his
I endowment.
I • induction
I
a process of reasonmg
('generalising') leading from
I the observation and recording
I
of particular cases to general
conclusions or 'laws'.
I
• inductive reasoning
characterises a reasoning pro-
I cess of generalising from facts,
I instances or examples.
• industrial concentration
the extent to which a small num-
I ber of firms dominates an in-
I dustry, often measured by the
four-firm concentration ratio.

II =======================Economics
\1 indwelling I infrastructure 91
*================
Concentration is, in effect, the ~ Activities operating outside the
opposite of competition, though ; regulatory and often also out-
in an open economy, imports : side the taxation system.
complicate the relationship. ~ • information literacy
• indwelling I implicit in a full understanding

a term M. Polanyi used to sug- I of information literacy is the

gest that 'human beings create realisation that several condi-
knowledge by involving them- tions must be simultaneously
selves with objects, that is, ~ present. First, someone must
through self-involvement and ; desire to know, use analytic
commitment ... ' skills to formulate questions,
• inelastic I identify research methodolo-
I gies, and utilise critical skills to
having an elasticity less than evaluate experimental results.
one. For a price elasticity of de- I Second, the person must pos-
mand, this means that expen- I sess the skills to search for an-
diture falls as price falls. For an swers to those questions in in-
income elasticity, it means that ~ creasingly diverse and complex
the expenditure share falls with I ways. Third, once a person has
income. Contrasts with elastic . identified what is sought, he
and unit elastic. should be able to access it.
• inferior good • informational cascades
a good for which the demand I economic actors improve on
decreases when income in- ; their limited private informa-
creases. When a household's : tion by observing and mimick-
income goes up, it will buy a ~ ing the actions of others.
smaller quantity of such a good.
~ • infrastructure
• informal economy
I the facilities which must be in
a reference to those parts of the place in order for a country or
economy which operate with- I area to function as an economy
out official recognition or with I and as a state, including the capi-
only ambiguous or tenuous ties tal needed for transportation,
to governmental institutions. I

Economics======== 1\
92
==========*
communication, and provision
of water and power and the in-
stitutions needed for security,
health and education.
• injury
harm to an industry's owners
injury I interbank rate It
I trolled by policy makers and
I can be used to influence other
variables, called targets. Ex-
I amples are monetary and fiscal
I policies used to achieve exter-
nal and internal balance.
I

and/or workers. • in~el1igent enterprise

such enterprises that convert
• input-output table
I intellectual resources into a
a table representing all inputs chain of service outputs and in-
and outputs of an economy's I tegrate these into a form most
industries, including intermedi - I useful for certain customers.
ate transactions, primary in-
puts, and sales to fmal users. As I • intensity of land use
developed by Wassily Leontief, I factor inputs (capital, labour,
the table can be used to calcu- fertiliser, etc.) per unit area of
late gross outputs and primary land, generally yielding high
factor inputs needed to produce I returns per unit area of land, as,
specified net outputs. Leontief ~ e.g., in 'intensive agriculture' (as

I.
(1954) used this to find the fac- : different from 'extensive land
tor content of u.s. trade, gen- I use' and 'extensive agriculture').
erating the Leontief Paradox. intensive
• institutional thickness I of production, using a relatively

a reference to the institutional large input of an input.

structure and qualities of insti- I
• intensive agriculture
tutions of a region, more spe- I
cifically the presence, interac- system of farming
tion, collective action (lack of ~ characterised by relatively high
inter-institutional conflict) and I levels of factor inputs (capital
legitimacy of institutions in a [including fertiliser] and/or
I labour) per unit of land.
regIOn.
I • interbank rate
• instrument
an economic variable that is con- I the rate of interest charged by
a bank on a loan to another

II ========&onomics
II interestparity I internationalad~tprocesS 93

bank. ~ to another, presumably to be

; used as an intermediate input.
• interest parity
equality of returns on otherwise ; • internal balance
identical financial assets de- : a target level for domestic ag-
nominated in different curren- ~ gregate economic activity, such
cies. May be uncovered, with I as a level of GDP that
returns including expected ~ mInImises unemployment
changes in exchange rates, or : without being inflationary.
covered, with returns including I
: • internal economies of scale
the forward premium or dis-
~ economies of scale that are in-
count. Also called interest rate
parity. ; ternal to a firm, that is, the
: firm's average costs fall as its
• interindustry trade ~ own output rises. Likely to be
trade in which a country's ex- I inconsistent with perfect com-
ports and imports are in differ- : petition. Contrasts with exter-
ent industries. Typical of mod- ~ nal economies of scale.
els of comparative advantage, . • InternalIse
I. .
such as the Ricardian Model
and Heckscher-Ohlin Model. ~ to cause, usually by a tax or sub-
Contrasts with intraindustry ; sidy, an external cost or benefit
trade. : of someone's actions to be ex-
~ perienced by them directly, so
• intermediate input ; that they will take it into ac-
an input to production which : count in their decisions.
has itself been produced and :I • international adjustment
that, unlike capital, is used up I process
in production. As an input, it is
in contrast to a primary input I 1. any mechanism for change in
and as an output, it is in con- ~ international markets.
trast to a final good. A very : 2. the mechanism by which pay-
large portion of international ~ ment imbalances diminish un-
trade is in intermediate inputs. ; der pegged exchange rates and
: nonsterilisation. Similar to the
• intermediate transaction specie flow mechanism, ex-
the sale of a product by one firm I

&onomies======= II
94 international;-nuwement I intra-mediatetmde /I

change-market intervention I of July 2000, it had 182 mem-

causes money supplies of sur- I ber countries.
plus countries to expand and 2. an international organisation
vice versa, leading to price and I with liquidity services to main-
interest rate changes that cor- I tain fmancial stability.
rect the current and capital ac-
count imbalances. I •interoperability
I ability of diverse intelligent de-
• international factor move- vices to communicate with one
ment I
another in performing mean-
the international movement of ~ ingful tasks.
any factor of production, includ-
ing primarily labour and capi- I • intra-firm (international)
tal. Thus includes migration and trade
foreign direct investment. Also flow of imports and exports of
may include the movement of ~ goods and services across na-
financial capital in the form of ; tional bOlmdaries between differ-
international borrowing and ent components of a corporate
I network (e.g. between home-
lending.
I country parent firms and their
• international macroeco- foreign affiliates).
nomics
same as international finance, • Intraindustry trade (lIT)
but with more emphasis on the trade in which a country ex-
international determination of ~ ports and imports in the same
macroeconomic variables such . industry, in contrast to inter-
as national income and the price industry trade. Ubiquitous in
level. I the data, much lIT is due to
aggregation. Can be horizon-
• International Monetary tal or vertical.
Fund (IMF)
1. an organisation formed to • intra-mediate trade
help countries to stabilise ex- I another term for fragmenta-
change rates, but today pursu- I tion. Used by Antweiler and
ing a broader agenda of finan- Trefler (2002).
cial stability and assistance. As

1I=======&Onomics
II intra-product specialisation lIS-1M:=1==========9=5
• intra-product I visible.
specialisation I •invisible trade
another term for fragmenta-
I (imports or exports of a region
tion. Used by Arndt (1997). or country) trade in non-com-
• inventories modity services such as finance
stocks of goods in the hands of I (banking, insurance etc.), com-
producers. These stocks are in- munications, transportation or
eluded in the definition of capi- toUrIsm.
tal and an increase in invento- ~ • involuntary unemploy-
ries is considered to be invest- I ment
ment. ; unemployment as result of de-
• invertible : ficiency in aggregate demand.
I
said of a matrix if its inverse : • IS-Curve
exists. That is, a matrix A is in- I
in the IS- LM model, the curve
vertible if there exists another
I representing the combinations
matrix B such that BA =I, where
of national income and interest
I is the identity matrix.
rate at which aggregate demand
• investing I equals supply for all goods. It

creating capital goods. Acquir- I is normally downward sloping

ing or producing structures, because a rise in income in-
machinery and equipment or I creases output by more than
inventories. aggregate demand (through
consumption), while a rise in
• investment spending I the interest rate reduces aggre-
the total amount of spending I gate demand through invest-
during some period of time on : ment.
I
capital goods.
: • lSI
I
• invisible : Import-Substituting
with reference to international I Industrialisation
trade, used as a synonym for
'service'. 'Invisibles trade' is I • IS-LM model
trade in services. Contrasts with I a Keynesian macroeconomlC

Economks======= II
""96=========L"",S"",-IM",,,:pmodel l Israel-US Free TradeArea II
model, popular particularly in I prices are) constant, most com-
the 1960s, in which national in- I monly in factor-price space
come and the interest rate were where it shows the combina-
determined by the intersection I tions of prices of factors consis-
of two curves, the IS-curve and I tent with zero profit in produc-
the LM-curve. ing a good at a specified price
• IS-LM-BP model of the good .
a particular version of the • isoquant
Mundell-Fleming Model that I a curve representing the com-
extends the IS-LM model by binations of factor inputs that
including in the diagram a third yield a given level of output in
curve, the BP-curve, represent- I a production function.
ing the balance of payments I • isostante
and/or the exchange market.
I term used by Tord Palander
• isocost line (following Schilling) to refer to
a line along with the cost of ~ the boundary between two mar-
something - generally a com- I ket areas served by two market
bination of two factors of pro- centres with varying prices and
duction - is constant. Since transport costs. The isostante
these are usually drawn for I specifies the points with equal
given prices, which are therefore delivered prices from both cen-
constant along the line, an tres.
isocost line is usually a straight I • isotim
line, with slope equal to the ra-
I line connecting points which are
tio of the (factor) prices.
I subject to equal transport cost
• isodapane for given materials (or prod-
points of equal additional trans- ucts) around a point of supply
port costs around the mini- I or around a market. Isotims
mum-total-trans port-cost are the basis for calculating ag-
point. gregate 'isodapanes' .
• iso-price curve • Israel-US Free Trade Area
a curve along which price is (or I a free trade area between the

" '========&onomics
II J-curve I Kaldor-Hicks criterion 97
*===========
United States and Israel that ~ because 'pre-existing condi-
was initiated in 1985. ; tions' are often not covered un-
: der U.S. health insurance.
- J-curve I

the dynamic path followed by : - just-in-time

the balance of trade in response ~ an organisational system of
to a devaluation, which typically I production designed to
causes the trade balance to : minimise the time and thereby
worsen before it improves, trac- associated cost between differ-
ing a path that looks like a let- I em stages of production as well
ter '1'. I as between initial expressions of

: demand and the delivery of

- Jensen's Inequality
~ goods or services. Just-in-time
if X is a real-valued random ; principles and methods were
variable with E( IX I) finite and : first applied by Japanese car
the function g() is convex, then ~ manufacturers but have found
E[g(X)] > = g(E[X]). Jensen's ; wide application in other activi-
inequality is the inequality one : ties.
can refer to when showing that I
an investor with a concave util- I: - k percent rule
ity function prefers a certain : a monetary policy rule of keep-
return to the same expected re- ~ ing the growth of money at a
turn with uncertainty. ; fixed rate of k percent a year.
: This phrase is often used as
- Jigyobusei (jp)
f ~ stated, without specifying the
multidivisional system o ; percentage.
organisation.
; - Kaldor-Hicks criterion
- job lock
: the criterion which, for a change
describes the situation of a per-
~ in policy or policy regime to be
son with a U.S. job who is not
I viewed as beneficial, the gain-
free to leave for another job
~ ers should be able to compen-
because the first job has medi-
: sate the losers and still be bet-
cal benefits associated with it
I ter off. The criterion does not
which the person needs, and the
; require that the compensation
second one would not, perhaps actually be paid, which, if it did,

&onomics===================== /I
""9",,,8===========
would make this the same as
the Pareto criterion.
• keiretsu system
the framework of relationships
in post-war Japan's big banks
and big firms. Related compa-
nies organised around a big
bank (like Mitsui, Mitsubishi,
and Sumitomo) which own a lot
of equity in one another and in
the bank and do much business
with one another. The keiretsu
system has the virtue of main-
taining long term business re-
lationships and stability in sup-
pliers and customers. The
keiretsu system has the disad-
vantage of reacting slowly to
outside events since the players
are partly protected from the
external market.
• kernel estimation
the estimation of a regression I
function or probability density I
function. Such estimators are
consistent and asymptotically ~ • kitchen sink regression
normal if as the number of ;
observations n goes to infinity,
I sors are not in the opinion of
the bandwidth (window width)
h goes to zero, and the product I
nh goes to infinity.
I Often used pejoratively; other
• Keynes effect
as prices. fall, a given nominal regresSIOn.
II =======&onomics
;:retsu system I kitchen sink regression 1\
I amount of money will be- a
I larger real amount.
Subsequntly, the interest rate
I would fall and investment de-
I manded rise. This Keynes ef-
fect disappears in the liquidity
I
trap. Contrast the Keynes effect
I with the Pigou effect.
I • Keynesian growth models
models in which a long run
growth path for an economy is
I traced out by the relations be-
I tween saving, investing and the
level of output.
I
• Keynesian macroeconom-
I
ics
I the theory which shows how a
I
market-based capitalist
economy may reach equilib-
I rium with large scale unemploy-
ment and how government
spending may be used to raise
it out of this to a new equilib-
rium at the full-employment
level of output.
a regression where the regres-
the writer thoroughly 'justified'
by an argument or a theory.
times describes an exploratory
/I k-nearest-neighbour estimator I
• k-nearest-neighbour
estimator
it is a kind of nonparametric
estimator of a function. Given
a data set {Xi' YJ, it estimates
values of Y for X's other than
those in the sample. The pro-
cess is to choose the k values of
Xi nearest the X for which one
seeks an estimate, and average
their Y values. Here, k is a pa-
rameter to the estimator. The
average could be weighted, e.g.
with the closest neighbour hav-
ing the most impact on the es-
cimate.
• knightian uncertainty
unmeasurable risk.
• knots
if a regression will be run to
estimate different linear slopes
for different ranges of the in-
dependent variables, it's a spline
regression, and the endpoints of
the ranges are called knots. The
spline regression is designed so
that the resulting spline func-
cion, estimating the dependent
variable, is continuous at the
knots.
• Kruskal's theorem
let X be a set of regressors, y
be a vector of dependent vari-
Economies========
Kuz; curve 99
~ abIes and the model be:
; y=Xb+e where E[ ee'] is the
: matrix OMEGA. The theorem
~ is that if the column space of
I (OMEGA)X is the same as the
: column space of X; that is, that
~ there is heteroskedasticity but
I not cross-correlation, then the
~ GLS estimator of b is the same
: as the OLS estimator of b.
~ • kurtosis
~ an attribute of a distribution,
; describing 'peakedness'. Kurto-
: sis is calculated as E[ (x-mu)4]j
~ S4 where mu is the mean and s
; is the standard deviation.
; • Kuznets curve
~ a graph with measures of in-
: creased economic development
~ (presullled to correlate with
; time) on the horizontal axis, and
: measures of income inequality
~ on the vertical axis,
; hypothesised by Kuznets
: (1955) to have an invened-U-
~ shape. That is, Kuznets made
I the proposition that when an
: economy is primarily agricul-
~ tural, it has a low level of in-
~ come inequality, that during
. early industrialisation income
~ inequality increases over time,
~ then at some critical point it
/I
100 labour
starts to decrease over time.
Kuzners (1955) showed evi-
dence for this.
• labour market outcomes
shorthand for worker (never
employer) variables that are
often considered endogenous in
a labour market regression.
Such variables, which often ap-
pear on the right side of such
regressions: wage rates, em-
ployment dummies or employ-
ment rates.
• labour-using
a technological change or w;:h-
nological difference that is bi-
ased towards usage of more
labour, compared to some defi-
nition of neutrality.
• LAD estimation / LAD
estimator
can be used to estimate a
smooth conditional median
function, that is an estimator
for the median of the process
given the data. Say the data are
stationary {Xt' Yt}' The depen-
dent variable is y and the inde-
pendent variable is x. The cri-
terion function to be minimised
in LAD estimation for each ob-
servation t is:
q(xt,Yt,D) = IYt =m(xt,D) I
II = = = = = = = = E e o n o m i c s
;ket outctJ1MS I laissez foin economics II
I where mO is a guess at the con-
I ditional median function.
I • lag operator
denoted by L, a lag operator
operates on an expression by
I moving the subscripts on a time
series back one period, so:
Let = et-l
I
• lagging indicator
a measurable economic variable
I that varies over the business
cycle, reaching peaks and
troughs somewhat later than
I other macroeconomic variables
such as GDP and unemploy-
ment. Contrasts with leading
I indicator.
I • Lagrangian
I a function constructed in solv-
ing economic models that in-
elude maximisation of a func-
I tion (the 'objective function')
subject to constraints. It equals
I the objective function minus, for
I each constraint, a variable
'Lagrange multiplier' times the
amount by which the constraint
I is violated.
I • laissez faire economics
I a school of economics inspired by
Adam Smith who believed that
if we would just let the market
II JA,issez-foire IlRw oftliminishinomu;==========""l""O""l
function without any son of in- ~ tion.
tervention, competition would ~ • Latin American Integra-
create order and eventually pros- ; tion Association (LAIA)
perity for all.
: an organisation of Latin Ameri-
• Laissez-faire ~ can countries which replaced the
a economic theory advocating I failed LAFTA. LAIA_has the
minimum role for government ~ more limited goal of encourag-
in the economy, such as provid- : ing free trade but with no time-
ing for defence against external ~ table for achieving it.
enemies, a system of law to pro-
~ • law of comparative advan-
tect individuals and their prop-
; tage
erty, and production of such
. goods and services which for : the principle which, given the
some reason are needed, but ~ freedom to respond to market
would not be produced by pri- I forces, countries will tend to
vate firms. : export goods for which they
~ have comparative advantage
• large country I and import goods for which
a country that is large enough ; they have comparative disad-
for its international transactions : vantage, and that they will ex-
to affect economic variables ~ perience gains from trade by
abroad, usually for its trade to ; doing so.
matter for world prices. Con-
; • law of diminishing tlnar-
trasts with a small open ginal utility .
economy. I . h
. as a person mcreases er con-
• Latin American Free Trade ; sumption of a good or service
Association (LAFTA) : (other consumption being held
a group of Latin American ~ constant), the marginal utility
countries formed in 1960, with I of the good or service eventu-
the aim of establishing a free ; ally will tend to decline.
trade area. This aim was never
; • law of diminishing returns
achieved, and LAFTA was re-
placed in 1980 with the Latin : the principle that, in any pro-
American Integration Associa- ~ duction function, as the input of

EeonomuS======-4== II
"",10"",2===========.. law alone price I learning objective II
one factor rises, holding other I which varies over the business
factors fixed, the marginal I cycle, reaching peaks and
product of that factor must troughs somewhat earlier than
eventually decline. I other macroeconomic variables

- I such as GDP and unemploy-

ment and therefore useful for
forecasting them. Contrasts
I with lagging indicator.
- learning by doing
refers to the improvement in
technology that takes place in

..
- I some industries, early in their
history, as they learn by expe-
rience so that average cost
I falls as accumulated output
- law of one price I nses.
the principle where identical
goods should sell for the same ~ - learning curve
price throughout the world if ; a relationship representing ei-
trade were free and frictionless. ther average cost or average
I product as a function of the ac-
-LDC cumulated output produced.
for many years, the acronym I Usually reflecting learning by
LDC has stood for Less De- I doing, the learning curve shows
veloped Country, which was cost falling, or average product
more or less the same as de- nsmg.
veloping country. However, in I
recent years, LDC has also - learning curve effects
been used for Leas t Devel- cost reductions resulting from
oped Country, which has a I skill improvements based on
narrower and more formal repetitive (usually production"
definition. related) experiences.
_ leading indicator - learning objective
a measurable economic variable I a written statement describing

II = = = = = = = = E c o n o m i c s
II learning organisation l.leontiefpa~ 103

measurable achievements you ~ Akerlof's 1970 paper, in

hope can be accomplished dur-
ing your class experience or any
other definable learning activ-
ity.
- learning organisation
an organisation that is continu-
ally expanding its capacity to cre-
ate its future. A learning
; which the fact where a good
: is available suggests that it is
~ of low quality. For example,
; why are used cars for sale? In
: many cases because they are
~ 'lemons', that is, they were
~ problematic to their previous
. owners.
I

organisation is not merely trying : - lender of last resort

I
to survive, i.e. engage in adap- : the function whereby the cen~
~ tral bank readily makes cash
tive learning, but it adds 'genera-
tive learning'. ; advances to commercial banks
: in the event they misjudge
- learning web
~ their cash reserve require -
an integrated system of I ments.
Internet- based, hypertextually
organised course or program ; - Leontief composite
materials, resources, Jinks to : a composite of two or more
resources and communication goods or factors which includes
opportunities designed to facili- I them in fixed proportions,
tate learning environments and I analogous to the Leontief tech-
processes. : nology.
I
- least squares learning : - Leontief paradox
the kind of learning that an agent ~ the fmding of Leontief (1954)
in a model exhibits by adapting ; that u.s. imports embodied a
to past data, by running least : higher ratio of capital to labour
squares on it to estimate a ~ than U .S. exports. This was sur-
hypothesised parameter and be- I prising because it was thought
having as if that parameter were ; that the U.S. was capital abun-
correct. : dant, and the Heckscher-Ohlin
~ Theorem would then predict
- lemons model
describes models like that of I
=lO=4=================Lwn==:rhM~~FU~I~I~ II
that u.s. exports would be rela- I
Leptokurtic
tively capital intensive.
• Leontief Production
Function
has the form q=min{xl,x2}, I
where q is a quantity of output I
and xl and x2 are quantities of :
· c.
mputs or lunctions of the quan- I:
tities of inputs.
• Leontief technology • Lerman Ratio
a production function in which a government benefit to the
?O sub~titution between inputs lmderemployed will presumably
IS possIble: F(V) = mini(Vi/ I reduce their hours of work. The
ai), where V is a vector of in- ratio of theil, actual increase in
puts Vi, and ai are the constant income to the benefit is the
per unit input requirements . .~ Ler.man ratIo, which is ordi-
Isoquants are L-shaped. ; nanly betw~en zero and one.
: Moffitt (199~) estimates it in
• leptokurtic I regard to the U.S. AFDC pro-

an adjective describing a distri- gram at about .625.

bution with high kurtosis.
'High' means the fourth central • Lerner Diagram
moment is more than three thi.s diagram, drawn for given
times the second central mo- pnces and technology, uses
ment, such a distribution has I unit-value isoquants of two or
greater kurtosis than a normal more goods to deduce patterns
distribution. This term is used of specialisation and factor
in Bollerslev-Hodrick 1992 to I prices as they depend on factor
characterise stock price returns. endowments. Due originally to
Lepto- means 'slim' in Greek Lerner (1952) and popularised
arid refers to the central part of ~ by Findlay and Grubert (1959).
the distribution. I • Lerner Index

I a measure of the profitability of

11=======&011"","'
 105
*================
a firm that sells a good: (price- ~ to the Lerner Diagram. In fact,
marginal cost) / price. ; Pearce's (1952) diagram uses
One estimate, from Domowitz, : unit isoquants rath~r than ·unit
Hubbard, and Petersen (1988) ~ value isoquants and is much
is that the average Lerner in- ; more cumbersome.
dex for manufacturing firms in ; _ leverage ratio
their data was .37.
~ often, the ratio of debts to total
- Lerner paradox : assets. Can also be the ratio of
the possibility, identified by ~ debts (or long-term debts in
Lerner (1936), where a tariff; particular, excluding for ex-
might worsen a country's terms : ample accounts payable) to eq-
I .
of trade. This can happen only: wry.
if the country spends a dispro- I Normally used to describe a
portionately large fraction of : firm's accounts but could de-
th~ tariff revenue on the im- ~ scribe the accounts of some
ported good, and it will not hap- I other organisation or an indi-
pen (from a stable equilibrium) ~ vidual or a collection of
if the tariff revenue is redistrib- : organisations
uted. I
: - Leveraged Buy-Out
- Lerner Symmetry Theo- I (LBO)
rem ; the act of taking a public com-
the proposition where a tax on : pany private by buying it with
all imports has the same effect ~ revenues from bonds and using
as an equal ta.x 011 all exports, if I the revenues of the company to
the revenue is spent in the same : payoff the bonds.
way. The result depends criti- I
: - Leviathan
cally on balanced trade, as in a I
real model, so that a change in : the all-powerful kind of state
imports leads to an equal ~ that Hobbes thought 'was nec-
change in the value of exports. ; essary to solve the problem of
Due to Lerner (1936). ~ social order.
- Lerner-Pearce Diagram : - Likert Scale
this name is' sometimes given ~ measures the extent to which a

Eetmomics======= II
",1=06==========I=im; dependent variable Ilinking scheme II
person agrees or disagrees with I erally involving the variables
the question in a survey (e.g. I like the total transport costs and
1 = strongly disagree, 2 = dis- the distance. The function
agree, 3=not sure,4=agree, I would be linear ifit is suggested
and 5=strongly agree). I that the increase in transport
cost is proportional to the in-
• limited dependent variable I
crease in distance. Linearity
a dependent variable in a model I may exist with or without ter-
is limited if it is discrete (can minal (or distance-fixed) cost.
take on only a countable num- I
The latter would result in a
ber of values) or if it is not al- I curvi-linear, downward sloping
ways observed because it IS average transport-cost func-
truncated or censored. tion.
• linear model / linear I In general, non-linear total
econometric model I transport costs with declining
an econometric model is linear marginal distance costs would
if it is expressed in an equation tend to make long-haul trans-
in which the parameters enter I portation relatively inexpen-
linearly, whether or not the data sive and might create the in-
require nonlinear transforma- centive to select locations
tions to get to that equation. I which reduce the number of
short-haul links and take ad-
• linear pricing schedule
vantage of the 'distance-
say the number of units, or I economies' of (fewer but)
quantity, paid for is denoted q long hauls.
and the total paid is denoted ~
T(q), following the notation of ; • linearly homogeneous
Tirole. A linear pricing sched- . homogeneous of degree 1.
ule is one that can be Sometimes called linear homo-
characterised by T(q)=pq for I geneous.
some price-per-unit p. I • linking scheme

• linear transport cost a requirement that, in order to

function get an import license, the im-
a reference to a theoretical, lin- I porter must buy a certain
ear mathematical function, gen- I

II ========Eeonomics
IIlUJUidity I locality
amount of the same product
from local producers.
• liquidity
the capacity to turn assets into
cash, or the amount of assets in
a portfolio that have that capac-
ity. Cash itself (i.e., money) is
the most liquid asset.
• liquidity constraint
many households or families,
e.g. young ones, cannot borrow
to consume or invest as much
as they would want, but are con-
strained to current income by
imperfect capital markets.
• little giants
a reference to those medium-
sized firms which are techno-
logically and organisationally
particularly innovative and for-
ward-looking in terms of em-
ployee relations. In contrast to
corporate giants, such medium-
sized firms are more entrepre-
neurial, less bureaucratic, with
fewer managerial layers.
• living wage
a wage which allows families to
meet their basic needs without
resorting to public assistance
and provides them some abil-
ity to deal with emergencies and
Beonomics========= II
107
*================
~ plan ahead. It is not a poverty
I wage.
; • Ljung-Box Test
: the same as the portmanteau
I
. test.
I
.• LM-Curve
~ in the IS-LM model, the curve
; representing combinations of
: income and interest rate at
~ which demand for money
; equals the money supply in the
: domestic money market. It is
~ normally upward sloping be-
I cause an increase in income in-
: creases the demand for money
~ while an increase in the inter-
I est rate reduces the demand for
; money.
~ • local optimum
: an allocation where by some
~ criterion is better than all those
; in its neighbourhood.
; • locality
: localisation economies or exter-
~ nal economies of localisation.
I Agglomeration economies
~ (benefits, cost reductions) re-
: sulting from the concentration
I of the same or similar activities:
; ego benefits resulting from the
: local access to a specialised
~ work force or the specialised
108 Locally A.rymptotica; Normal (£AN) Ilocational triangle
reputation of a locality to which
some but maybe not all of these
specialised activities contribute.
• Locally Asymptotically
Normal (LAN)
a characteristic of many ('a fam-
ily of') distributions.
• locally identified
linear models which are either
globally identified or there are
an infinite number of observ-
ably equivalent ones. But for
models that are nonlinear in
parameters, 'we can only talk
about local properties'. Thus,
the idea of locally identified
models, which can be distin-
guished in data from any other
'close by' model. 'A sufficient
condition for local identification
is that' a certain Jacobian ma-
trix is of full column rank.
• locally nonsatiated / local
nonsatiation
an agent's preferences are 10-
cally nonsatiated if they are con-
tinuous and strictly increasing
in all goods.
• location decisions and
locational decision -making
decisions and behaviours re-
lated to locational choices.
II ========&onomus
II
I • location quotient
I a measure of the relative sig-
nificance of a phenomenon (e.g.
employment in software activi-
I ties) in a region compared with
I
its significance in a larger
('benchmark') region. A high
I location quotient for a specific
activity implies specialisation
and the export of the goods or
I
I ity.
....... _--
services produced by the activ-
........
"----------------
........
I
::" ;:s * eo
u ee
t. - - - - - - - -_ _ _ _ _ __ _
I
I t1 .. M+t" 'tit, to4II;, Mot} . . . ,
I .locational advantage
any reason for a firm to locate
production, or a stage of pro-
I duction, in a particular place,
I such as availability of a natural
resource, transport cost, or bar-
I riers to trade. May explain why
a country's firms succeed in
trade, or why a multinational
I firm locates there.
I • locational triangle
I the triangle which has been de-
vised and used by Wilhelm
IllOComDtive effect I log convexity
Launhardt and Alfred Weber to
construct their basic locational
modeL This model was used to
demonstrate the impact of the
forces of attraction of three (in
a polygon more) reference lo-
cations (originally 2 raw mate-
rial locations and one market)
vis-a-vis the (dependent) opti-
mal (=least-transport-cost) lo-
cation of a processing plant.
Subsequently, the triangle was
used by Isard and Moses to
demonstrate the impact of sub-
stitution benveen distances
and/or materials, and by Beyers
and Krumme substitution be-
tween products (outputs) on
optimal locations.
- locomotive effect
the effect that economic expan-
sion in one large country can
have on other parts of the world
economy, causing them to ex-
pand as well, as the large coun-
try demands more of their ex-
ports.
- log concavity
a function f( w) is said to be log-
concave if its natural log,
In(f(w)) is a concave function;
i.e., assuming f is differentiable,
f"(w)/f(w) - f'(w)2 < = 0 Since
log is a strictly concave function,
Economics===================== II
109
*================
~ any concave function is also log-
I concave.
: A random variable is said to be
~ log-concave if its density func-
I tion is log-concave. The uni-
: form, normal, beta, exponen-
~ tial, and extreme value distribu-
~ tions have this property. If pdf
; fO is log-concave, then so is its
: cdfFO and I-FO. The trUncated
~ version of a log-concave func-
; tion is also log-concave. In prac-
: tice, the intuitive meaning of
~ the assumption that a distribu-
; tion is log-concave is that (a) it
: doesn't have multiple separate
~ maxima (although it could be
I flat on top), and (b) the tails of
: the density function are not 'too
~ thick.'
~ An equivalent definition, for
; vector-valued random variables,
: is in Heckman and Honore,
I Random vector X is log-concave
I iff its density
fO satisfies the condition that
f(ax 1 +(I-a)x 2 )·[f(x 1 )
~ ]a[f(~)](l-a) for all xl' and
; x2 in the support of X and all a
: satisfying O.a.l.
I
: - log convexity
~ a random variable is said to be
I log-convex if its density function
no log or naturtJllog IJogit model II
=========*
is log-concave. Pareto distribu- I dt.
tions with fInite means and vari- I Equivalently, V is the space of
ances have this property, and so real-valued random variables
do gamma densities with a co- I that have variances. This is an
efficient of variation greater I infinite dimensional space.
than one.
I.Ln
A log-convex random vector is
one whose density fO satisfies I the set of continuous bounded
the condition that f( aX I + ( 1- functions with domain RN.
a)x2 ). [f(xI)]a[f(~)](l"a) for all • logistic distribution
Xl' and ~ in the support of X a logistic distribution has the cdf
and all a satisfying O.a.I. I F(x) = 1/(1 +e"X)

• log or natural log This distribution is quicker to

compute than the normal dis-
in-economics, log always means
I tribution but is very similar.
'natural log', that is loge' where
e is the natural constant that is I Another advantage over the
approximately 2.718281828. So normal distribution is that it
I has a closed form cdf.
x=log Y < = > eX=y.
x
I pdf is f(x) = e'(l +e )"2 =
• logical omniscience F(x)F( -x)
an assumption underlying the
information facets of most mi- I • logit model
cro-economic models: If an a univariate binary model. i.e.,
agent has knowledge of a phe- I for dependent variable y, that
nomenon, he/she also has per- I can be only one or zero, and a
fect knowledge of all its impli- continuous indepdendent vari-
cations. able x" that:
I Pr(Yj=l)=F(x j'b)
.Ll
I Here, b is a parameter to be es-
the set of Lebesgue-integrable
timated, and F is the logistic
real-valued functions on [0,1].
I cdf. The probit model is the
.L2 I same but with a different cdf for

a Hilbert space with inner prod- E

uct (x,y) = integral of x(t)y(t)

II ========Economics
\\loanormal distributitm I LouPreAcC:; ==========1=11
• lognormal distribution
let X be a random variable
with a standard normal distri-
bution. Then, the variable
Y=e x has a lognormal distri-
bution. Example: Yearly in-
comes in the United States are
roughly log-normally distrib-
uted.
• Lome Convention
an agreement originally signed
in 1975 committing the EU to
programs of assistance and
preferential treatment for the
ACP Countries. The Lome
Convention was replaced by the
Cotonou Agreement in June
2000.
• London Interbank Of-
fered Rate (LIBOR)
the interest rate which the larg-
est international banks charge
each other for loans, usually of
Eurodollars. In fact, LIBOR
includes rates quoted each day
for many currencies, excluding
the eufO, but it is the rate for
dollar loans that is used as a
benchmark for other transac-
tions.
• long run average costs
total costs divided by the num- ~ • Louvre Accord
ber of units of output. The long : an agreement reached in 1987
Beonom;cs=======
~ run average cost curve plots the
; relationship between output and
: the lowest possible average total
~ cost when all inputs can be var-
; ied.
; • long run costs
~ production costs when the firm
: is using its economically most
~ efficient size of plant.
~ • longitudinal data
; a synonym for panel data.
; • long-term capital
~ in the capital account of the bal-
: ance of payments, long-term
I capital movements include FDI
~ and movements of financial
: capital with maturity of more
~ than one year (including equi-
; ties).
; • Lorenz curve
: a curve indicating the cumula-
~ tive percentage of income plot-
I ted against the cumulative per-
: centage of population.
I c...........
oflnc.)1nt
I
I
II
112 .. lwe ofvariety I magnification ejfo&t II
among the central banks of ~ ply. Ml includes only chequable
France, Germany, Japan, US, I demand deposits.
and UK to stop the decline in I • M2 Money Supply
the value of the US dollar that
they had initiated at the Plaza I
a measure of total money sup-
Accord. ply. M2 includes everything in
I Ml and also savings and other
• love of variety time deposits.
preference for variety. • macroeconomics
• lump sum the branch of economic theory
a tax or subsidy which does not I concerned with the economy as
distort behaviour. By using a tax I a whole. It deals with large ag-
(or subsidy) in an amount (the gregates such as total output,
lump sum) independent of any I rather than with the behaviour
aspect of the payer's or I of individual consumers and
recipient's behaviour, it does firms.
not alter behaviour. • made-to-measure tariff
Nondistorting lump sum taxes I a tariff set so as to raise the
and subsidies do not exist, but
are a convenieut fiction for theo- I price of an imported good to the
retical analysis, especially of ~ domestic price, so as to leave
. fl d domestic producers unaffected.
gams rom tra e. ; Also called a scientific tariff.
• lump sum taxes
1 • magnification effect
a tax of a fixed amount that has
to be paid by everyone regard- I the property of the Heckscher-
less of the level of his or her I Ohlin Model where changes in
income. Lump sum taxes are certain exogenous variables
considered efficient taxes be- I lead to magnified changes in
cause they do not influence a I the corresponding endogenous
person's decision on how much variables: goods prices as they
I affect factor prices in the
to work.
Stolper-Samuelson Theorem;
• Ml Money Supply factor endowments as they af-
a measure of total money sup- I fect outputs in the Rybczynski

II ========Econumics
II managedflORt I marginal rateoftra~""""",,,,,twn,,,,·
========1",,1=3

Theorem. Due to Jones (1965). ~ good.

- managed float ~ - marginal principle
an exchange rate regime in I to maximise the net benefits,
which the rate is allowed to be : the strategic or action variable
determined in the exchange ~ should be increased until MB =
market without an announced I Me, i.e. marginal benefits equal
par value as the goal of inter- ~ marginal costs.
vention, but the authorities do
- marginal propensity to
nonetheless intervene at their I
import
discretion to influence the rate.
I the increase in expenditure on
- Management Buy-Out / I imports per unit increase in
Management by Objec- (disposable) income.
tives (MBO)
- marginal propensity to
the purchase of a company by I save
its management. Sometimes
means Management By Objec- I the increase in saving per unit
tives, a goal-oriented personnel I increase in (disposable) income.
evaluation approach. ~ - marginal rate of substitu-
tion
- Maquiladora
this is a program for the tem- ~ 1. generally referring to the
porary importation of goods ; rate at which the consumer is
into Mexico without duty, un- : willing to substitute one good
der the condition that they con- ~ for another (without loss or gain
tribute - through further pro- I of satisfaction).
cessing, transformation, or re- I 2. the rate at which factor in-
pair - to exports. The program puts can be exchanged in a pro-
was established in 1965 and ~ duction process without a
expanded in 1989. ; change in the production (out-
: put) leveL
- marginal benefit I
the increase in total benefit con- : - margin~l rate of transfor-
sequent upon a one unit in- ~ mation'
crease in the production of a I the increase in output of one
~ good made possible by a one-

Economics======== /I
~1=14=======11UJ=rg=ina=l=rrn=; I 11UJrketpower theory ofadvertising
unit decrease in the output of ~
another, given the technology;
and factor endowments of a
country. Thus, the absolute I
value of the slope of the trans- I
formation curve.
• marginal revenue
the addition to total revenue
resulting from the sale of one
additional unit of outpUt.
• marginal revenue product
the change in total revenue
which results from employing
one more unit of a factor.
• market clearing
equality of supply and demand.
A market-clearing condition is
an equation (or other represen-
tation) stating that supply
equals demand.
• market equilibrium
equality of supply and demand.
• market failure
1. instances of a free market be-
ing unable to achieve an opti-
mum allocation of resources.
2. any departure from the ideal
benchmark of perfect competi-
tion, particularly the complete
absence of a market due to in-
complete or asymmetric infor-
mation.
II ========Eeonumics
II
• market for corporate
control
when shares of public firms are
traded and in large enough
blocks, this means control over
corporations is traded. That
puts some pressure on manag-
I ers to perform, otherwise their
I
corporation can be taken over.
• market power
1. the power held by a firm over
price and the power to subdue
I
competitors.
2. a continuum from perfectly
competitive to monopsony and
I there's an extensive practice/in-
dustry/science of measuring the
degree of market power.
I Examples: For workers in an
I isolated company town, created
by and dominated by one em-
ployer, that employer is a
I monopsonist for some kinds of
employment.
• market power theory of
I
advertising
I the theory of advertising is that
I established firms use advertis-
ing as a barrier to entry through
I
product differentiation. Such a
I firm's use of advertising differ-
entiates its brand from other
I
II marketpriceofrisk I markup
brands to a degree that consum-
ers see that its brand is a
slightly different product, not
perfectly substituted by existing
or potential competitors. This
makes it hard for new competi-
tors to gain consumer accep-
tance.
- market price of risk
is a synonym for the Sharpe ra-
tio.
_ market structure
the way that suppliers and de-
manders in an industry interact
to determine price and quantity.
There are four main idealised
market structures that have
been used in trade theory: per-
fect competition, monopoly, oli-
gopoly, and monopolistic com-
petition.
- marketing board
a form of state trading enter-
prise. A marketing board typi- ~ _ Markov's Inequality
cally buys up the domestic sup- ; if Y is a nonnegative random
ply of a good and sells it on the : variable, i.e., ifPr(Y <0) =0, and
international market.
_ Markov Process
115
*================
~ recent draw affects the distribu-
; tion of the next one; all such
: processes can be represented by
~ a Markov transition density
; matrix. A Markov process can
: be periodic only if it is of higher
~ than first order.
I
: - Markov Property
~ a property that a set of stochas-
; tic processes may have. The sys-
: tern has the Markov property
~ if the present state predicts fu-
; ture states as well as the whole
: history of past and present
~ states - that is, the process is
I memoryless.
; _ Markov Strategy
~ in a game, a Markov strategy is
: one which does not depend at
I all on state variables that are
~ functions of the history of the
: game except those that affect
~ payoffs.
~ k is any positive constant, then
~ E(Y) = kPr(Y = k).

a stochastic process where all ~ - markup

the values are drawn from a dis- ; 1. the amount (percentage) by
crete set. In a first-order : which price is in excess of mar-
Markov process, only the most ~ ginal cost. A profit-maximising

&onomics======== II
116 MarShallian~ndFunction I matrix multiplications II
seller facing a price elasticity of ~ demands. Under certain as-
demand, h will set a markup ; sumptions, this is the condition
equal to (p-c)jp=ljh. One ef- for a depreciation to improve
fect of international trade that I the trade balance, for the ex-
increases competition is to re- I change market to be stable and
duce markups. for international barter ex-
2. in wro terminology, some- change to be stable.
times used for the extent to I • mass production
which an applied tariff exceeds
I a production system
the bound rate.
characterised by mechanisation,
3. the ratio of price to marginal high wages, low prices, and
cost. Can be used as a measure I large-volume output.
of market power across firms,
I • Matlab
industries, or economies.
I a matrix programming lan-
• Marshallian Demand
guage and programming envi-
Fl1nction
ronment. Used more by cngi-
denoted x(p,m), it is the I neers but increasingly by econo-
amount of a factor of produc- mIsts.
tion which is demanded by a I
producer given that it costs p I • matrix multiplications
per unit and the budget limit the multiplication of matrices or
that can be spent on all factors I vectors is 'commutative', i.e. the
is m. p and x can be vectors. order of the multiplicand and
the multiplier cannot be altered
• Marshall-Lerner condition I as is the case in regular multi-
the condition where sum of the I plications. The process of mul-
elasticities of demand for ex- tiplication of matrices proceeds
ports and imports exceed one I by multiplying (more exactly:
(in absolute value); that is, hX I 'post-multiplying') horizontal
+ hM > 1, where hX, hM are vectors by vertical vectors. The
the demand elasticities for a I sum of the products of this
country's exports and imports I multiplication of corresponding
respectively, both defined to be numbers of the respective vec-
positive for downward sloping tors results in a number which

II ===================Economks
II maturity date I AIeR.COSUR
is placed in the position of the
resulting matrix (or vector)
where the two vectors would
intersect (overlap).
Thus,
horiwntal vector x vertical vec-
tor = a number
vertical vector x horiwntal vec-
tor = matrix
matrix x vertical vector = ver-
tical vector
horizontal vector x matrix =
horiwntal vector
matrix A x matrix B'l = matrix
C : they shape our actions and de-
matrix B x matrix A = matrix
117
*==~~==========
~ ment,
~ _ mediall voter theorem
; the proposition where political
: parties will tend to adopt mod-
~- erate policies to appeal to vot-
I ers near the middle of the po-
~ litical spectrum.
:I - mental models
: one of Senge's five learning dis-
~ ciplines for the learning
; organisation: 'reflecting upon,
: and continually clarifying, and
~ improving our internal pictures
I of the world, and seeing how
I
0 0 ,

o ClSlons.
D oI _ °1°
mercant11sm
- maturity date I an economic doctrine of the
the maturity date of a financial 16th and 17th centuries that
asset is the date at which that international commerce should
asset is converted into a speci- ~ primarily serve to increase a
fied amount of money or physi- ; country's financial wealth, espe-
cal assets. : cially of gold and foreign cur-
~ rency. To that end, exports are
- maximum price system
; viewed as desirable and imports
similar to a minimum price sys-
: as undesirable unless they lead
tem, except that the price speci- I
: to even greater exports.
fied is the highest, rather than
the lowest, permitted for an ~ - merchandise trade
imported good. ~ exports and imports of goods.
_ maximum revenue tariff ; Contrasts with trade in services.
a tariff set to collect the largest ; -MERCOSUR
possible revenue for the govern- a common market among Ar-

Eeonomics======= II
",1""1,,,,8===========* M-Estimators I millennium round II
gentina, Brazil, Paraguay and I world price down by even more
Uruguay, known as the 'Com- I than the size of the tariff, as it
mon Market of the South' may do if the foreign demand
('Mercado Comun del Sur'). It ~ for the importing country's ex-
was created by the Treaty of ; port good is inelastic.
Asuncion on March 26, 1991, :
and added Chile and Bolivia as I • micro-micro theory:
associate members in 1996 and I concerned with the 'study of
1997. what goes on inside the black
I box' (i.e. the artefact of classi-
• M-Estimators cal micro-economic theory of
estimators that maximise a the firm).
sample average. The em' means I
• milestones
'maximum-likelihood-like' .
subprojects where a project is
• metatheorem I broken up (to be able to moni-
an informal term for a propo- tor development progress and
sition which can be proved in a adhere to deadlines.
class of economic model envi - I • milestone stabilisations:
ronments.
I while there may be some free-
• method of moments dom to make changes to the
estimation design of an evolving product,
a way of generating estimators: I there is a need to adhere to in-
set the distribution moments I termittent milestone deadlines.
equal to the sample moments, I • millennium round
and solve the resulting equations
for the parameters of the dis- I the name suggested by the Eu-
tribution. ropean Union for the trade
I round which they and others
• Metzler paradox hoped would be initiated at
the possibility, identified by the Seattle Ministerial in
Metzler (1949), that a tariff ~ 1999. That ministerial ended
may lower the domestic relative . without agreement to start a
price of the imported good. new round.
This will happen if it drives the I

II = = = = = = = = E c o n o m i e s
II MiWs test I monetarism 119
*================
- Mill's test ~ merce and Industry, MITI was
one of two conditions needed ; renamed METI as of January
for infant industry protection to : 6,2000.
I
be welfare-improving. This re- : - mixing regulation
quires that the protected indus-
~ 1. specification of the propor-
try become, over time, able to
I tion of domestically produced
compete internationally with-
~ content in products sold on the
out protection. : domestic market.
- minimum efficient scale ~ 2. specification of an amOlillt of
the smallest output of a firm ; domestically produced product
consistent with minimum aver- : that must be bought by an im-
age cost. In small countries, in ~ porter for given quantities of
some industries the level of de- I imports, under a linking
mand in autarky is not sufficient : scheme.
I
to support minimum efficient
:I - mobile and immobile
scale.
factors of production
- Ministry of Economy, ('factor mobility')
Trade and Industry the mobility between different
(METI) uses or occupations of factors
the Japanese government min- I of production (land, labour,
istry which deals with eco- I capital, etc.).
nomic issues, including the ; _ mode of supply
vitality of the private sector,
external economic relations, I the method by which suppliers
energy policy, and industrial of internationally traded ser-
I vices deliver their service to
development.
buyers. The four modes usually
- Ministry of International identified are: cross-border sup-
Trade and Industry ~ ply, consumer movement, pro-
(MITI) ; ducer presence and movement
the Japanese government min- : of natural persons.
istry which deals with trade and ~ _ monetarism
industrial policies. Established I
in 1949 as the Ministry of Com- a view where market econo-

Beonomics======= II
120 mon;ristview I monopolisticcumpetition II
mies are inherently self-
stabilising and that variations in
the quantity of money are the
main cause of fluctuations in the
level of aggregate demand.
• monetarist view
in extreme form, the monetar-
ist view is the view where only
the quantity of money matters
by way of aggregate demand
policy. Relevant only in an over-
heated economy.
• monetary base
the same as high-powered
mone)" It refers to the cash in
commercial banks, plus cash in
circulation and deposits of tl1e
commercial bank at the central
bank.
• money income
nominal income.
• money market
the money market, in macro-
economics and international fi-
nance, refers to the equilibra-
tion of demand for a country's
domestic money to its money
supply. Both refer to the quan-
tity of money that people in the
country hold (a stock), not to
the quantity that people both in
and out of the country choose
II ========:&onomit:s
I to acquire during a period in the
I exchange market, mostly for the
purpose of then using it to buy
I something else.
I • money overhang
I a money supply which is larger
than what people want to hold
at prevailing prices. This was
I said to be a major cause of in-
flation in Russia after the fall
of the Soviet Union, which left
I an excess of money in circula-
I tion.
I • money supply
there are several formal defIni-
tions, but all include the quan-
I tity of currency in circulation
plus the amount of demand de-
posits. The money supply, to-
I gether with the amount of real
I economic activity in a country,
is an important determinant of
I its price level and its exchange
I rate.
• monopolistic competition
essentially the same as imper-
I fect competition. A market
I situation in which one or more
firms may be capable of influ-
I encing the price of the product.
I It is characterised by product
differentiation, often estab-
I lished through advertising.
I! monopolyar;gument I morbidity
• monopoly argument
the monopoly argument for a
tariff is the same as the optimal
tariff argument. It gets its name
from the fact that a country us-
ing a tariff to improve the terms
of trade is acting much like a
monopoly firm, restricting its
sales to get a better price.
• monopsoms • 0· fi
C lrm
fi h ' th I b f . lcally feaslble or when one
a lrm t at lS .e so e uy~r 0
a good or serViCe, most likely
Of labour in a particular mar-
ket.
• monopsony
a state where demand comes
from one source. If there is only
one customer for a certain
good, that customer has a
monopsony in the market for
that good. Analogous to mo-
nopoly, but on the demand side
not the supply side. A common
theoretical implication is that
the price of the good is pushed
down near the cOSt of produc-
tion. The price is not predicted
to go to zero because if it went
below where the suppliers are
willing to produce, they won't
produce.
• Monte Carlo Simulations
the data obtained by simulating
Economics=======
121
*=================
~ a statistical model in which all
; parameters are numerically
: specified.
~ One might use Monte Carlo
I simulations to check how an
~ estimation procedure would
: behave, for example under con-
~ ditions when exact analytic de-
; scriptions of the performance of
:I the estimation are not algebra-
. .
; wants to verify that one's ana-
: lytic calculation for a confidence
~ interval is correct.
.
~ • moral hazard
I the tendency of individuals,
~ firms, and governments, once
: insured against some contin-
~ gency, to behave so as to make
; that particular contingency
: more likely. A pervasive prob-
~ lem in the insurance industry, it
; also arises internationally when
: international financial ins tim-
~ tions assist countries in finan-
; cial trouble.
; • morbidity
~ an incidence of ill health. It is
: measured in various ways, of-
~ ten by the probability that a ran-
; domly selected individual in a
: population at some date and
~ location would become seri-
II
 g
""12""2========""mD=t.,,,,hh=a: I Multifiber Arrangement (MFA)
ously ill in some period of time.
Contrast to mortality.
• mothballing
the preservation of a production
facility without using it to pro-
duce, but keeping the machin-
ery in working order and sup-
plies available. This may be
preferable - if the facility'S
operating costs are high and the
aim is to have it available in
time of war - to having it pro-
duce in peacetime under a sub-
sidy or import protection.
• movement of natural
persons
one of four modes of supply
under the GATS, this involves
the temporary movement
across national borders of nalli-
ral persons employed by or as-
sociated with a firm in order to
participate in the firm's busi-
ness. Also called temporary
producer movement.
• multi-cone equilibrium
a free-trade equilibriun1 in the
Heckscher-Ohlin Model in
which prices are such that all
goods cannot be produced
within a single country, and in-
stead there are multiple diver-
sification cones. This, or a two
1\ ========&onomics
/I
I cone equilibrium, will arise if
I countries' factor endowments
are sufficiently dissinUlar com-
I pared to factor intensities of
I industries. Contrasts with one
cone equilibrium.
I
• multifactor model
a model with more than two
I factors. In the context of trade
theory, this is likely to mean a
Heckscher-Ohlin Model with
I more than two factors.
I • multi-factor
productivity(MFP)
same as total factor productiv-
ity, a certain type of Solow re-
I sidual.
MFP = d(ln f)/dt = d(ln Y)/dt
- sLd(ln L)/dt - sKd(ln K)/dt
I
where f is the global production
I function; Y is output; t is time;
SL is the share of input costs at-
I
tributable to labour expenses;
I
SK is the share of input costs at-
I tributable to capital expenses;
L is a dollar quantity of labour;
K is a dollar quantity of capital.
I
• Multifiber Arrangement
(MFA)
I an agreement (OMA) amongst
developed country importers
and developing country export-
II multifunctionality I multiplier effict.. ==========1"",2=3
ers of textiles and apparel to ~ • Multilateral Investment
regulate and restrict the quan- I Guarantee Agency
tities traded. It was negotiated (MIGA)
in 1973 under GATT auspices ~ one of the five institutions that
as a temporary exception to the I form the World Bank Group,
rules that would otherwise ap- ~ MI GA helps encourage foreign
ply, and was superceded in 1995 : investment in developing coun-
by the ATC. I tries .

• multifunctionality
the purposes that an industry
may serve in addition to pro-
ducing its output. Most often
applied to agriculture by coun-
tries that wish to subsidise it,
who argue that subsidies are
needed to serve these other pur-
poses, such as rural viability,
land conservation, cultural heri-
tage, etc.
• Multilateral Agreement on
Investment (MAl)
an agreement to liberalise rules
on international direct invest-
ment that was negotiated in the
OECD but could not be com-
pIe ted or adopted because of
adverse public reaction to it.
Preliminary text of the agree-
~ent w~ leaked to the Internet :
m Apnl 1997,. where .m.any ~ aggregate spending to cause a
groups.oppo~edlt. ~egot1at1ons ;
were discontInued ill Novemer :
1998. ~ tional income.
~ • multiplier
; 1. a numerical coefficient which
: relates the change of a compo-
~ nent of aggregate demand
; (such as the export demand for
: a region's products) to a conse-
~ quent change in income (or
~ employment).
; 2. in Keynesian macroeco-
: nomic models, the ratio of the
~ change in an endogenous vari-
; able to the change in an exog-
: enous variable. Usually means
~ the multiplier for government
; spending on income. In the sim-
~ plest Keynesian ~~l of a
: closed economy, thIS IS l/s,
~ ~here s is the marginal propen-
; Slty to save.
~ • multiplier effect
the tendency for a change in
more than proportionate
change in the level of real na-

&onomies======= II
124 multistRgeproduction I Na,tionaldefencea,~tforprotection "
========*
• multistage production ~ • mystery of the missing
another term for fragmenta- ; trade
tion. Used by Dixit and : the empirical observation, by
Grossman (1982). ~ Trefler (1995), for the amount
I of trade which is far less than
• multivariate discrete
choice model : predicted by the HOV version
~ of the Heckscher-Ohlin Model.
a discrete choice model in which ~ More precisely, the factor con-
the choice is made from a set . tent of trade is far less than the
with more than one dimension I differences between countnes .

is said to be a multivariate dis- I in their factor endowments.

crete choice model.
'.Nash
• Mundell-Fleming Model
used as an adjective applied to
an open-economy version of the a strategy in a game, this .means
IS-LM model that allows for that it is part of a Nash equilib-
international trade and interna- I rium.
tional capital flows. Due to
Mundell (1962,63) and I • Nash equilibrium
Fleming (1962). an equilibrium in game theory
where each player's action is
• Mundell-Tobin Effect
I optimal, given the actions of the
says that nominal interest rates other players. E.g., in a tariff-
would rise less than one-for-one and-retaliation game, with each
with inflation because in re- I country able to improve its
sponse to inflation, the public terms of trade with a tariff, zero
would hold less in money bal- tariffs are not Nash, since each
ances and more in other assets, I can do better by raising its tar-
which would drive interest rates iff. A Nash equilibrium, with
down. positive tariffs, is likely to be
• mutual recognition inferior to free trade for both.
the acceptance by one country • National defence argu-
of another country's certifica- ment for protection
tion that a satisfactory standard the argument that imports
has been met for ability, perfor- should be restricted in order to
mance, safety, etc.

II =======Bconomks
II national income I natural rate OfU~loyment
sustain a domestic industry so
that it will be available in case
of trade disruption due to war.
This is a second best argument,
since there are a variety of ways
of providing for defence at
lower economic cost, including
production subsidies,
mothballing, and stockpiling.
• national income
1. the general term used to re-
fer to the total value of a
country's output of goods and
services in some accounting pe-
riod, without specifying the for-
mal accounting concept such as
Gross Domestic Product.
2. the income generated by a
country's production, and there-
fore the total income of its fac-
tors of production. Except for
some adjustments that don't
usually enter theoretical mod-
els, NI is the same as GD P.
• national income (GDP)
deflator
a general way of referring to the
price index that measures the
average level of the prices of all
the goods and services compris-
ing the national income or GD P.
• national treatment
~ ment in the system.
the principle of providing for-
Economics=======
125
~ eign producers and sellers the
; same treatment provided to
: domestic firms.
~ • natural increase
~ growth of the population due to
I an excess of births over deaths.
~ • natural monopoly
; a market situation where econo-
: mies of scale are such that a
~ single firm of efficient size is
; able to supply the entire mar-
: ket demand.
I
: • natural person
~ this term appears in the GATS
I and it deals with the interna-
~ tional movement of employees
: of firms that are providing ser-
~ vices in another country. Per-
; sons are called 'natural' to dis-
: tinguish them from 'juridical
~ persons', such as partnerships
; or corporations, that are given
: certain rights of persons under
~ the law.
~ • natural rate of unemploy-
I ment
~ the rate of unemployment
: which would exist when the
~ economy is operating at full ca-
; pacity. It would be equal to the
: amount of frictional unemploy-
II
126 naturaltrade I Nemawashi (jp) II
=================*
- natural trade I commitment being to apply the
trade which is either free or re- I agreement to everything else.
stricted, but that is not artifi- Contrasts with positive list.
cially encouraged by subsidies _ neighbourhood produc-
or other stimulants. tion structure
- necessity test I a structure of technology for a
a procedure to determine I general equilibrium model due
whether a trade restriction in- to Jones and Kierzkowski
tended to serve some purpose I (1986). With an arbitrary but
is necessary for that purpose. equal number of goods and fac-
tors, each factor produces two
- negative externality I (different) goods, each good
a harmful externality, i.e., a uses two (different) factors, in
harmful effect of one economic a way that yields more unam-
agent's actions on another. Con- I biguous results than one nor-
sidered a distortion because the I mally finds in high-dimension
first agent has inadequate in- trade models without specific
centive to curtail their action. I factors.
Examples are pollution from I
factories (a production external-
- neighbourhood
ity) and smoke from cigarettes in mathematical Euclidean
I
(a consumption externality). space, a small set of points sur-
rounding and including a par-
- negative introspection I ticular point. Thus, for an eco-

implicit assumption of most nomic variable, such as an allo-

decision models: If an agent cation, the neighbourhood of a
does not know something .than I particular allocation includes all
he/she, however, knd~s that I those allocations that are suffi-
he/she does not know it. .. ciently similar to it.
- negative list _ Nemawashi (jp)
in an international agreement, I a Japanese term that refers to
a list of those items, entities, I the practice of broad consulta-
products, etc. to which the tion before taking action.
agreement will not apply, the

II = = = = = = = = E c o n o m i c s
II neoclassical \ neutral 127
*================
_ neoclassical ~ to scale and smoothly diminish-
a collection of assumptions cus- ; ing returns to individual factors.
tomarily made by mainstream ; _ neoliberalism
economists starting in the late : a view of the world which
19th century, including profit ~ favours social justice while also
maximisation by firms, utility I emphasising economic growth,
maximisation by consumers, ~ efficiency, and the benefits of
and market equilibrium, with : free markets.
corresponding implications for I •
determination of factor prices : - Net DomestIc Product
and the distribution of income. I (NDP)
Contrasts with classical, ; gross domestic product minus
Keynesian, and Marxist. : depreciation.
I
- neoclassical economics : - Net National Product
most of modern, mainstream I (NNP)
economics based on neoclassi- I gross national product minus
cal assumptions. Tends to as- ~ depreciation.
cribe inevitability, if not neces-
~ - net present value
sarily desirability, to market
outcomes. : same as present value, being
~ sure to include (negative) pay-
- neoclassical growth model ; ments as well as (positive) re-
a model of economic growth : ceipts.
where income arises from neo- I
classical production functions in :I - neutral
one or more sectors displaying : 1. said of a technological
diminishing returns to saving ~ change or technological differ-
and capital accumulation. Due ; ence if it is not disproportion-
to Solow (1956) and Swan : ately in favour of using more
~ or less of one factor than an-
(1956).
; other. This can be defined in
- neoclassical production : several different ways that are
function ~ not normally equivalent: Hicks-
a production function with the ; neutral, Harrod-neutral, and
properties of constant returns

E&onomus======= II
128
=================*
Solow-neutral.
2. said of economic growth if it I
expands actual or potential out-
put of all goods at the same rate, :
not being biased in favour of I
one over another. In the :
Heckscher-Ohlin Model neutral
growth will occur if all factor I
endowments grow at the same
rate or if there is Hicks Neu-
tral technological progress at I
the same rate in all industries .. I
3. said of a trade regime if the
I • new trade theory
structure of protection favours
neither exportables nor I
importables.
• new bancor
a proposed new non-national
world currency to be used for
payment and reserve purposes,
to be issued by the IMF and in-
tended to maintain a fixed pur-
chasing power in the dollar and
euro countries.
• new economic geography
the study of the location of eco-
nomic activity across space, par-
ticularly a strand of literature
begun by Krugman (1991a)
using agglomeration economies
to help explain why industries
cluster within particular coun-
tries and regions.
/I ========Economies
new hamar I nominal 1/
• new economy
this term was used in the late
1990's to suggest that
globalisation and/or innova-
tions in information technology
had changed the way that the
world economy works. Conjec-
tures included changes in pro-
ductivity, the· inflation-unem-
ployment tradeoff, the business
cycle, and the valuation of en-
terprises.
models of trade that, particu-
larly in the 1980s, incorporated
I aspects of imperfect competi-
tion, increasing returns, and
product differentiation into
I both general equilibrium and
partial equilibrium models of
trade and trade policy. Many
I contributed to this literature,
I but the most prominent was
Krugman, starting with
I Krugman (1979) .
I • Newly Industrialising
I Country (NIC)
a group of countries previously
regarded as LDCs which have
I recently achieved high rates and
levels of economic growth.
• nominal
1. in the form most directly
II nominal exchange rate I noneconomic:jectil1es argument.for protection 129

observed or named, in contrast ~ These include non-specific sub-

to a form that has been adjusted ; sidies, subsidies for industrial
or modified in some fashion. : research, regional aids and
2. as measured in terms of ~ some environmental subsidies.
money, usually in contrast to ~ • non-automatic licensing
real.
I import licensing that is discre-

• nominal exchange rate ~ tionary, based on an import

the actual exchange rate where : quota or performance related.
currencies are exchanged on an :I • nonconvextty •

exchange market. Contrasts

I the property of an economic
with real exchange rate.
I model or system that states rep-

• nominal interest rate resenting technology, prefer-

the interest rate actually ob- ences, or constraints are not
served in the market, in contrast I mathematically convex. Be-
to the real interest rate. cause convexity is needed for
proof that competitive equilib-
• nominal rate of protection I rium is efficient and well-be-
the protection afforded an in- haved, nonconvexities may im-
dustry directly by the tariff and/ I ply market failures.
or NTB on its output, ignoring I
effects of other trade barriers • nondistorted
on the industry'S inputs. Con- ~ without distortions. Many
trasts with the ERP. ; propositions in trade theory are
strictly valid, often only implic-
• nominal tariff I itly, only in nondistorted econo-
the nominal protection pro- I mles.
vided by a tariff, i.e., the tariff
itself. Contrasts with effective I • nondistorting lump sum
tariff. redundant appellation for a
lump sum tax or subsidy.
• non-actionable subsidy
a subsidy which is permitted by • noneconomic objectives
the rules of the wro, thus not argument for protection
subject to countervailing duties. I the view where a restriction on
Imports may serve a purpose

Economics================== II
130 nonhrmwthetic I norma/good II
========*
outside of conventional eco- ~ • Nontariff Measure (NTB)
nomic models. Unless that pur- ; any policy or official practice
pose is itself the restriction of : that alters the conditions of in-
trade, then this is a second-best ~ ternational trade, including ones
argument, since changes in out- I that act to increase trade as well
put, consumption, etc. can be as those that restrict it. The
achieved at lower economic cost term is therefore broader than
in other ways. I nontariff barrier, although the

• nonhomothetic two are usually used inter-

any function which is not changeably.
homothetic, but usually applied • nontraded good
to consumer preferences that I a good which is not traded, ei-
include goods whose shares of ; ther because it cannot be or be-
expenditure rise (and others cause trade barriers are too
that fall) with income. high. Except when services are
I being distinguished from
• non-market economy
goods, they are often men-
a COlIDtry in which most major I
tioned as exam pIes of
economic decisions are imposed
I nontraded goods, or at least
by government and by central
they were until it becan1e com-
planning rather than by free use I
mon to speak of trade in ser-
of markets. Contrasts with a
vices.
market economy.
I • nonviolation
• non-specific subsidy
I in WTO terminology, this is
a subsidy which is available to
shorthand for a complaint that
more than a single specific in- I
a country's action, though not a
dustry and is therefore non-ac-
I violation of WTO rules, has
tionable under WTO rules.
nullified or impaired a
• nonsterilisation member's expected benefits
the exchange market interven- I from the agreement.
tion which is done without I • normal good
sterilising its effects on the do-
any good for which the demand
mestic moneY'supply.
increases as incomes increase.

II =~=====Econo",ics

II normal value I official reserve trans7============
• normal value
price charged for a product on
the domestic market of the pro-
ducer. Used to compare with
export pnce in determining
dumping.
• normative
the value judgements as to
'what ought to be', in contrast
to positive which is about 'what
· •.
1S >
• normative theory
the theory which depends on
underlying values, not on facts.
It identifies 'what ought to be'
if such values are adhered to.
• numeraire
the unit in which prices are
measured. This may be a cur-
rency, but in real models, such
as most trade models, the
numeraire is usually one of the
goods whose price is then set
at one. The numeraire can also
be defmed implicitly by, for ex-
ample, the requirement that
prices sum to some constant.
• offer curve
a curve showing, for a two-
good model, the quantity of one
good which a country will ex-
port (or 'offer') for each quan
Economics====================== II
. 131
I M
I
)(
I
~ tity of the other that it imports.
; Also called the reciprocal de-
: mand curve, it is convenient for
~ representing both exports and
I imports in the same curve and
: can be used for analysing tar-
~ iffs and other changes.
~ • offer curve diagram
~ a diagram which combines ~e
; offer curves of two countnes
: (or one country and the rest of
~ world) to determine equilib-
; rium relative prices.
; • official reserve transactions
: transactions by a central bartk
~ which cause changes in its offi-
I cial reserves. These are usually
~ purchases or sales of its own
: currency in the exchange mar-
~ ket, in exchange for foreign cur-
; rencies or other foreign-cur-
: reney-denominated assets. In
I
132
the balance of payments, a pur-
chase of its own currency is a
credit (+) and a sale is a debit
( - ).
• offset requirement
as a condition for importing into
a Gountry; a requirement that
foreign exporters purchase do-
mestic products and/or invest in
the importing country.
• offsets
side payments or other commit-
ments made by countries or
corporations to secure export
orders. In the aerospace indus-
try, companies often have to
subcontract parts production
and/or to transfer technology; in
order to receive a pllrchase or-
a.:;reqUirement I one cone equilibrium II
I each with a different focus or
I question: 0: Ownership Ad-
vantages (Firm Specific Advan-
I tages) address the why ques-
I tion. L: Location Advantages
(Country Specific Advantages)
I
focus on the where question. I:
I Internalisation Advantages re-
fer to the how or organisational
I
question.
• oligopoly
I a market structure where there
I are a small number of sellers,
at least some of whose indi-
I
vidual decisions about price or
I quantity matter to the others.
Pr1ce
I
Prl.ce
D2

der. However, offsets can take I

many other forms, including Prl.C'i

decreases
1m2
Dl
barter trade. are matched lIRl

• Ohlin definition
the price definition of factor
abundance. In contrast to the
quantity definition, the price
definition incorporates differ-
ences in demands as well as sup-
plies. Due to Ohlin (1933).
• OLI Paradigm
represents a mix of three differ-
ent FDI theories = 0 + L + I,
I • oligopsony
I a market ~tructure in which
there are a small number of
I buyers.
I • one cone equilibrium
I a free-trade equilibrium in the
Heckscher-Ohlin Model
where prices are such that all
I goods can be produced within
a single country; and there is

II = = = = = = = = E c o n o m i c s
II one-way arbitrage I opmregionalism *==========1",,3~3
<;>lily one diversification cone. ~ lation.
This will arise if countries' fac- ~ • Open Market Operation
tor endowments are suffi- ; (OMO)
ciently similar compared to
: the sale or purchase of govern-
factor intensities of industries. I

Contrasts with multi-cone : ment bonds by a central bank,

I in exchange ·for domestic cur-
equilibrium.
~ rency or central-bank depos-
- one-way arbitrage : its. This changes the mon-
the use, by a potential supplier ~ etary base and therefore the
or demander in a market, of ; domestic money supply, con-
a different market or markets : tracting it with a bond sale and
to accomplish the same pur- ~ expanding it with a bond pur-
pose, taking advantage of a ; chase.
discrepancy among their ; _ open position
prices. With transaction costs,
this enforces smaller price dis- I an obligation to take or make
crepancies than would be per- delivery of an asset or currency
mitted by conventional arbi- I in the future without cover, that
trage. Due to Deardorff I is, without a matching obligation
(1979).
in the other direction that pro-
~ tects them from effects of change
- one-way option ; in the price of the asset or cur-
the situation of a speculator on : rency. Aside from simple owner-
an exchange market with a ~ ship and debt, an open position
pegged exchange rate. If there is ; can be acquired or avoided using
doubt about the viability of the : the forward market.
peg, the speculator can sell the I
: - open regionalism
currency short, knowing that
there is only one direction (one ~ regional economic integration
way) that the currency is likely I which is not discriminatory
to move. Therefore, there is little : against outside countries,
risk associated with such specu- ~ typically, a group of countries
~ that agrees to reduce trade
. barriers on an MFN basis.

E&onomics======= II
134
Adopted as a fundamental
principle, but not defined, by
APEC in 1989. Bergsten
(1997) offers five definitions,
ranging from open member-
ship to global liberalisation
and trade facilitation.
• open-economy multiplier
the simple Keynesian multiplier
for a small open economy.
Equals l/(s+m), where s is the
marginal propensity to save and
m is the marginal propensity to
import.
• opportunism
the suggestion (widely associ-
ated with transaction cost
analysis) where a decision-
maker may unconditionally
seek his/her self-interests, and
that such behaviour cannot
necessarily be predicted. This
proposition extends the
simple self-interest seeking
assumption to include 'self-in-
terest seeking with guile',
thereby making allowance for
strategic behaviour.
• opportunity cost
the cost of something in terms
of opportunity foregone. The
II = = = = = = = & o n o m i c s
;""-CC""otUJtn==iJ""m""U""lh""p""l",,ier=1""itf""h""·ma=l""tll"""""iff,,,, 1/
I
I
I
~fl', . lk dW-I4f(: qu~"''11)' and cumd IhrOV$h ~2:QL. me \·c:Jo..:il~ vr
I :\u ,.ltw 1... In!
~nil~
notrIfNol ~ ,JI.~"""fuClIO ,l\(: \UW.k 04 M2. "The
,;'(ttI .,1' ho.Wdina; Ml i.. If. t"',-,,-qu;MiCt ftl.)\'j~ ilWI~ (of the
I JilfCN"~~ hct .... c:" dlC' tfwc!c·/{1MltI TI"c.;r.'¥ty hill ,... aM ''''~ ""Cifhtcd
'*
A\,\;,r. lo!ll,Ifa bidS ita;iu.:l.'d III M!
opportunity cost to a country of
I
producing a unit more of a
I good, such as for export or to
replace an import, is the quan-
tity of some other good that
I could have been produced in-
I
stead.
• optimal currency area
the optimal grouping of regions
I or countries within which ex-
I change rates should be held
fixed. First defined (as 'opti-
I
mum currency areas') by
I Mundell (1961).
I • optimal tariff
I the level of a tariff which
maximises a country's welfare.
I In a nondistorted small open
economy, the optimal tariff is
zero. In a large country, it is
I positive, due to its effect on the
I terms of trade.
II optimal tarijfargument ,outputa7ting 135

• optimal tariff argument ~ countries to restrict the quan-

an argument in favour of levy- ; tities traded of a good or
ing a tariff in order to improve : group of goods. Since the im-
I
the terms of trade. The argu- . petus normally comes from
ment is valid only in a large ; the importers protecting their
country, only if other countries : domestic industry, an OMA is
do not retaliate by raising tar- ~ effectively a multi-country
iffs themselves. Even then, this I VER.
is a beggar thy neighbour I • Organisation for Eco-
policy, since it lowers welfare : nomic Cooperation and
abroad. Development (OECD)
• optimum ~ an international organisation
the best. Usually refers to a ; of developed countries which
most preferred choice by con- : 'provides governments a set-
sumers subject to a budget con- ~ ting in which to discuss, de-
straint, a profit maximising ; velop and perfect economic
choice by firms or industry sub- : and social policy.' As of July
ject to a technological con- ~ 2002, it had 30 member coun-
straint, or in general equilib- ~ tries.
rium, a complete alloc~tion of ; • Organisation for Euro-
factors and goods that m some: pean Economic Coopera-
sense maximises welfare. I tion (OEEC)
• optimum optimorum ~ an internatioQ.al organisation
the best of the best or the glo- ; established in 1~48 as the re-
bal optimum. This term is : cipient institution of aid
used, when there are several ~ through the Marshall Plan. In
allocations each of which is lo- ; 1961, it was replaced by the
cally optimal, to refer to the : OEeD.
I
best among these. : • output augmenting
I
• Orderly Marketing Ar- : said of a technological change
rangement (OMA) ~ or technological difference if
an agreement among a group ; one production function pro-
of exporting and importing : duces a scalar multiple of the
I

Bconomics======= II
~1=3=6===========0l1=er;alued Ct/:rrency I partial equilibrium II
other. Also called Hicks neu-
tral.
• over-valued currency
the situation of a currency
whose value on the exchange
market is higher than is be-
lieved to be sustainable. This
may be due to a pegged or man-
aged rate that is above the mar-
ket-clearing rate, or, under a
floating rate, it may be due to
speculative capital inflows. Con-
I • Pareto criterion
I the criterion that for change in
an economy to be viewed as
socially beneficial, it should be
I Pareto-improving.
I • Pareto optimality
the condition which exists when
it is impossible to make any in-
I dividual better off without mak-
I ing any other individual worse
off.
I

trasts with under-valued cur- I

• Pareto-improving
rency. making no one worse off and
I making at least one person bet-
• para tariff ter off.
a charge on imports which is not .
included in a country's tariff I • Pareto-optimal
schedule, such as a statistical : a situation where no Pareto-
tax, stamp fee, etc. I improving change is possible.

• parallel import I • partial equilibrium

trade which is made possible I equality of supply and demand
when the owner of intellectual I in only a subset of an economy's
property causes the same markets, usually just one, tak-
product to be sold in different I ing variables from other mar
countries for different prices. I
If someone else imports the
.....
low-price good into the high-
price country, that is a paral- I
lel import.
• para-tariff
a charge on an imported good
instead of, or in addition to, a I
tariff.

II = = = = = = = = E c o n o m ; c s
II pass-through I pauperlabOUrargume;:.
kets as given. Partial equilib-
rium models are appropriate
for products that constitute only
a negligibly small part of the
economy. They are used rou-
tinely (not always appropri-
ately) for analysis of trade poli-
cies in single industries. Con-
trasts with general equilibrium.
- pass-through
the extent to which an exchange
rate change is reflected in the
prices of imported goods. With
full pass-through, a currency
depreciation, which increases
the price of foreign currency,
would increase the prices of
imported goods by the same
amount, and vice versa. With no
pass-through, prices of imports
remain constant.
- path dependency
reference to effects of past com-
mitments or acquired knowl-
edge on subsequent actions and
decisions. Recognising that 'his-
tory matters' for a future course
of action or development, such
past commitments or learning
activities could entail previous
investments, e.g. in transac-
tion-specific assets, contracts,
research & development, or the
Economics=======
137
I pool of (usually locally) learned
I behaviours and organisational
routines which constrain (in-
~ eluding spatially) future activi-
I ties.
; - path dependent
~ the property where you get to
: depend on how you got there.
~ That is, if the equilibrium that
; will ultimately be reached by a
: system depends on the values
~ of variables taken on away from
; equilibrium, then the equilib-
: rium is path dependent.
I
: - patriotism argument.for
~ protection
I the view in which one is help-
~ ing one's country by buying do-
: mestically produced goods in-
~ stead of imports. In a
; nondistorted economy, this is
: not correct, since the country
~ can do better producing where
; it has a comparative advantage
: rather than using scarce re-
~ sources where it does not.
~ - pattern of specialisation
I what all goods a country pro-
~ duces and what it does not pro-
: duce.
I
: - Pauper labour argument
I the view that a country loses by
II
"",13"",8==========* perfoct competition I perfoctly elastic
importing from another coun-
try which has low wages, pre-
sumably by lowering wages at
home. This view ignores the
fact that low wages are due to
low productivity, and that the
high-wage home country, with
high productivity, will have com-
parative advantage in some
products and will gain from
trade.
• perfect competition
an idealised market structure
where there are large num-
bers of both buyers and sell-
ers, all of them small, so that
they act as price takers . Per-
fect competition also assumes
homogeneous products, free
entry and exit, and complete
information. Most interna-
tional trade theory prior to
the New Trade Theory as-
sumed perfect competition.
Price
AC
Q . . . .ty
II ======================_Economics
II
I • perfect foresight
I exact knowledge of the future.
Under perfect foresight, for ex-
I ample, the forward rate would
I exactly equal the spot rate, that
later prevails when the forward
contract matures.
I
• perfect substitute
I <l good which is regarded by its
I demanders as identical to an-
other good, so that the elastic-
ity of substitution between
I them is infinite.
I • perfectly competitive
I refers to an economic agent
(firm or consumer), group of
I agents (industry), model or
I analysis that is characterised by
perfect competition. Contrasts
I with imperfectly competitive.
I • perfectly elastic
I refers to a supply or demand
curve with a price elasticity of
infinity, implying that the sup-
I ply or demand curve as usu-
ally drawn is horizontal. A
small open economy faces per-
I fecdy elastic demand for its
exports and supply of its im-
ports, and a foreign offer
I curve that is a straight line
I from the origin.
II peifo'mul-ncerequirement Iplace Utili; 139

Perfectly Elastic & I the learning organis ation :

Inelastic Demand I 'learning to expand our personal
p"" p,,« capacity to create the results we
D

C ~
I most desire, and creating an
o I organisational environment
Q-y Q- 7 which encourages all its mem-
P.r,r.,.'vEl. .. , P"j«dyln</a,., bers to develop themselves to-
• performance requirement I wards the goals and purposes
a requirement where an im- I
they choose.'
porter or exporter achieves • pessimum distance
some level of performance, in reference to the (possibly) dis-
terms of exporting, domestic I advantageous location of a
content, etc., in order to obtain I smaller city relative to a larger
an import or export license. one.
• permatemps • phytosanitary
workers arbitrarily classified as ~ pertaining to the health of
'temporary' by employers while I plants.
they perform regular jobs and
work over extended periods of I • Pittsburgh Plus
time with other workers who I a form of spatial price discrimi-
are given regular employee sta- nation based on oligopolistic
tus. Permatemps tend to receive I collusion. The mill price at one
lower wages and less benefits. I location determines the deliv-
ered price at all locations, re-
• personal distribution I gardless of the location of the
the distribution of income on I plant from which delivery is ac-
the basis of income groups. For tually made.
example, by dividing all income I
recipients into ten groups :I • place utility
(deciles) and showing the share the utility (benefits, satisfac-
each of these groups had of the I tion) associated with or derived
total income. from the attributes of a place
or location.
• personal mastery
one of Senge's 5 principles for

&onomics======== II
140 Planned Unit Development :UD) I political econmny ofprotection II
• Planned Unit Develop- I more than two, that would be

ment (PUD) I bilateral, but not a great many,

a land development project which would be multilateral.

comprehensively planned as an • plurilateral agreement
entity via a unitary site plan I
the plurilateral agreements of
which permits flexibility in I
the WTO contrast with the
building sitting, mixtures of :
larger multilateral agreements,
housing types and land uses, I
in which the former are signed
usable open spaces a,nd the
I onto by only those member
preservation of significant natu-
countries that choose to do so,
ral features.
while all members are party to
• planning curve I the multilateral agreements.

the long nm average cost curve. I • political economy

• plasticity I 1. early name for the discipline
resources and investments are of economics.
called 'plastic', to indicate that 2. a field within economics en-
there is a wide range of discre- I compassing several alternatives
tionary, legitimate decisions to neoclassical economics, in-
within which the user may cluding Marxist economics.
choose. I Also called radical political
• Plaza Accord I economy.
3. a field within economics that
an agreement reached in 1985 I
among the central banks of : concerns the interactions be-
France, Germany, Japan, US ~ tween political processes and
and UK to bring down the value I economic variables, especially
of the U.S. dollar, which had economic policies.
appreciated substantially since • political economy of
1980. By the time of the Lou- I protection
vre Accord, two years later, the I the study of reasons, especially
dollar had fallen 30%. political ones, in which the coun-
• plurilateral tries choose to use protection.
among several countries

II = = = = = = = = E c o n o m i c s
II portfolio approach I positive list 141
*================
Includes models of voting, lob- ~ • positional goods
bying, and campaign contribu- I goods which are at least in part
tions, as these lead policy male- : demanded because their posses-
ers to erect tariffs. ~ sion or consumption implies
I social or other status of those
• portfolio approach
an approach to explaining ex- ~ acquiring them.
change rates which stress their ; • positive
role in changing the propor- refers to 'what is', in contrast
tions of different currency-de- to normative which involves
nominated assets in portfolios. value judgements as to 'what
The exchange rate adjusts to ought to be'. The word is not,
equate these proportions to de- in this use, the opposite of ei-
sired levels. ther 'negative' or 'harmful'.
• portfolio flow • positive externality
the sale or purchase of fil!ancial a beneficial externality, I.e., a
assets across countries. beneficial effect of one eco-
• portfolio investment I nomic agent's actions on an-

the acquisition of portfolio capi- I

tal. Usually refers to such trans-
actions across national borders
and/or across currencies.
• portfolio theory
other. Considered a distortion
because the first agent has in-
I adequate incentive to act. Ex-
I amples are the attractiveness of
well-kept fr.rrms for the tourism
I industry (a production external-

the analysis as to . how an in- I ity) and ·reduced contagion of

vestor can maximise the ex- disease due to vaccines (a con-

pected return from a 'portfolio' sumption externality).
of various kinds of financial as- ~ • positive list
sets, having given degrees of I
risk and uncertainty associated . in an international agreement,
with them (or minimise the risk ; a list of those items, entities,
involved in realising some given : products, etc. to which the
I agreement will apply, with no
expected return).

Economics======= II
""14,,,,2==========:Ostmodernism I preferenceforl1ariety II
commitment to apply the agree- I GMOs, for example.
ment to anything else. Con- I • predation
trasts with negative list.
I the use of aggressive (low) pric-
• postmodernism ing to put a competitor out of
a still tenuous attempt to lend business, with the intent,. once
identity to a new era beginning I they are gone, of raising prices
in the early 1970s which is as- to gain monopoly profits.
sociated with changes from and • predatory dumping
reaction to certain attributes of I
modernity or modernism. . dumping for the purpose of
I driving competitors out of bus i-

• Prebisch-Singer Hypoth- I ness and then raising price. This

esis is·the one motivation for dump-
the idea where the relative ing that most economists agree
prices of primary products I is undesirable, like predatory
would decline over the long pricing (predation) in other
term, and therefore that de- contexts.
veloping countries that were I • predatory pricing
led by comparative advantage
to specialise in them would I a company engages in preda-
find their prospects for devel- I tory pricing when it sets the
opment diminished. Due to price of its goods very low, in
Prebisch (1950) and Singer I order to eliminate its competi-
I tors and prevent new companies
(1950).
from entering into the market-
• precautionary principle place.
the view that when science has I • preference for variety
not yet determined whether a
I the increased utility which
new product or process is safe
or unsafe, policy should pro- I people experience when they
hibit or restrict its use until it is have access to a larger number
known to be safe. Applied to I of differentiated product vari-
trade, this has been used as the ~ eties. In reality, this may reflect
their ability to find products
basis for prohibiting imports of ;
more closely suited to their own

~fl ====================Bconomics
II J!refoY.ences Iprice definition 143
*=======
particular ne~d~, b~t .as m.~d- ~ (1996).
elled in the Doot-StIglitz utIlity ~ • present value
function, they are better off con- ; the value today of a stream of
suming small quantities of each : payments and/or receipts over
of a larger number of products. ~ time in the future and/or the
• preferences ; past, converted to the prese~t
1. in trade policy, this refers to : using an interest rate. If Xt IS
special advantages, ~uc h as '., the amount in period t and r the
lower-than-MFN tanffs, ac- , interest rate, then present value
corded to another country's ex- ~ at time t=O is V = St (Xt)/
ports, usually in order to pro- : (1 +r)t. .
mote that country's deve1op- ~ • preshipment inspection
ment. ~ certification of the value, qual-
. 2. in trade theory, this refers to ; ity, and/or identity of tra~ed
the attitudes of consumers to- : goods done in the exportmg
wards different goods, as :ep- ~ country by specialized agencies
resented by a utility functlon. ; or firms on behalf of the im-
Some propositions in. tra e ~ porting country. Traditionally
theory use the assumptlon f. used as a means to prevent
identical and/or homothe ic ; over- or under-invoicing, it is
Preferences. :, now beino- b
used also as a secu-
• preferential trading ar- : rity measure.
rangement ~ • price definition
a group of countries which ~e 'Y ~ a method of defining relative
lower (or zero) tariffs agal st ; factor abundance based on ra-
imports from members th n : tios of factor prices in autarky:
outsiders. Includes FTAs, c s- ~ Compared to country B, coun-
toms unions, and common m - , try A is abundant in factor X
kets. Encouragement to e: relative to factor Y iff wXA/
this term instead of the m re ~ wYA < wXB/wYB, where wIJ
misleading FfA has come fr ; is the autarky price of factor I
Jagdish Bhagwati, as . "n ~ in country J, I=X,Y, J=A,B.
Bhagwati and Panaganya

E&onomics======= 1/
""l",,44============~e discrimination I price undertaki1ltf
• price discrimination
the sale by a firm to buyers at
two different prices. When this
occurs internationally and the
lower price is charged for ex-
port, it is regarded as dumping.
• price elasticity
the elasticity of supply or de-
mand with respect to price.
• price elasticity of demand
change in the quantity de
~ P,
P,
P.,iod
8 . a n ti c Own and .
~ "', =~~~·i~Y
Price. .
P' ,
manded of a good or service in
response to a change in price
• price inelastic
having a price elasticity of less
than one (in absolute value).
• price level
the overall level of prices in a
country, generally measured
empirically by a price index, but
often captured in theoretical
models by a single variable.
II = = = = = = = = E c o n o m i c s
/I
I • price line
I a straight line representing the
combinations of variables, usu-
ally two goods, that cost the
I same at some given prices. The
slope of a price line measures
relative prices, and changes in
I prices can therefore be repre-
sented by changing the slope of,
or rotating, a price line. A
I steeper line means a higher
I relative price of the good mea-
sured on the horiwntal axis .
• price support
. .
government action to Increase
I the price of a product, usually
by buying it. May be associated
with a price floor.
• price taker
I an economic entity which is too
I small relative to a market to
affect its price, and that there-
fore must take that price as
I given in making its own deci-
sions. Applies to all buyers and
sellers in markets that are per-
I fectly competitive. Applies also
to a country if it is a small open
I
economy.
• price undertaking
I a commitment by an exporting
I firm to raise its price in an im-
porting-country market, as a
II pricing to 11UJrket I private cost 145
*================
means of settling an anti-dump- ~ ing an additional unit of a good
ing suit and preventing an anti- ; or service declines as additional
dumping duty. : units are acquired.
I
• pricing to market : _ principle of diminishing ,
the practice of an exporting ~ returns
firm holding fixed (or not I the proposition which states that
fully adjusting) the price it ~ the marginal product of the last
charges in the export market : unit of labour employed de-
when its costs or exchange I clines as additional units of
rates change. ; labour are employed.
• primary budget surplus ; - Prisoners' dilemma
the primary budget surplus a strategic interaction where
(or deficit) of a government two players both gain individu-
is the surplus excluding inter- ally by not cooperating, leading
est payments on its outstand- to a Nash equilibrium in which
ing debt. both are worse off than if they
cooperated. Important espe-
• primary factor
cially for explaining why coun-
an input which exists as a stock I tries may choose protection
providing service that contrib- even though all lose as a result.
utes to production. The stock is
not used up in production, al- ~ - private benefit
though it may deteriorate with ; the benefit to an individual eco-
use, providing a smaller flow of : nomic agent, such as a con-
services later. The major pri- ~ sumer or firm, from an event,
mary factors are labour, capital, ; action, or policy change. Con-
human capital (or skilled : trasts with social benefit.
I
labour), land, and sometimes
:I - private cost
natural resources.
: the cost to an individual eco-
• principle of diminishing ~ nomic agent, such as a con-
marginal utility ; sumer or firm, from an event,
the proposition that the satis- : action, or policy change. Con-
faction derived from consum- I trasts with sqtial cost.

Economics======== II
146
=========*
• private goods
a good that cannot be consumed
without paying for it and the
supply of which is reduced when
it is consumed by a particular
user of it.
• probability density
for a continuous random vari-
able, a function whose integral
over any set is the probability
of the variable being in that set.
• probability distribution
a specification of the probabili-
ties for each possible value of a
random variable.
• producer presence
a mode of supply of a traded
service in which the producer
establishes a presence in the
buyer's country by FDI and/or
permanent relocation of work-
ers.
• producer subsidy equiva-
lent I
1. producer support estimate.
2. this ought logically to mea-
sure the extent to which exist- I
ing policies serve to subsidise
producers, defined as the ad
valorem subsidy that, if paid I
directly to producers per unit of ~
production, would lead to the
II ========&onomies
privategoods I product cyck II
I same level of output as existing
I policies.
I • Producer Support Esti-
mate (PSE)
I
introduced by the OEeD to
I quantify support in agriculture,
it measures 'transfers from con-
sumers and taxpayers to agri-
I cultural producers as a result of
I measures (of) support,' ex-
pressed as percentage of gross
I farm receipts. Also called pro-
I ducer subsidy equivalent.
I
• product cycle
the life cycle of a new product,
that first can be produced only
I in the country where it was de-
veloped, then as it becomes
I standardised and more familiar,
I can be produced in other coun-
tries and exported back to
where it started. Due to Vernon
I.
I (1966) .
product cycle
associated with observed regu-
larities in the way in which the
production and marketing of
products change during the life
of a product and thereby
change their interaction with
and demands on their environ-
ment.
II protluatliffiren#lltWn Iprotectionirm. =========14=7
_ product differentiation ~ profit of a firm.
causing buyers to believe that a ~ - profit shifting
particular version of a product ; the use of government policies
is superior to that being offered : to alter the outcome of interna-
by competitors.
~ tional oligopolistic competition
_ product localisation I so as to increase the profits of

modifying and adapting for- ~ domestic firms at the expense

eign-made products/services, to : of foreign firms. This is a key
render them suitable for a new ~ element of strategic trade
market. ; policy.
- production externality ; - prohibited subsidy
an externality arising from pro- : a subsidy which is prohibited
duction. ~ under the rules of the wro.
; These include subsidies that are
- production function : specifically designed to distort
a function that specifies the out- ~ international trade, such as ex-
put in an industry for all com- I port subsidies or subsidies that
binations of inputs. ~ require use of domestic rather
- production possibilities : than imported inputs.
I
levels of output that are within : - prohibition
the range of possibilities for a ~ denial of the right to import or
particular economy. ; export, applying to particular
- production worker : products and/or particular
a worker directly engaged in ~ countries. Includes embargo.
production. In empirical stud- ~ - prohibitive tariff
ies of skilled and unskilled ~ a tariff that reduces imports to
labour, data on production ; zero.
workers are often taken to rep-
resent unskilled labour. ~ - protectionism
: advocacy of protection. The
- profit maximising ~ word has a negative connota-
the level of a variable or ; tion, and few advocates of
behaviour that maximises the protection in particular situa-

Eeonomics======= II
",1""4,,,,8===========~OCOI o/accession I quantity definition
tions will acknowledge being
protectionists.
• protocol of accession
legal document specifying the
procedures for a country to
join an international agree-
ment or organisation, includ-
ing the rights and responsibili-
ties that accompany such ac-
cessIOn.
• public goods
a good that can only be supplied
to all if it is supplied to one and
the availability of which is not
diminished by anyone
consumer's use of it.
• purchasing power parity
exchange rate
an exchange rate, computed to
yield absolute purchasing power
parity. Useful for making com-
parisons of real values (wages,
GDP) across countries with dif-
ferent currencies. Since the pur-
chasing power parity theory is
rarely correct, this contrasts with
the nominal exchange rate.
• purchasing power parity
theory
a theory of the exchange rate
that the rate will adjust to
achieve purchasing power par-
II = = = = = = = = E c o n o m i c s
II
I ity, in either its absolute or its
relative form.
I • push-pull factors
push factors act to drive people
or goods and services away
I from a place whereas pull fac-
tors draw them to a new loca-
tion.
I
• quad
I refers both to the Quadrilateral
I Meetings and to the partici-
pants in those meetings, the
U.S., Canada, EU and Japan.
I
• quadrilateral meetings
I meetings which occur occasion-
ally, involving the trade minis-
ters of the U .S., Canada, EU
I and Japan to discuss trade
policy issues.
• quality multiplier
I
I secondary effects resulting
from learning, innovative activi-
I ties and quality improvements
I · of existing products or technolo-
gles.
• quantity definition
I a method of defining relative
factor abundance based on ra-
tios of factor quantities: Com-
I pared to country B, country A
I is abundant in factor X rela-
tive to factor Y, iff XA/YA >
IllJUantity theory ofnumey I relICtion C:ient 149

XB/YB, where II is the quan- ~ imported good, net of any tar-

tity of factor I with which ; iff, minus the world price times
country J is endowed, 1=X,Y, : the quantity of imports.
J=A,B. .~ • range
• quantity theory of money ~ usually used in the context of
the idea that there is a direct link I the 'outer range' of a good. This
between the quantity of money ~ range refers to the maximum
in the economy and the price : distance over which a product
level. ~ can be sold at a givenEo.B.
; price. /
• quasi-linear utility
a utility function of the form ~ • ration foreign/exchange
U(xO,x1, ... ,xn) = xO + Siui(xi), : to ration access to scarce for-
where ui( x) are strictly concave ~ eign currency under a pegged
functions. This is useful for gen- I exchange rate with an over-val-
erating demand functions for : ued currency. Usually done by
goods xi that depend only on ~ means of import licensing.
their own prices in terms of the .I • reactlon •
coeffi Clent
.
numeraire xO.
~ terms used as a relatively gen-
• quid pro quo FDI ; eral reference to the manner in
FD1 in response to the threat : which a dependent subsystem
of protection. Done by a firm ~ is (structurally) linked to an-
which exports into the domes- ; other subsystem within a larger
tic market, the motive is to cre- : systems model. The coefficient
ate jobs there and lessen the . ~ specifies the impact of a change
threat that its exports will be I in one variable (representing
restricted. Due to Bhagwati : the independent subsystem) on
(1985). ~ another variable (representing
I the dependent subsystem). 1n-
• quota rent
~ put-output coefficients, 'pro-
the economic rent received by : pensities to consume locally'
the holder of the right (or li-
~ (pel) and probabilities in tran-
cense) to import under a quota. ; sition matrices represent ex-
Equals the domestic price of the : amples.
I

E&onomics======== II
150
=~~~~~~~~~~~=
Ho,.iZl:lnt:81 dicplace.ent V{c.)
" .0 '.0 5 .0 4 .0 3 .0 20 1.0 0 .0 - 1.0
0 .0 :
..
:!20
1, 0
' .0
o 10 ~ ~
Coeff, cient of horu:onUI t ubcr adt
koH(N/c.' ]
• reaction curve
the graph of a reaction function .
• reaction function
the function that specifies the
choice of a strategic variable by
one economic agent as a func-
tion of the choice of another
agent. Most familiar specifying
output choices of firms In a
Cournot duopoly.
• real
1. adjusted for inflation.
2. referring only to real eco-
nomic variables as opposed to
~ominal, or monetary ones, as
ill real models.
3. used with 'appreciation' or
'depreciation', refers to the real
exchange rate. Thus, a real ap-
preciation means that the nomi-
nal ~alue of a country's currency
has Increased by more than its
1/ =======Economics
* .
reactum curve I real exchllrngerate II
I relative price level, which may
have decreased, so that the
prices of its goods relative to
I foreign goods have increased.
• real balance effect
I the influence that a change in
the quantity of real money has
on the quantity of real national
~ ~
~ ~ ~
r~actlort
I income demanded.
I • Real Estate Investment
Trust (REIT)
I
a trust (corporation) which
pools the capital of different
I investors to acquire (or provide
financing for) all forms o(real
estate. A REIT functions like a
I mutual fund for real estate.
I • real exchange rate
1. the nominal exchange rate
adjusted for inflation. Unlike
I most other real variables , this
I adjustment requires accounting
for price levels in two curren-
cies. The real exchange rate is:
I R = EP* jP where E is the
nominal domestic-currency
price of foreign currency, P is
I the domestic price level, and P*
is the foreign price level.
I
2. the real price of foreign
goods; i.e., the quantity of do-
I mestic goods needed to pur-
chase a unit of foreign goods.
1\ reIIl interestmte I reflexivity 151
*==============~
Equals the reciprocal of the ~ • red box
terms of trade. Equivalent to I a category of subsidies which are
definition l. : forbidden under WTO rules.
3. the relative price of traded ~ This terminology is used in the
goods in terms of nontraded I Agriculture Agreement, where
goods. ~ however there is no red box.
: Presumably equivalent to pro-
• real interest rate
I hibited subsidies.
the nominal interest rate which
is adjusted for inflation, to get I • redistributed tariff revenue
the percentage yield an asset ; a common assumption that tar-
holder gets in terms of real re- : iff revenue is given to consum-
sources. Equals the nominal in- ~ ers as transfer payments (not in
terest rate minus the rate of in- I proportion to what they paid by
flation. : importing) to be spent like any
~ other income. Since in general
• real model
I equilibrium the effects of a tar-
an economlC model without ~ iff depend on how the revenue
money. Most general equilib- : is spent, this is a useful neutral
rium models of trade are real ~ assumption.
models. This includes the
Ricardian Model, the ~ • redistribution policy
Heckscher-Ohlin Model, and ; measures taken by government
the models of the New Trade : to transfer income from some
Theory. ~ individuals to others.
• real national income ~ • redundant tariff
national income adjusted for ~ a tariff which, if changed, will
inflation. ; not change the quantity of im-
: ports, either because the tariff
• real terms
~ is prohibitive, or because some
same as real. A 'wage expressed ; other policy such as a quota or
in real terms' is just the real : an embargo is limiting quantity.
wage. I
: • reflexivity
I a post-structuralist concept in-

Economics======= II
152 region I relative location II
=~~=""'='====*
creasingly used in industrial so- I mcreases.
cial geography to capture the I • regulation school/theory
ability of a person to 'reflect on
their own reflections' and to I a body of thought originating
understand the foundations of ; in French political economy, fo-
one's own knowledge and un- cusing on structure and change
derstanding of one's local envi- I of the capitalist economr Re-
ronment and context. jecting market forces as
allocative mechanisms, these
• region I theories suggest the dominance

contiguous areas with common of the 'mode of regulation' (so-

or complementary characteris- cial norms, government rules
tics or linked by intensive inter- I and private practices) which
action or flows. I motivate(s) individuals to
achieve economic stability.
• regional policy
in a trade context, this usually • Reilly's law of retail gravi-
refers to a regional aid. tation
I a statement related to the dis-
• regionalism
tribution of market share in hin-
the formation or proliferation I terlands of competing cities or
of preferential trading arrange- I shopping centres.
'ments:
I • relative demand
• regression analysis
I the ratio of the demand for one
the statistical technique of fmd- good to the demand for an-
ing a straight line which ap- I other, most useful in represent-
proximates the information in I ing general equilibrium in a two-
a group of data points . Used good economy, where relative
throughout empirical econom- I price adjusts to equate relative
ics, including in both interna- I supply and relative demand.
tional trade and finance.
I • relative location
• regressive tax
I a pOSItIOn in space (location)
a tax on income in which the defined on the basis of distances
proportion of tax paid relative I and relationships to other loca-
to income decreases as income

II = = = = = = = = & o n o m i c s
II relative price I rent seeking 153
*================
tions. ~ or other forum, the measure
; recommended by the dispute
- relative price
: settlement panel to resolve the
1. the price of one thing (usu- ~ dispute, usually a measure
ally a ~ood) in ter~s of an- ; which will bring the offending
other; I.e., the ratio of two : country into compliance with
prices. ~he relatiive price ~f ~ wro (or other) rules.
good X ill terms of good Y IS ;
pX/ pY</SUB< i>. . - rent
2. the relationship between the ~ 1. economic rent, or the pre-
prices of different goods and ; mium that the owner of a re-
services. May be thought of in : source receives over and above
terms of the amount of one ~ its opportunity cost.
good which can be had for a I 2. the payment to the owner of
certain expenditure compared : land or other property in return
to the amount of another good ~ for its use.
which can be had for the same
:I - rent grad.lent
expenditure.
~ a representation of the decline
- relative supply ; in rent with distance from a
the ratio of the supply of one : market or centre.
good to the supply of another, I s
most useful in representing I Rent ~
general equilibrium in a two- per:n~rc
I lJeight of
good economy, where relative Buildinss
price adjusts to equate relative I
supply and relative demand. ____
- rdiability Di.bncc
caD
the ability of a statistical instru-
ment to come up with similar/ ~ - rent seeking
consistent measurements/re- ; the using up of real resources
sults over time. : in an effort to secure the rights
~ to economic rents that arise
- remedy ; from government policies. In
in a trade dispute in the wro : international economics, the
I

~onomics======== 1/
154
================~*
term usually refers to efforts to
obtain quota rents.
• rental price
the payment per unit time for
the services of a unit of a factor
of production, such as land or
capital.
• rentier
a person whose income comes
mainly from rent on land or,
more broadly, from assets
rather than labour.
• rent-seeking
the activities of individuals or
firms to obtain special privi-
leges, such as monopoly power,
which will enable them to in-
crease their incomes. Using up
resources to win such privileges
from governments or their
agencles.
• reserve asset
any asset which is used as inter-
national reserves, including a
national currency, precious
metal such as gold or SDRs.
• reserve currency
a currency that is used as inter-
national reserves, often because
it is an intervention currency.
II ========E&onomies
rental price I revealed preforence II
I • restrictive business prac-
tice
action by a firm or group of
firms to restrict entry by other
I firms, that is, to prevent other
firms from selling their prod-
I
uct in their market. This is a
I restraint of competition and
would normally be illegal under
competition policy.
I
• results-based trade policy
I
the use of trade policies tar-
I geted to specific indicators of
economic performance. For ex-
ample, in the early 1990s, the
I U.S. insisted on achieving speci-
fied market shares in trade with
Japan.
I
• return to capital
I same as the rental price of capi-
I tal. Since capital can only be
measured in monetary units,
I the rental price is, say, dollars
I per dollar's worth of capital per
unit time, and it therefore has
the form of a rate of return like
I an interest rate.
I • returns to scale
I same as increasing returns to
scale.
• revealed preference
the use of the value of expendi-
II revenueargumentfora tariff I risk ~~iU~m=========~1~5~5
ture to 'reveal' the preference of ~ advantage. It assumes perfect
a consumer or group of con- ; competition and a single factor
sumers for the bundle of goods : of production, labour, with con-
they purchase compared to ~ stant requirements of labour
other bundles of equal or ; per unit of output that differ
smaller value. : across countries.
!

• revenue argument for a : • risk

I
tariff : 1. uncertainty that associates
the use of a tariff to raise rev- I with a transaction or an asset.
enue for the government. Many ; 2. the probability of loss. Dif-
other kinds of tax cause smaller : fers from definition 1, because
distortions and are hence pref- ~ 'uncertainty' includes probabil-
erable to tariffs for this pur- I ity of gain as well.
pose. However, a tariff is one
of the easier taxes to collect, and I • risk aversion
it is therefore common in the ~ desire to avoid uncertainty. Risk
early stages of a country's de- : aversion is usually quantified by
velopment. ~ the mathematical expected
; value that one is willing to
• revenue seeking : forego in order to get greater
the use of real resources in an ~ certainty.
effort to secure a share of the
disposition of tariff revenues. ~ • risk premium
I 1. the higher expected return
• reverse engineering ~ (in the sense of ~athematical
the process of learning how a : expected value) which an uncer-
product is made by taking it ~ tain asset must pay in order for
apart and examining it. ; risk averse investors to be will-
• Ricardian Model : ing to hold it.
the classic model of interna- ~ 2. the difference between the
tional trade introduced by ; interest rate on a risky asset and
David Ricardo to explain the I: that on a safe one.
pattern and the gains from 3. in exchange markets, the dif-
trade in terms of comparative I ference between the forward

&onomics======== II
156
=================*
rate and the expected future
spot rate.
- rollback
1. the phasing out of measures
which are not consistent with an
agreement.
2. in the Uruguay Round, the
agreement to remove all
GATT-inconsistent trade-re-
stricting and trade-distorting
measures by the time negotia-
tions were completed.
_ Ru1es of Origin (ROO)
rules included in a FTA speci-
fying when a good will be re-
garded as produced within the
FTA, so as to cross between
members without tariff. Typi-
cal ROOs are based on percent-
age of value added or on
changes in tariff heading.
- ru1es-based trade policy
institutional arrangements in
which national trade policies are
governed by internationally
agreed-upon rules, as in the
GATT and WTo.
_ Rybczynski Theorem
the property of the Heckscher-
Ohlin Model that, at constant
prices, an increase in the en-
dowment of one factor in-
II = = = = = = = = E c o n o m i c s
rollback I satisficer, satisficing 1/
I creases the output of the indus-
I try that uses that factor inten-
sively and reduces the output of
I the other (or some other) in-
I dustry. Due to Rybczynski
(1955).
- sanction
1. to approve or give permis-
I sion for an action, as when an
I international organisation sanc-
tions the use of particular eco-
I nomic policies.
I 2. a forceful measure used by a
nation or group of nat:ions
I against another as a penalty for
I violating international law or
international norms. Usually
I plural: sanctions.
- Sanitary and phytosanitary
I regu1ations(SPR)
I government standards to pro-
tect health of humans, plants
and animals. SPS measures are
I subject to rules in the WTO to
prevent them from acting as
I
NTBs.
-SAP
I Structural adjustment program.
I - satisficer, satisficing
I 1. a references to behaviours
that are constrained by limited
information and 'bounded ra-
II saPingfunction I second-best RI,;gUmen:=J1t1=rJte&=tuJn",,·".."",======""1",,5,,,,7
tionality'. Satisficers' ~ - Schengen Agreement
behavioural objectives are asso- I an agreement (later, conven-
ciated with fmding satisfactory : tion) signed in 1985 to elimi-
solutions (instead of 'optimal' ~ nate all frontier controls and
solutions) to problems which, I permit free movement of per-
in turn, are conditioned by the ; sons between the participating
individual's 'aspiration levels'. : countries. In 1999, it was incor-
2. seeking or achieving '1 satis- ~ porated into the European
factory outcome, rather than ; Union. Currently (2001), the
the best possible. Contrasts with : participants include all EU
the optimising behaviour usu- ~ countries except Ireland and the
ally assumed in economics and ; U.K., plus Iceland and Norway.
trade theory. Alternative mod- ; _ scientific tariff
els based on satisficing are
spreading within economics, : a made-to-measure tariff.
I
but not yet much in interna- :-SDR
I
tional. : Special Drawing Right.
I
- saving function : - secondary tariffs
the relationship between saving ~ any charges imposed on im-
and national income. ; ports in addition to the statu-
- scale economies : tory tariff, such as an import
I
increasing returns to scale. : surcharge.
I

- scarce factor : - second-best argument for

. protection
the factor in a country's endow-
ment with which it is least well; 1. any argument for protection
endowed, relative to other fac- : which can be countered by
~ pointing to a different and less
tors, compared to other coun-
tries. May be defmed by quan- ; distortionary policy that would
tity or by price. : achieve the same desired result
~ at lower economic cost.
- scarcity rent I 2. an argument for protection
an economic rent that is due to ; to partially correct an existing
something being scarce. distortion in the economy when

Eeonomics======= II
158 secular change 1;lf-SUjJi&iency argumentfor protection "

the first-best policy for that pur- I other, the first country derives
pose is not available. For ex- I these seigniorage benefits. This
ample, if domestic production is the case of a reserve currency.
generates a positive externality I • selective
and a production subsidy to I
internalise it is not available, applied to a trade policy. This
then a tariff may be second-best
I means one which affects only

optimal. some countries, not all, in con-

trast to MFN policy. Selectivity
• secular change ~ is an important concern in the
change over a long period of ; use of safeguards, which coun-
time, such as a decade or more. tries often would prefer to
Distinguished from cyclical I make selective but are required
change which occurs in shorter I by GATT Article XIX to be
time periods such as a year. nondiscriminatory.
• segmentation • selective closure
a segmented pattern of business a form of plant closure where
organisations where every seg- I the decision-maker has options
ment is 'conceived as a number between different plants and
of organisations) with similar where the ultimate decision is
characteristics which are both I based on relative (internal and/
the cause and the effect of their or external) locational merits.
membership of particular eco- This type of closure is 'the most
nomic niches.' I spatially specific type of closure.'
• seigniorage I • self-sufficiency

the difference between what I provision by one's self to all of

money can buy and its cost of : one's own needs. In interna-
produ~tion.Therefore, seignior- ~ tional trade, this means either
age is the benefit that a govern- I not trading at all (autarky), or
ment or other monetary au- importing only non-necessities.
thority derives from the ability • self-sufficiency argument
to create money. In interna- I for protection
tional exchange, if one country's I the view which states that a
money is willingly held by an-

1/ ========E&onomks
II sensitin I Shimbel Index
country is better off providing
for its own needs than depend-
ing on imports. It may be based
on fear that war or foreign gov-
ernments will interrupt imports.
This is a second-best argument,
since many policies could pro-
vide for that contingency with-
out sacrificing all the gains from
trade.
- sensitive
in trade negotiations and agree-
ments, countries often identify
lists of particular sensitive prod-
ucts or sensitive sectors that
they regard as especially vulner-
able to import competition and
that they wish to exempt from
trade liberalisation.
- serious injury
the injury requirement of the
escape clause, understood to be
more stringent than material
injury but otherwise apparently
not rigorously defmed.
- service
a product which is not embod-
ied in a physical good and that
typically effects some change in
another product, person or in-
stitution. Contrasts with good.
Trade in services is the subject
of the GATS.
Beonomics======= II
159
*================
~ - shadow price
; the implicit value or cost asso-
: ciated with a constraint. That is,
~ the increased value that will be
I achieved by relaxing the con-
: straint by one unit. When for-
~ eign exchange is rationed, the
~ shadow price of foreign ex-
; change becomes for relevant ex-
: change rate decisions.
I
: - shallow integration
~ reduction or elimination of tar-
; iffs, quotas and other barriers
: to trade in goods at the border,
~ such as trade-limiting customs
I procedures. Contrasts with
~ deep integration.
:I - shared vision
: one of Senge's five learning dis-
~ ciplines for the learning
; organisation: 'building a sense
: of commitment in a group, by
~ developiiIg shared images of
; the future we seek to create, and
: the principles and guiding prac-
~ tices by which we hope to get
I there.'
I _ Shimbel Index
; measure of the minimum num-
: ber of links necessary to con-
~ nect one node with all nodes in
; the network.
~16~O~~~~~~~~~~sm~'t~gaUhalnud~non~immne
• Shitauke gaisha
a Japanese term that refers to a
subcontract( ed) company
_ short
1. used with 'sell' or 'sale,' this
means that the seller does not
currently have the thing being
sold, but intends to acquire it
on .the market prior to making
dehvery.
2. used by itself as a verb, it
means to sell short, as 'to short
a currency,' meaning to sell it
forward in anticipation that its
value on the spot market will
fall.
• shuttle trade
the trade accomplished by indi-
viduals and groups travelling to
other countries, buying goods
and bringing them home, often
in their luggage, to resell. An
important source of imports for
Russia in 1990s, some people
travelling abroad several times
a month for this purpose.
_ silver standard
a monetary system where the
value of a currency is defmed in
terms of silver. If two currencies
are both on a silver standard, then
the exchange rate between them
II = = = = 0= = = E c o n o m i c s
II
I is approximately determined by
I their two prices in terms of sil-
ver.
- simple money multiplier
the amOlll1t by which a change in
I the monetary base is multiplied
to bring about the eventual
change in the total money sup-
I ply. It is called the simple money
multiplier because it does not
take into aCCOlll1t possible offsets
I to the process, such as a rise in
I the amOlll1t of money that indi-
viduals or households may
choose to hold as cash when the
I money supply increases .
I • single undertaking
I a term, in trade negotiations,
for requiring participants to ac-
I cept or reject the outcome of
I multiple negotiations in a single
package, rather than selecting
I among them.
I • situation
I a reference to the 'relational' at-
tributes of a location, i.e. to the
location relative to (in relation-
I ships with) other key locations
('relative location').
- size distribution of income
I
the distribution ofincome among
I groups of income recipients, de-
1\ SMAC function I SOE 161
*================
fined on the basis of the size of I

their incomes.
• SMAC function
an acronym for the CES fimction
based on the names of the four
authors who introduced it in Ar- I
row et al. (1961). I private costs incorporated by
• small country assumption ~ the producer in its market price.
the assumption in an economic : - Social Darwinists
model that a country is too :I a disparate group of turn-of-
small to affect world prices, in- ~ the-century commentators on
comes or interest rates. ; social issues who sought to
• small open economy : utilise the Darwinian law of
an economy which is small ~ natural selection ('survival of
enough compared to the ; the fittest') as a basis for social
world markets in which it par- : policy. The best-known of the
ticipates that (as a good ap- ~ social Darwinists was Herbert
proximation) its policies do I Spencer.
not alter world prices or in- ; • social indifference curve
comes. The country is thus a ~ a curve showing the combina-
price taker in world markets. : tions of goods that, when avail-
The term is normally applied ~ able to a count~ yield the same
to a country as a whole, al- ; level of social welfare.
though it is sometimes used
in the context of only a single ; - social welfare function
product. : a function mapping levels of
~ utility of the individuals in an
• social cost
I economy to a level of welfare
the real cost to society of hav- ~ for the economy as a whole.
ing a good or service produced,
that may be greater than the :.SOEI
Small open economy.

Economics======~ II
""16,,,,2==========s=ole:Porling agency I Spatial entrapment
- sole importing agency
an entity, either private or gov-
ernment, that has been granted
by government the exclusive
right to import certain goods.
- Solow model
the neoclassical growth model.
Also called the Solow-Swan
Model.
- Solow neutral
a particular specification of
technological change ortechno-
logical difference that is capital
augmenting.
_ Solow residual
a measure of technological
progress equal to the difference
between the rate of growth of
output and the weighted aver-
age of the rates of growth of
capital and labour, with factor
income shares as weights. Due
to Solow ( 1957). Also called the
growth of total factor produc-
tivity. Used to compare sources
of growth across countries.
- space-cost curve
expresses the spatial variability
of total production costs of a
firm with a given output level.
Smith (1966) superimposed
this spatial cost curve on the
1\ = = = = = = = = & u n o m i & s
II
I spatial revenue curve in order
I to determine the 'spatial mar-
gin of profitability'.
_ Spatial demand curve
I refers to the aggregate demand
I curve containing the individual
I demand of consumers located
at different distances from the
I focal point of supply. In other
words, demand is aggregated
across space, as seen from the
I perspective of the supplier (and
I her f.o.b. prices), as if the deliv-
ered price of the good is in-
I creasing for the consumer with
I distance by the corresponding
I
transport cost.
:
~
;
:
~
I----\--~--Io/C
I
D.
I
- Spatial entrapment
a concept used to describe the
I situation of women restricted to
distinctly female labour mar-
I
kets close to children and home
I in the urban periphery.
II Spatial iso-outlay line I specialisation.. ===========1"",63~

• Spatial iso-outlay line ~ permits tariff preferences

this is a theoretical construct I among developing countries
used to introduce space into and by developed countries, in
micro-economic production I favour of developing countries,
theory. The curve represents I as under the GSp.
the results of an optimisation ; - special drawing right
process. Every point on the : originally intended within the
curve represents different loca-
IMF as a sort of international
tions but equal total production I money for use among central
costs (outlays) based on vary-
banks pegging their exchange
ing (optimal) input combina-
rates, the SD R is a transferable
tions (and resulting varying I right to acquire another
transport costs for these in-
; country's currency. Defined in
puts).
terms of a basket of currencies,
• Spatial margin I today it plays the role in that
a line or boundary signifying the I form of a unit of international
end of profitability or viability, I account.
thus separating profitable from : - specialisation
loss-making spaces. I
1. producing more than is
• Spatial margin of agricul- ~ needed by you with regard to
tural production ; some things, and less of others,
the boundary of a region of : hence 'specialising' in the first.
profitability or positive rent. ~ In international trade, this is
Beyond this boundary, trans- ; just the opposite of self-suffi-
port costs outweigh net-returns : ciency.
leading to net losses. ~ 2. doing less than everything, as
I when a country produces fewer
• special and differential
treatment ~ different goods than it con-
: sumes. In a 2x2 trade model,
the GATT principle where de-
~ this means each country pro-
veloping countries be accorded ; duces just one good. With many
special privileges, exempting goods and countries, it means
them from some requirements I each country has some goods
of developed countries. It also
164
========*
that it does not (and cannot
competitively) produce. Also
may be called complete
specialisation.
• specie
coins, normally including only
those made of precious metal.
• specie flow mechanism
under the gold standard, the
mechanism where international
payments would adjust. A coun-
try with high inflation would
export less, import more and
thus lose specie, i.e., gold. With
the money supply fixed to the
quantity of gold, the resulting
monetary contraction would
reduce prices. Due to David
Hume.
• specific commitment
under the GATS, the identifI-
cation of a category of services
in which a country will apply
national treatment and assure
market access for foreign ser-
vice providers.
• specific factor
a factor of production which is policy for correcting a distortion
unable to move into or out of ~ is one that deals most directly,
an industry. The term is used to . or specifically, with that distor-
describe both factors that would tion.
not be of any use in other in- I
11----========&onDmi&1
specie I specificity ru.le "
I dustries and - more loosely -
I factors that could be used else-
where but do not, in the short
I run, have the time or resources
I needed to move.
I • specific factors model
a model where some or all fac-
tors are specific factors. Must
I commonly, the specific factors
model has one specific factor
I
(often capital or land) in each
I industry plus another factor (of-
I ten labor) that is mobile be-
tween them. But an extreme
I
form of the model can have all
I factors specific.
I • specific tariff
a tariff specified as an amount
of currency per unit of the good.
• specificity
I the property where a policy
I measure applies to one or a
group of enterprises or indus-
I tries, as opposed to all indus-
I tries.
specificity rule
I •
the principle where the optimal
II specu~ative attack I stable 165
*================
• speculative attack ~ • spot rate
in any asset market, the surge I the exchange rate on the spot
in sales of the asset that occurs ~ market. Also called the spot
when investors expect its price : exchange rate.
to fall. A common phenomenon I
: • spread
in the exchange market, espe-
~ the difference between the price
cially under an adjustable
pegged exchange rate. ; one must pay to buy something,
: such as a currency, and the price
substance of the site.
~ one receives for selling it.
• splashing ('industrial ~ • stabilising speculation
splashing')
I speculation which decreases the
a term used to refer to the es-
~ movements of the price in ~e
tablishment of multiple branch
: market where the speculation
plants across the landscape (of
~ occurs. Freedman (1953) pro-
Nigeria) by expatriate firms.
; vided a classic argument that
• splintering : speculation on a floating ex-
another term for fragmenta- ~ change rate would be
tion. Used by Bhagwati (1984). ; stabilising.
• spot market ; • stabilisation policy
1. a market for exchange (of : the use of monetary and fiscal
currencies, in the case of the ex- ~ policies to stabilise GDp, aggre-
change market) in the present ~ gate employment and prices.
(as "Opposed to a forward or fu- I • stable
tures market in which the ex-
; 1. of an equilibrium, where the
change takes place in the fu- : dynamic adjustment away from
ture). ~ equilibrium converges to the
2. market where goods, ser- ; equilibrium.
vices, or financial assets are
: 2. of an economic variable, not
traded for immediate delivery. ~ subject to large or erratic fluc-
This differs from a futures mar- I tuations.
ket, where the delivery will be
made at a future date.

Beonomics======= II
166
=======~*
• standard of living ~ duction in distortion from im-
the concept has moved from a
more or less strictly pecuniary
interpretation of well-being to
one which incorporates non-
pecuniary components, thereby
approaching the economist's
concept of utility as expressed
in a utility function. Dissatisfac-
tion with using the simple mea-
sure of real per-capita GDP has
lead to use of indicators which
include length of life, level of
. b
education and access to JO S,
infrastructure and amenities.
• standstill
1. a commitment to refrain
from introducing new measures
that are not consistent with an
agreement.
2. in the Uruguay Round, the
agreement not to introduce new
GATT-inconsistent trade-re-
stricting and trade-distorting
measures during the negotia-
tions.
• static gains from trade
the economic benefits from
trade which arise in static mod-
els, including the efficiency
gains from exploiting compara-
tive advantage, the reduced
costs from scale economies, re-
II = = = = = = = E c o n o m i e s
standard ofliving I stelldy state II
I perfect competition and in-
~ creased product variety. Con-
: trasts with dynamic gains from
I trade.
I • static model
an economic model which has
I no explicit time dimension. A
static model abstracts from the
process by which an equilib-
I rium or an optimum might be
I reached only over time, as well
: as from the dependence of the
I
. variables in the model itself on
; a changing past or future. Con-
trasts with dynamic model.
I • stationary state
the economic condition envi-
I sioned by the classical writers
I once the growth of population
had reached the point where
output per capita was reduced
to the subsistence level and the
accumulation of capital had re-
duced the return to investment
I to zero. The economy would
remain in equilibrium with no
I
possibility of future incre.ases. in
population or per capIta lll-
I comes.
I • steady state
a type of equilibrium, especially
in a neoclassical growth model,
·11 sterilise I strlltegic decision-mRking •
in which those variables that are
not constant grow over time at
_a constant and common rate.
sterill.~
. I tor. Due to Stolper and
to use. offsetting open market
operations to prevent an act of
exchange market intervention
from changing the monetary
base. With sterilisation, any
purChase of foreign exchange is
accompanied by an equal-value
sale of domestic bonds and vice
versa.
_ sticky place
a concept used in industrial ge-
ography to refer to the geo-
graphic consequences of inertial
forces which prevent hyper-
mobility (in an increasingly
'slippery production space')
from completely obliterating
production assembles in space.
- Stolper-Samuelson Theo-
rem
1. the proposition of the
Heckscher-Ohlin Model where
a rise in the relative price of a
good raises the real wage of the
factor used intensively in that
industry and lowers the real
wage of the other factor.
2. the further proposition (re-
quiring addition assump-
Eeonomics======== II
~========1~6~7
~ tions) that protection lowers
; the real wage of a country's
: scarce factor and raises the
.~ real wage of its abundant fac-
: Samuelson (1941).
I
~ - straight-line PPF
: the PPF which arises in the
I Ricardian Model or in the HO
; Model if the two sectors have
: the same factor intensity. It is a
~ downward ~loping straight line
; with, therefore, a constant mar-
: ginal rate of transformation.
I
: - strategic alliance
I
: an agreement among compa-
I nies for the purpose of achiev-
~ ing a common goal, usually in
: the form of sharing comple-
~ mentary strengths, achieving
; cost efficiencies or adjusting to
: rapid technological or market
~ changes.
~ - strategic decision-making
; as different from programmed,
: routine decisions, strategic de-
~ cisions tend to be relatively in-
I frequent, not repetitive, involve
~ the commitment of consider-
: able resources (capital) and
~ have long-time horiwns with
; significant levels of uncertainty.
 ic
""16,,,,8==========S;teo "aU policy I substitution effect II
• strategic trade policy I • structural adjustment

the use of trade policies, includ- I program

ing tariffs, subsidies and even : the list of budgetary and policy
export subsidies, in a context of ~ changes that are required by the
imperfect competition and/or I IMF and World Bank in order
increasing returns to scale to for a developing country to
alter the outcome of interna- qualify for a loan. This 'condi-
tional competition in a country's I tionality' typically includes re-
favour, usually by allowing its ducing barriers to trade and
firms to capture a larger share capital flows, tax increases and
of industry profits. I cuts in government spending.

• strategic variable I • stumbling block

an economic variable that is cho- I the term which Bhagwati
sen with regard to, and some- (1991) used, together with
times with a view to influenc- building block, to address
ing, economic behaviour by I whether PTAs help move the
someone else. Most frequently world toward or away from
refers to the choice of firms in multilateral free trade.
an oligopoly. • substitution effect
• strategy I 1. the change in the quantity of
determination of the basic long- I a good demanded resulting
term goals and objectives of an
enterprise, and the adoption of ~
courses of action and the allo- I
cation of resources necessary
for carrying out these goals.
• structural adjustment
the reallocation of resources I

(labour and capital) among sec-

tors of the economy, in response
to changing economic circum-
stances, including trading con-
ditions or changes in policy.
I from a change in its relative
I
price, leaving aside any change
in quantity demanded that can

II ========Economics
 II sunk costs I SlNp 169
*================
be attributable to the associated ~ upward sloping, straight or
change in the consumer's real ; curved and drawn with quantity
income. It may also be thought : on the horiwntal axis and price
of as a change in the quantity ~ on the vertical axis. Supply
demanded as a result of a move- ; curves for exports and for for-
.' ment along a single indifference : eign exchange usually have the
curve. ~ same qualitative properties as
2. that portion of the effect of ~ supply curves for labour, being
price on quantity demanded ; potentially backward bending.
that reflects the changed ~ - supply elasticity
tradeoff between the good and
: the elasticity of a supply func-
other alternatives. Contrasts
~ tion, usually with respect to
with income effect.
I pnce.

- sunk costs
; - surplus
costs that are irrevocable and
: in the balance of payments, or
should not be used to influence
~ in any category of international
current decisions.
I transactions within it, the sur-

- superior good ~ plus is the sum of credits mi-

a good the demand for which is : nus the sum of debits. Also
elastic. ~ called simply the 'balance' for
; that category. Thus, the balance
- supply curve : of trade is the same as the sur-
the graph of quantity supplied ~ plus on trade, or the trade sur-
as a function of price, normally ; plus, and similarly for merchan-
I .~\lI,pl: I"UI ~(
10 I'i,,,,", : dise trade, current account and
~ capital account.
l"~'
:" -~
-' . - ~"'
.. ...
"
,

'" ~" ~.': :/:

... ,....-..... ~.............. . ..~........
~ - sustainable development
. - - -!..!:::.: I a system of resource us<; that

ILL
~ protects non-renewable re-
: sources and the environment.
I
: - swap
I 1. in the exchange markets, this

&onumics======= II
"",17"",0==========* swap rate I tariffjumping II
is a simultaneous sale of a cur- , specified level, called the bow1d
rency on the spot market to- , rate.
gether with a purchase of the • tariff equivalent
same amount on the forward '
market. By combining these , the level of tariff which would
two transactions into a single be the same, in terms of its ef-
one, transactions costs may be , fect, usually on the quantity of
reduced. imports, as a given NTB.
2. an arrangement between • tariff escalation
central banks whereby they in a country's tariff schedule,
each agrees to lend their cur- , the tendency for tariffs to be
rency to the other. , higher on processed goods than
on the raw materials from
• swap rate
, which they are produced. This
the difference between the spot , causes the effective rate of pro-
and forward exchange rates.
tection on these goods to be
Thus, the price of a swap. higher than the nominal rate
• systems thinking , and puts LDC producers of pri-
the last of Senge's five learning mary products at a disadvan-
disciplines of his learning tage.
organisation: 'A way of think - , • tariff factory
ing about, and a language for ,
a production facility established
describing and understanding, , by a foreign firm through FD I
the forces and interrelationships
in a country, in spite of its
that shape the behaviour of sys-I higher production costs, in or-
tems, helps us to see how to , der to serve its market without
change systems more effec-
paying a tariff.
tively, and to act more in tune ,
with the larger processes of the • tariff heading
natural and economic world.' the descriptive name attached to
, a tariffline, indicating the prod-
• tariff binding
uct to which it applies.
a commitment, under the '
GATT, by a country not to raise , • tariff jumping
the tariff on an item above a the establishment of a produc-

II = = = = = = = = E c o n o m i c s
II tariffline Itariffic4tion 171
*================
tion facility within a foreign ~ iffs, organised by product.
country, through FDI or licens- ~ _ Tariff Schedule of the
ing, in order to avoid a tariff. ; United States (TSUS)
_ tariff line : the official product nomenc1a-
a single item in a country's tar- ~ ture for specifying tariffs in the
iff schedule. I United States, used until 1988,

_ tariff peak ~ when it was replaced with the

: harmonised system.
in a tariff schedule, a single tar- I
iff or a small group of tariffs : - tariff wall
which are particularly high, of- ~ a tariff, presumably a high one,
ten defined as greater than ; perhaps in lots of industries.
three times the average nomi- : The term is used to highlight
nal tariff. ~ the difficulty foreign sellers
c. I have in getting their products
- tariff prel.erence
past the tariff, often in the con-
a lower (or zero) tariff on a ~ text of the incentive therefore
product from one country than ~ provided for FDI.
is applied to imports from most
countries. This violation of the ~ - tariff-and-retaliation game
MFN principle is permitted in ; the game of countries setting
special cases, including some : tariffs knowing that by doing so
preferential trade arrange- ~ they alter the terms of trade to
ments and the GSp. ; their own advantage. This is one
: very specific form of trade war.
- Tariff Rate Quota (TRQ) I
a combination of an import tar- : - tariffication
iff and an import quota in which ~ conversion of NTBs to ad valo-
imports below a specified quan- I rem tariffs, at the level of their
tity enter at a low (or zero) tar- ~ tariff equivalents. In the Uru-
iff and imports above that quan- : guay Round, developed country
tity enter at a higher tariff. Also ~ agricultural NTBs were
called a tariff quota. ; tariffied and bound, the purpose
Ii tariff schedule : being to replace unwieldy NTBs
~ with tariffs that can then be-
the list of all of a country's tar-

E e _ i e s = = = = = = = II
",1"",7"",2=========t."",a"",""",iffi=a; retaliation I technological trajecttwy
come the subject of negotiation.
• tariffs and retaliation
the process of one country rais-
ing its tariff to secure some ad-
vantage, to which another coun-
try responds by raising its tar-
iff, the first raises its tariff still
further, etc.
• task environment
those elements or inputs in an
orgmsation's environment that
bear potentially on goal setting
and on goal attainment within
an organisation .
• tax increment financing
is used to facilitate the financ-
ing of larger development
projects by capturing the prop-
erty tax revenue stream pro-
jected for the development and
investing it into improvements
associated with the project.
• team learning
one of Senge's five learning dis-
ciplines for his 'learning
organisation': transforming
conversational and collective
thinking skills, so that groups
of people can reliably develop
intelligence and ability greater
than the sum of individual
members' talents.
II ========Ecrmomi&s
II
I • Technical Barrier to Trade
(TBT)
a technical regulation or other
I
requirement (for testing, label-
I ling, packaging, marketing, cer-
I
tification, etc.) applied to im-
ports in a way that restricts
I trade.
I • technical coefficient
I
in input-output analysis, iden-
tifies the percentage or portion
I
of the total inputs of a sector
I required to be purchased from
another sector irrespective of
the geographic origin of this
I purchase. Technical (input) co-
efficients represent direct back-
ward linkages of an industry to
I other industries and constitute
I the 'recipe' for production of
that industry.
• technical regulation
a requirement of characteristics
I (such as dimensions, quality,
performance or safety) that a
product must meet in order to
I be sold on a country's market.
I • technique of analysis
I
a method for displaying or ma-
nipulating economic models.
• technological trajectory
the movement of multi- dimen-
~I temporary admission I tertiary sector .. 173

sional trade-off's amopg techno- ~ trade of a region or country

logical variables that the para-
digm defines as relevant.
Progress can be defmed as an
improvement of these trade-
off's. One could imagine the tra-
jectory as a 'cylinder' in a mul-
tidimensional space (Dosi); or:
a pattern of 'normal' problem-
solving activity within a techno-
logical paradigm.
- temporary admission
permission to import a good
duty free for use as input in pro-
ducing for export.
- temporary producer
movement
; improve when the prices for
: exports increase or those for
~ imports decrease. Yes, the con-
; cepts of terms of trade can be
: meaningfully applied to many
~ exchange type interactions.
1 f
: - terms 0 trade argument
1 same as the optimal tariff argu-
ment, that works by restricting
the quantity of trade in order
1 to improve the terms of trade.
~ - terms of trade effect
1 the effect of a tariff on the terms
: of trade. By reducing the de-
~ mand for imports, a tariff' lev-
1 ied by a large country causes the

a mode of supplying a traded ~ prices of those imported goods

service by the temporary move- : to fall on the world market
ment of persons employed by ~ relative to the country's exports,
the supplier into the buyer's ; improving its terms of trade.
country. ; _ tertiary sector
- terminal costs : economic activities which are
transshipment and loading ~ concerned with the
costs that must be paid regard- 1 organisation and coordination
less of the distance involved. : of production and other eco-
~ nomic activities, and with the
- Terms of Trade (TOT)
1 exchange (logistics, distribu-
terms of trade that do not refer · .
' tion, marketing etc.), mainte-
1
to contractual conditions of : nance (repair etc.) and con-
trade, but to price or exchange ~ sumption (retailing, wholes al-
relationships between exports ; ing) of goods and services .
and imports. Thus, the terms of

Economics======= II
""17""4=========t""he""C,,,,Dm=;S I Total Factor Productivity (TFP) "

• the commons I would be true in the world if the

shared resources. Air and w,a- I world conformed to the model's
ter are frequently used ex- assumptions, and perhaps also
amples. I to additional assumptions speci-
I fied in the proposition.
I • thread
a hierarchical arrangement of
linked notes where each succes-
I sive contribution is written as a
response to an earlier note in
the discussion (to organise dis-
I course). Usually used by online
conferencing forums and called
• the loss function
'threading' .
also known as the 'criterion func- I
tion' . A function that is • time-space convergence
minimised to achieve a desired refers to the diminishing time
outcome. Often econometricians I needed to connect two places by
minimise the sum of squared er- transportation due to improv-
rors in makir.g an estimate of a ing transport technologies.
fi..mction or a slope. In this case, ~ • tort
the loss function is the sum of ;
in law, a private or civil wrong.
squared errors. One might also
think of agents in a model as I • total factor productivity
minimising some loss fi..mction in I the growth of real output be-
their actions that are predicated yond what can be attributed to
on estimates of things such as fu- increases in the quantities of
ture prices. I labour and capital employed.

• theoretical proposition I • Total Factor Productivity

a property of an economic
model which is derived (de-
duced) from its assumptions. It
usually takes the form of a pre-
diction about something that
(TFP)
a measure of the output of an
I industry or economy relative to
I the size of all of its primary fac-
tor inputs. The term, and its
II trade creati011 I Trade Policy Review :echanism (TPRM) 175

acronym TFP, often refers to ~ country's participation in world

the growth of this measure, as ; markets through trade, accom-
measured by the Solow re- : plished by trade liberalisation.
sidual. I
: • trade intensity index
I
• trade creation for a group or bloc of countries,
trade which occurs between I usually in a PTA, the ratio of
members of a preferential trad- the bloc's share of intra-bloc
ing arrangement that replaces trade to the bloc's share in world
what would have been produc- ~ trade. If greater than one, this
tion in the importing country ; is said to suggest that the bloc
were it not for the PTA. It is : displays trade diversion. Index
associated with welfare im- ~ seems to be due to Frankel
provement for the importing I (1997).
country since it reduces the cost
of the imported good. Concept I
due to Viner (1950).
• trade flow
the quantity or value of a
country's bilateral trade with
another country.
• trade indifference curve
in a diagram measuring quan- I
tities of exports and imports, a : • trade liberalisation
I
curve representing amounts of : reduction of tariffs and removal
q~ade among which a freely I or relaxation of NTBs.
trading country is indifferent,
based on its community indif- I • Trade Policy Review
ference curves and its transfor- ~ Mechanism (TPRM)
mation curve. Due to Meade : the periodic review of the trade
(1952). ~ policies and practices of the
; member countries of the WTO,
• trade integration conducted and published by the
the process of increasing a WTo.

Economics======= II
176
=========*
• trade theory
the body of economic thought
which seeks to explain why and
how countries engage in inter-
national trade and the welfare
implication of that trade, en-
compassing especially the
Ricardian Model, the
Heckscher-Ohlin Model, and
the New Trade Theory.
• trade triangle
in the trade-and-transforma-
tion-curve diagram, the right
triangle formed by the world
price line and the production
and consumption points, the
sides of which represent the
quantities exported and im-
ported.
• trade-and- transforma-
tion- curve diagram
one of the most frequently used
diagrams of trade theory, using
a transformation curve together
with one or more price lines and
sometimes community indiffer-
ence curves to illustrate produc-
tion, consumption, and trade
and the effects on them of tar-
iffs and other exogenous
changes.
• traded good
a good that is exported or im-
" ========Economics
trade theqry I transfor payment II
I ported or sometimes a good
I that could be exported or im-
ported if it weren't for those
I pesky tariffs.
I • trade-related investment
measure
any policy applied to foreign
I
direct investment which has an
I impact on international trade,
such as an export requirement.
• trade-weighted average
tariff
I
the average of a country's tar-
I iffs, weighted by the value of
imports. This is easily calculated
I
as the ratio of total tariff rev-
I enue to total value of imports.
I • trade-weighted exchange
rate
the weighted average of a
I country's bilateral exchange
I rates using bilateral trade, ex-
ports plus imports, as weights.
I
• transaction value
the actual price of a product,
I paid or payable, used for cus-
toms valuation purposes.
• transfer payment
I
payment made by the govern-
I ment or private sector of one
I country to another as a gift or
aid, not as payment for any
II trtInsftrJl4ymmts I ubUJuitous""'""::~Dr!!!!!!m!!!!!!·'[,nits!!!!!!
===",!!====1!!!!!!7!!!!!!7

good or service nor as an obli- ~ • treasury bills

gation. Also called a unilateral i short-term bonds issued by the
transfer. : government, used to pay to
• transfer payments : cover government spending.
I

I
social benefits paid to individu- .• tree
als or households by govern- ~ a fully connected network with-
ment. i out circuits.
• transfer pricing ; • triad
the practice of pricing goods and : Europe, North America and
I
services flowing within a corpo- : Japan.
ration between corporate units
located in different tax jurisdic- ~ • two cone equilibrium
tions, so as to shift profits into I a free-trade equilibrium in the

the jurisdiction with the lowest ~ Heckscher-Ohlin Model where

corporate income tax rates. : prices are such that all goods
~ cannot be produced within a
• transformation curve i single country, and instead there
same as production possibility : are two diversification cones.
frontier. The name comes from ~ This, or a multi-cone equilib-
the idea that, by devoting re- ; rium, will arise if countries' fac-
sources to producing one good : tor endowments are sufficiently
instead of another, it is as ~ dissimilar com pared to factor
though one good is being trans- ; intensities of industries. Con-
formed into another. : trasts with one cone equilib-
I .
• transition matrix : num.
a matrix of transition probabili- ~ • ubiquitous materials or
ties (p) (probabil~ties of ou~- ~ inputs
come a on any gIven expen- ; materials or production (or
mentj during a specific period: consumption) inputs that are
of time, given that outcome a ~ available more or less every-
occurred on the preceding ex- ; where in a similar quality and
periment j during the previous : at approximately the same
period of time). ~ price. Still, ubiquitous inputs

II
178 utIeO'Peretl intertst jlllrity ~nited Nations Con.formee on nwIe ...
may have an effect on location: ~
Inasmuch as such ubiquities ;
affect the weight or bulk of:
the final product, the location ~
of production (ceteris pari- ;
bus) will tend to be relatively
close to the market (in order
to save transport costs).
• uncovered interest parity
equality of expected returns on
otherwise comparable finan-
cial assets denominated in two
currencies, without any cover
against exchange risk. U ncov-
ered interest parity requires
approximately that i = i * + a
where i is the domestic inter-
est rate, i * the foreign inter-
est rate and a the expected ap-
preciation of foreign currency
at an annualised percentage
rate.
• unequal exchange
trade where the labour used to
produce a country's exports is
more than the labour used to
produce its imports, as in the
exchange between low -wage
developing countries and high-
wage developed countries.
• uniform delivered pricing
a common pricing scheme for
consumer and other goods
II ========Economi&s
II
where prices charged at differ-
ent locations are uniform and
independent of transport costs.
'Romote buyers are subsidised
by buyers near the production
location.'
• unilateral transfer
transfer payment.
• unit isocost line
I an isocost line along which the
I cost is equal to one unit of the
I
numeraire, such as one dollar.
• unit isoquant
I the isoquant for a quantity equal
I to one unit of a good. The unit
isoquant is useful for relating
the price of a good to the prices
I of factors employed in its pro-
duction.
- Un~ laoquant
1.B for Food
1.6
1.4
Land in 1.2
I Food 1
Pr.ducti •• O.B
0.6
I 0.4
I 0.2
o 1 2 3
lebor In Foo" Production
I • United Nations Confer-
ence on Trade and Devel-
opment (UNCTAD)
I an intergovernmental body es-
tablished in 1964 within the ~ times other considerations).
United Nations, responsible for ; Represents both their welfare
trade and development. His- : and their preferences.
I
torically, it has often been the
: - value added
international voice of develop-
ing countries. ~ the value of output minus the
I value of all intermediate inputs,
- upstream subsidisation ~ representing therefore the con-
export of a good, one of whose : tribution of, and payments to,
inputs has been subsidised. ~ primary factors of production.

- urban-growth boundary ~ - Value Added Tax (VAT)

a politically specifted line around ; a tax which is levied only on the
cities, beyond which develop- : value added by a ftrm. A VAT
ment is discouraged or prohib- ~ is usually subject to border tax
ited. Sometimes also called ur- I adjustment.
ban-limit lines or rural-limit
; - value marginal product
lines, urban growth boundaries
exist in many cities, counties and ~ marginal value product.
~ - value network
regions across the U.S., particu-
larly in California. : the communications network of
- utility function ~ relations between all individu-
a function which speciftes the als and organisations who add
;
utility (well being) of a con :I value to a product.
: - value quota
I
°1 ~ : a quota specifying value - price

f ~:'._ j /1 \\ ~ times quantity - of a good.

variable cost
I _
; the portion of a firm or
: industry's cost which changes
., . , ~ with output, in contrast to ftxed
- .. - - - - I cost.
sumer for all combinations of :
goods consumed (and some- I

Beonomics======= II
 ~18~O~~~~~~~~M~nII~'~ble~~ I VoluntRry Export Restmint (VER) II
I A merger accomplishing an
2!lOO I internalisation of such linkages
1.800

1.000 increases control of input or

I."'" I output markets and thereby
I.ZOO
lover prices and other market
facets.
• vertical intraindustry trade

• variable levy
-..
""'
a tax on imports that varies over
time, so as to stabilise the do-
mestic price of the imported
good. Essentially, the tax is set
equal to the difference between
the target domestic price and
the world price.
• vehicle currency
the currency used to invoice an
international trade transaction,
especially when it is not the na-
1 tional currency of either the
I
intraindustry trade in which the
exports and imports are at the
different stages of processing.
I
Contrasts with horiwntal lIT.
I
• vertical mixing
I ensures a variety of different
I ages, experience sets and skills
on design teams.
• vertical specialisation
another term for fragmenta-
I tion.
I • visible
in referring to international
I

importer or the exporter. trade, used as a synonym for

'good'. 'Visibles trade' is trade
• vertical integration I in goods. Contrasts with invis-

production of different stages of : ible.

processing of a product within ~
• Voluntary Export Re-
the same firm.
straint (VER)
• vertical integration I a restriction on a country's im-
corporate mergers involving ports that is achieved by nego-
firms that are involved in for- tiating with the foreign export-
wardly or backwardly related I ing country, for it to restrict its
production stages, i.e. they buy I exports.
each other's inputs or outputs.

II ========&OtJOmiu
II Voluntary Import Exptmsion (VIE) I: degree homogeneous 181

• Voluntary Import Expan- ~ • welfare proposition

sion (VIE) ; in trade theory, this usually re-
the use of policies to encourage :I fers to any of several gains from
imports, in response to pressure : trade theorems.
from trading partners. Due to ~ • welfare triangle
Bhagwati (1987).
~ in a partial equilibrium market
• Walrasian auctioneer ; diagram, a triangle represent-
a hypothetical entity that facili- : ing the net welfare benefit or
tates market adjustment in dis- ~ loss from a policy or other
equilibrium by announcing ; change. In trade theory, it often
prices and collecting informa- : means the triangle or triangles
tion about supply and demand ~ representing the deadweight
at those prices without any dis- I loss due to a tariff.
equilibrium transactions actu-
I • Western Hemisphere Free
ally taking place. : Trade Area (WHFTA)
I
• WARP : name sometimes proposed for
Weak Axiom of Revealed Pref- ~ a preferential trading arrange-
erence. ; ment including most or all of
: th(.· countries of the western
• water in the tariff
~ hemisphere. Now called FTAA.
the extent to which a tariff that
is higher than necessary to be ~ • :1£ro degree homogeneous
prohibitive. I homogeneous of degree zero.

E&onom;cs======== II
Notes