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Key Words

Globalisation – the process by which the world’s economies are becoming more closely integrated.

Absolute Advantage – an ability for an entity to produce a good more efficiently.

Competitive Advantage

Comparative Advantage – A trading country should specialise in exporting those good which it can produce at a lower opportunity cost whilst importing those goods which it can only produce at a higher opportunity cost.

Tariff – A tax imposed on imported goods.

World Trade Organisation (WTO)

Voluntary Export Restraint (VER)/Quota – a limit established on imports from another country.

Foreign Direct Investment (FDI) – Is investment by firms located abroad into the domestic economy.

Foreign Exchange Reserves – The use of foreign currency and gold administered by the central bank in order to balance demand and supply of a currency.

Currency Reallignment – the process by which a currnecy is devaluated or revaluated in order to reallign it with foreign currencies dependent on the state of the economy.

Devaluation – A devaluation occurs when the government/central bank reduces the price of the domestic currency relative to a foreign currency in order to make exports more competitive abroad.

Revaluation – A revaluation occurs when the government/central bank increases the price of the domestic currency relative to a foreign currency in order to make imports cheaper for the domestic market. This may occur if the economy is overheating and there is too much demand for exports causing inflation, and the price of imports is high relative to domestic prices.

Marshall Lerner Condition – A rule that states that a devaluation will only have a positive effect on the current account balance if the sum of the elasticities of demand for exports and imports is less than negative 1.

Forex Market – the foreign exchange market where currencies are bought and sold and hence exchange rates are determined (if they are free floating).

Spot Exchange Rate – the current exchange rate prevailing in the forex market.

Futures Market – a place where commodities or currency can be purchased for a fixed price but delivered at a specificed date in the future. This can be used by exports who want to export a good in 5 months but under a floating exchange rate regime wont know the exchange rate. Therefore they can purchase the currency now and they will receive it in 5 months, there may be a fee for this.

Foreign Exchange/Currency Gap – the inability to import goods needed (perhaps for development) as a result of a shortage of foreign exchange, usually because such countries cannot produce enough goods to sell abroad.

Trade Creation – is the substitution of expensive domestic production with the importation of relatively cheaper produce from a partner within a trading bloc.

Trade Diversion – the substituion of relatively less expensive goods that have been imported from a trading partner which is less efficient that other countries, but is a member of the trading bloc.

NAIRU – Non-accelerating inflation rate of unemployment; the natural rate of unemployment for an economy.

Hysteresis – a situation which occurs when a negative shock to the economy causes higher unemployment in the long term. This can cause the value of NAIRU to increase. This happens due to a deterioration in human capital which makes it harder for workers to get jobs (increasing occupational immobility). If there are high unemployment benefits, then some workers may become accustomed to living on these and hence chose not to find a job, instead becoming voluntarily unemployed. Voluntarily unemployment can also occur if some people decide to live on a spouse or another relatives income or a different source of income other than work.

International Competitiveness – the ability for an economy to sell its goods and services both domestically and internationally due to price and non-price factors.

Page last updated on 15/04/14