Glossary of terms

Glossary of terms
Absolute Advantage
The ability of a nation's residents to produce a good or service at a lower cost, measured in resources required to produce the good or service, or the ability to produce more output than other nations from given inputs of resources. For example suppose there was an...
Absolute Quota
A quantitative restriction that limits the amount of a product that can enter a country during a specific time period. For example the United States has a limit on different goods that could enter from other countries. In particular, the U.S. allows 847,690 cotton dresses to...
Arbitrage
Buying an item in one market to sell in another market for a higher price. An example would be an American resident who can buy many oranges in Mexico city for US $0.25 per orange and drive them a short distance to Los Angeles to sell each for US$0.50 for a profit of...
Autarky
A non-trade situation. Today, complete economic autarkies are rare. A possible example of a current autarky is North Korea. However, even North Korea has extensive trade with the Russian Federation, the People's Republic of China, Syria, Iran, Vietnam, and many countries in...
Balance of Payments
A system of accounts that measures transaction of goods, services, income, and financial assets between domestic residents, businesses, and governments and the rest of the world during a specific time period.The balance of payments is divided into three main categories: the...
Beggar-Thy-Neighbor Policy
A policy action that benefits one nation's economy but worsens economic performance in another nation. When a large country applies a tariff, a part of the tariff is shifted backwards resulting in a gain for the country that applied the tariff because the domestic...
Capacity Output
The real output that the economy could produce if all resources were used to their maximum. Typically the capacity output level is higher than the output level that a nation's economy tends to produce in the long-run, because all resources are not always utilized. For...
Capital
The physical equipment and buildings used to produce goods and services. For example the capital of a shoe making factory consists of all footwear making machines and the building in which the factory resides.
Capital Account
A tabulation of the flows of financial assets between domestic private residents and businesses and foreign private residents and businesses. The following investment flows would be recorded in the capital account: - Purchase of foreign securities by domestic residents...
Combination Tariff
A tariff that combines an ad valorem tariff and a specific tariff. Suppose Japan exports 100,000 Toyota Corollas to the United States. If the ad valorem tax imposed by the United States is 2% of the value of the good that is being imported and the specific tariff is US$5.00...
Common Market
A trading arrangement under which member nations remove all barriers to trade among their group, erect common barriers to trade with other countries outside the group, and permit unhindered movements of factors of production within the group. For example, in 1969 the...
Comparative Advantage
The ability to produce an additional unit of a good or service at a lower opportunity cost relative to other nations. For example suppose there was an economics professor and a maid. Suppose the economics professor worked her way through school by cooking at diners and...
Consumer Price Index (CPI)
A weighted sum of prices of goods and services that a typical consumer purchases each year. To illustrate a CPI, let's make up a simple example. Let's call our example the "young professional consumer price index." Suppose that a "typical" young professional spends one...
Consumer Surplus
The benefit that consumers receive from the existence of a market price. Consumer surplus is measured as the difference between what consumers are willing and able to pay for a good or services and the market price of the good. Supposed a college student is willing to pay...
Convertibility
The ability to freely exchange a currency for a reserve commodity or reserve currency. For example if the US dollar can be converted to gold, or a British pound, or Bulgarian lev, then the US currency is convertable.
Countervailing Duty (CVD)
A tax on imported goods and services designed to offset the domestic price effect of foreign export policies. Countervailing duties are generally imposed by the International Trade Commission (ITC). These taxes are imposed because a subsidized product can be sold for less...
Crawling Peg
An exchange rate system in which a country pegs its currency to the currency of another nation but allows the parity value to change at regular time intervals. For example Nicaragua has had a crawling-peg system since 1998. In order to promote exchange-rate stability and...
Currency-basket Peg
An exchange-rate system in which a country pegs its currency to the weighted average value of a basket, or selected number of currencies. For example, Kuwait shifted the peg of the Kuwaiti dinar to a currency basket from the U.S. dollar in 2007 because the dollar was weak...
Currency Board
An independent monetary authority that substitutes for a central bank. The currency board pegs the value of the domestic currency, and changes in the foreign reserve holdings of the currency board determine the level of the domestic monetary stock. For example, Bulgaria...
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