Chapter 1

GLOBALIZATION: REFERS TO THE SHIFT TOWARD A MORE INTEGRATED AND

INTERDEPENDENT WORLD ECONOMY

GLOBALIZATION OF MARKETS: REFERS TO THE MERGING OF HISTORICALLY

DISTINCT AND SEPARATE NATIONAL MARKETS INTO ONE HUGE GLOBAL
MARKETPLACE.

GLOBALIZATION OF PRODUCTION: REFERS TO THE SOURCING OF GOODS

AND SERVICES FROM LOCATIONS AROUND THE WORLD TO TAKE ADVANTAGE
OF NATIONAL DIFFERENCES IN THE COST AND QUALITY OF FACTORS OF
PRODUCTION (SUCH AS LABOR, ENERGY, LAND, AND CAPITAL).

WORLD TRADE ORGANIZATION (LIKE THE GATT BEFORE IT) IS PRIMARILY

RESPONSIBLE FOR POLICING THE WORLD TRADING SYSTEM AND MAKING
SURE NATION-STATES ADHERE TO THE RULES LAID DOWN IN TRADE
TREATIES SIGNED BY WTO MEMBER STATES.

INTERNATIONAL TRADE: OCCURS WHEN A FIRM EXPORTS GOODS OR

SERVICES TO CONSUMERS IN ANOTHER COUNTRY.

FOREIGN DIRECT INVESTMENT (FDI): OCCURS WHEN A FIRM INVESTS

RESOURCES IN BUSINESS ACTIVITIES OUTSIDE ITS HOME COUNTRY.

MULTINATIONAL ENTERPRISE (MNE): IS ANY BUSINESS THAT HAS

PRODUCTIVE ACTIVITIES IN TWO OR MORE COUNTRIES.

INTERNATIONAL BUSINESS: IS ANY FIRM THAT ENGAGES IN INTERNATIONAL

TRADE OR INVESTMENT.

Chapter 2

POLITICAL SYSTEM: WE MEAN THE SYSTEM OF GOVERNMENT IN A NATION.

COLLECTIVISM: REFERS TO A POLITICAL SYSTEM THAT STRESSES THE

PRIMACY OF COLECTIVE GOALS OVER INDIVIDUAL GOALS.

SOCIALISM: A POLITICAL PHILOSOPHY ADVOCATING SUBSTANTIAL PUBLIC

INVOLVEMENT, THROUGH GOVERNMENT OWNERSHIP, IN THE MEANS OF
PRODUCTION AND DISTRIBUTION.

COMMUNISTS: THOSE WHO BELIEVE SOCIALISM CA BE ACHIEVED ONLY

THROUGH REVOLUTION AND TOTALITARIAN DICTATORSHIP.

SOCIAL DEMOCRATS: THOSE COMMITED TO ACHIEVING SOCIALISM BY

DEMOCRATIC MEANS.
DEMOCRACY: REFERS TO A POLITICAL SYSTEM IN WHICH GOVERNMENT IS BY
THE PEOPLE, EXERCISED EITHER DIRECTLY OR THROUGH ELECTED
REPRESENTATIVES.

TOTALITARIANISM: IS A FORM OF GOVERNMENT IN WHICH ONE PERSON OR

POLITICAL PARTY EXERCISES ABSOLUTE CONTROL OVER ALL SPHERES OF
HUMAN LIFE AND PROHIBITS OPPOSING POLITICAL PARTIES.

REPRESENTATIVE DEMOCRACY: A POLITICAL SYSTEM IN WHICH CITIZENS

PERIODICALLY ELECT INDIVIDUALS TO REPRESENT THEM IN GOVERNMENT.

COMMUNISM TOTALITARIANISM: A VERSION OF COLLECTIVISM ADVOCATING

THAT SOCIALISM CAN BE ACHIEVED ONLY THROUGH A TOTALITARIAN
DICTATORSHIP

THEOCRATIC TOTALITARIANISM: IS FOUND IN STATES WHERE A PARTY,

GROUP, OR INDIVIDUAL THAT GOVERNS ACCORDING TO RELIGIOUS
PRINCIPLES MONOPOLIZES POLITICAL POWER

TRIBAL TOTALITARIANISM: OCCURS WHEN A POLITICAL PARTY THAT

REPRESENTS THE INTERESTS OF A PARTICULAR TRIBE MONOPOLIZES POWER.

RIGHT-WING TATALITARIANISM: GENERALLY PERMITS SOME INDIVIDUAL

ECONOMIC FREEDOM BUT RESTRICTS INDIVIDUAL POLITICAL FREEDOM.

MARKET ECONOMY: ALL PRODUCTIVE ACTIVITIES ARE PRIVATELY OWNED, AS

OPPOSED TO BEING OWNED BY THE STATE.

THE ALLOCATION OF RESOURCES IS DETERMINED BY THE INVISIBLE HAND OF

THE PRICE SYSTEM.

COMMAND ECONOMY: AN ECONOMIC SYSTEM WHERE THE ALLOCATION OF

RESOURCES, INCLUDING DETERMINATION OF WHAT GOODS AND SERVICES
SHOULD BE PRODUCED, AND IN WHAT QUANTITY, IS PLANNED BY THE
GOVERNMENT.

LEGAL SYSTEM: OF A COUNTRY REFERS TO THE RULES, OR LAWS, THAT

REGULATE BEHAVIOR ALONG WITH PROCESS BY WHICH THE LAWS ARE
ENFORCED AND THROUGH WHICH REDRESS FOR GRIEVANCES IS OBTAINED.

COMMON LAW: IS BASED ON TRADITION, PRECEDENT, AND CUSTOM.

CIVIL LAW: IS BASED ON A DETAILED OF LAWS ORGANIZED INTO CODES.

THEOCRATIC LAW: IS ONE IN WHICH THE LAW IS BASED ON RELIGIOUS

TEACHINGS.

CONTRACT: IS A DOCUMENT THAT SPECIFIES THE CONDITIONS UNDER

WHICH AN EXCHANGE IS TO OCCUR AND DETAILS THE RIGHTS AND
OBLIGATIONS OF THE PARTIES INVOLVED.

CONTRACT LAW: IS THE BODY OF LAW THAT GOVERNS CONTRACT

ENFORCEMENT.
PROPERTY RIGHTS: REFERS TO THE LEGAL RIGHTS OVER THE USE TO WHICH
A RESOURCE IS PUT AND OVER THE USE MADE OF ANY INCOME THAT MAY BE
DERIVED FROM THAT RESOURCE.

PRIVATE ACTION: REFERS TO THEFT, PIRACY, BLACKMAIL, AND THE LIKE BY

PRIVATE INDIVIDUAL OR GROUPS.

PUBLIC ACTION: TO VIOLATE PROPERLY RIGHTS OCCURS WHEN PUBLIC

OFFICIALS, SUCH AS POLITICIANS AND GOVERNMENT BUREAUCRATS, EXTORT
INCOME, RESOURCES, OR THE PROPERTY ITSELF FROM PROPERTY HOLDERS.

FOREIGN CORRUPT PRACTICES ACT: U.S. LAWS REGULATING BEHAVIOR

REGARDING THE CONDUCT OF INTERNATIONAL BUSINESS IN THE TAKING OF
BRIBES AND OTHER UNETHICAL ACTIIONS.

INTELLECTUAL PROPERTY: REFERS TO PROPERTY THAT IS THE PRODUCT OF

INTELLECTUAL ACTIVITY.

PATENT: GRANTS THE INVENTOR OF A NEW PRODUCT OR PROCESS

ESCLUSIVE RIGHTS FOR A DEFINED PERIOD TO THE MANUFACTURE, USE, OR
SALE OF THAT INVENTION.

COPYRIGHTS: ARE THE EXCLUSIVE LEGAL RIGHTS OF AUTHORS, COMPOSERS,

PLAYWRIGHTS, ARTIST, AND PUBLISHERS TO PUBLISH AND DISPERSE THEIR
WORK AS THEY SEE FIT.

TRADEMARKERS: ARE DESIGNS AND NAMES, OFTEN OFFICIALLY REGISTERED,

BY WHICH MERCHANTS OR MANUFACTURERS DESIGNATE AND
DIFFERENTIATE THEIR PRODUCTS.

WORLD INTELLECTUAL PROPERTY ORGANIZATION: GROUP OF 188

COUNTRIES THAT HAVE SIGNED INTERNATIONAL TREATIES DESIGNED TO
PROTECT INTELLECTUAL PROPERTY.

PRODUCT SAFETY LAWS: SET CERTAIN SAFETY STANDARDS TO WHICH A

PRODUCT MUST ADHERE.

PRODUCT LIABILITY: INVOLVES HOLDING A FIRM AND ITS OFFICERS

RESPONSIBLE WHEN A PRODUCT CAUSES INJURY, DEATH, OR DAMAGE.

GROSS NATIONAL INCOME (GNI): MEASURES THAT TOTAL ANNUAL INCOME

RECEIVED BY RESIDENTS OF A NATION.

PURCHASING POWER PARITY (PPP): AN ADJUSTMENT IN GROSS DOMESTIC

PRODUCT PER CAPITA TO REFLECT DIFFERENCES IN THE COST OF LIVING.

HUMAN DEVELOPMENT INDEX (HDI): AN ATTEMPT BY THE UNITED NATIONS

TO ASSES THE IMPACT OF A NUMBER OF FACTORS ON THE QUALITY OF
HUMAN LIFE IN A COUNTRY.

DEREGULATION: INVOLVES REMOVING LEGAL RESTRICTIONS TO THE FREE

PLAY OF MARKETS, THE ESTABLISHMENT OF PRIVATE ENTERPRICES, AND THE
MANNER IN WHICH PRIVATE ENTERPRICES OPERATE.
PRIVATIZATION: THE SALE OF STATE-OWNED ENTERPRICES TO PRIVATE
INVESTORS.

LEGAL SYSTEM: SYSTEM OF RULES THAT REGULATE BEHAVIOR AND

PROCESSES BY WHICH THE LAWS OF A COUNTRY ARE ENFORCED AND
THROUGH WHICH REDRESS AF GRIEVANCES IS OBTEINED.

FIRST-MOVER ADVANTAGES: ARE THE ADVANTAGES THAT ACCRUE TO EARLY

ENTRANTS INTO A MARKET.

LATE-MOVER DISADVANTAGES: ARE THE HANDICAPS THAT LATE ENTRANTS

MIGHT SUFFER.

POLITICAL RISK: HAS BEEN DEFINED AS THE LIKELIHOOD THAT POLITICAL

FORCES WILL CAUSE DRASTIC CHANGES IN A COUNTRY’S BUSINESS
ENVIRONMENT THAT ADVERSELY AFFECT THE PROFIT AND OTHER GOALS OF
A BUSINESS ENTERPRISE.

ECONOMIC RISK: CAN BE DEFINED AS THE LIKEHOOD THAT ECONOMIC

MISMANAGEMENT WILL CAUSE DRASTIC CHANGES IN THE COUNTY’D
BUSINESS ENVIRONMENT THAT HURT THE PROFIT AND OTHER GOALS OF A
PARTICULAR BUSINESS ENTERPRISE.

LEGAL RISK: CAN BE DENINED AS THE LIKEHOOD THAT A TRADING PARTNER

WILL OPORTUNISTICALLY BREAK A CONTRACT OR EXPROPIATE PROPERLY
RIGHTS.

Chapter 3

CULTURE: IS A SYSTEM OF VALUES AND NORMS THAT ARE SHARED AMONG A

GROUP OF PEOPLE AND THAT WHEN TAKEN TOGETHER CONSTITUTE A
DESIGN FOR LIVING.

VALUES: WE MEAN ABSTRACT IDEAS ABOUT WHAT A GROUP BELIEVES TO BE

GOOD , RIGHT, AND DESIRABLE.

NORMS: WE MEAN THE SOCIAL RULES AND GUIDELINES THAT DESCRIBE

APPROPIATE BEHAVIOR IN PARTICULAR SITUATIONS.

FOLKWAYS: ARE THE ROUTINE CONVENTIONS OF EVERYDAY LIFE.

MORES: ARE NORMS THAT ARE SEEN AS CENTRAL TO THE FUNCTIONING OF A

SOCIETY AND TO ITS SOCIAL LIFE.

SOCIAL STRUCTURE: REFERS TO ITS BASIC SOCIAL ORGANIZATION

GROUP: IS AN ASSOCIATION OF TWO OR MORE INDIVIDUALS WHO HAVE A

SHARED SENSE OF IDENTITY AND WHO INTERACT WITH EACH OTHER IN
STRUCTURED WAUS ON THE BASIS OF A COMMON SET OF EXPECTATIONS
ABOUT EACH OTHER’S BEHAVIOR.

INDIVIDUAL: IS THE BASIC BUILDING BLOCK OF SOCIAL ORGANIZATION.

SOCIAL STRATA: HIERARCHICAL SOCIAL CATEGORIES.

SOCIAL MOBILITY: REFERS TO THE EXTENT TO WHICH INDIVIDUALS CAN

MOVE OUT OF THE TRATA INTO WHICH THEY ARE BORN.

CASTE SYSTEM: IS A CLOSED SYSTEM OF STRATIFICATION IN WHICH SOCIAL

POSITION IS DETERMINED BY THE FAMILY INTO WHICH A PERSON IS BORN,
AND CHANGE IN THAT POSITION IS USUALLY NOT POSSIBLE DURING AN
INDIVIDUAL’S LIFETIME.

CLASS SYSTEM: IS A LESS RIGID FORM OF SOCIAL STRATIFICATION IN WHICH

SOCIAL MOBILITY IS POSSIBLE.

RELIGION: MAY BE DEFINED AS A SYSTEM OF SHARED BELIEFS AND RITUALS

THAT ARE CONCERNED WITH THE REALM OF THE SACRED.

ETHICAL SYSTEMS: REFER TO A SET OF MORAL PRINCIPLES, OR VALUES,

THAT ARE USED TO GUIDE AND SHAPE BEHAVIOR.

CHRISTIANITY:

ISLAM:

HINDUISM:

BUDDHISM:

CONFUCIANISM:

SPOKEN LANGUAGES:

LANGUAGE: IS ONE OF THE DEFINING CHARACTERISTICS OF A CULTURE.

SPOKEN LANGUAGES:

UNSPOKEN LANGUAGES: REFERS TO NONVERBAL COMMUNICATIONS.

EDUCATION:

POWER DISTANCE: DIMENSION FOCUSED ON HOW A SOCIETY DEALS WITH

THE FACT THAT PEOPLE ARE UNEQUAL IN PHYSICAL AND INTELLECTUAL
CAPABILITIES.

Chapet 5

FREE TRADE: REFERS TO A SITUATION WHERE A GOVERNMENT DOES NOT

ATTEMPT TO INFLUENCE THROUGH QUOTAS OR DUTIES WHAT ITS CITIZENS
CAN BYE FROM ANOTHER COUNTRY, OR WHAT THEY CAN PRODUCE AND
SELL TO ANOTHER COUNTRY.

NEW TRADE THEORY: STRESSES THAT IN SOME CASES COUNTRIES

SPECIALIZATE IN THE PRODUCTION AND EXPORT OF PARTICULAR PRODUCTS
NOT BECAUSE OF UNDERLYING DIFFERENCES IN FACTOR ENDOCUMENTS,
BUT BECAUSE IN CERTAIN INDUSTRIES THE WORLD MARKET CAN SUPPORT
ONLY A LIMITED NUMBER OF FIRMS.

GOVERNMENT POLICY:

ABSOLUTE ADVANTAGE: IN THE PRODUCTION OF A PRODUCT WHEN IT IS

MORE EFFICIENT THAN ANY OTHER COUNTRY IN PRODUCING IT.

COMPARATIVE ADVANTAGES:

PRODUCT LIFE-CYCLE THERY:

ECONOMIES OF SCALE: ARE UNIT COST REDUCTIONS ASSOCIARED WITH A

LARGE SCALE OF OUTPUT.

FACTOR ENDOWMENTS: A NATIONS’S POSITION IN FACTORS OF PRODUCTION

SUCH AS SKILLED LABOR OR THE INFRASTRUCTURE NECESSARY TO COMPETE
IN A GIVEN INDUSTRY.

DEMAND CONDITIONS: THE NATURE OF HOME DEMAND FOR THE INDUSTRY’S

PRODUCT OR SERVICE

RELATING AND SUPPORTING INDUSTRIES: THE PRESENCE OR ABSENCE OF

SUPPLIER INDUSTRIES AND RELATED INDUSTRIES THAT ARE
INTERNATIONALLY COMPETITIVE.

FIRM STRATEGY: STRUCTURE, AND RIVALRY-THE CONDITONS GOVERNING

HOW COMPANIES ARE CREATED, ORGANIZED, AND MANAGED AND THE
NATURE OF DOMESTIC RIVALRY.

Chapter 6

Free trade: government does not attempt to restrict what its citizens can buy
from or sell to another country

Tariff: is a tax levied on imports

Specific tariffs: levied a fixed charge for each unit of a good imported

Ad valorem tariffs: levied as a proportion of the value of the import good

Subside: government payment to a domestic producer, ex: cash grants, low-

interest loans, tax breaks and domestic firms
Import quota: direct restriction on the quantity of some good that may be
imported into a country is usually enforced by using import licenses to a
group of individuals or firms

Tariff rate quota: common hybrid of a quota. A lower tariff rate is applied to
imports within the quota than those over the quota

Voluntary export restraint (VER): is a quota on trade imposed by the

exporting country

Quota rent: extra profit that producers make when supply is artificially limited
by an import quota

Local content requirement: some specific fraction of god be produced

domestically can be expressed either in physical terms

Administrative trade policies: bureaucratic rules designed to make it difficult

for imports to enter a country

Dumping: variously defined as selling goods in a foreign market at below

their costs of production or as selling goods in a foreign market at below their
fair market value.

Antidumping policies: designed to punish foreign firms that engage in

dumping is to protect domestic producers from unfair foreign competition

Countervailing duties: special tariff can be fairly substantial and stay in place
for up to five years.

National security: protect certain industries because they are important for
national security

Retaliation. Play bye the rules of the game

Protecting consumers: protect consumers from unsafe products

Furthering foreign policy objectives: to support their foreign policy objective

Helms-Burton Act: this act allows Americans to sue foreign firms that use
property in Cuba confiscated from them after 1959 revolution

D’Amato act: 1996 congress passed a similar law aimed at libuya and Iran

Protecting human rights: protecting and promoting human rights in other

countries is an important clement of foreign policy for many democracies

Infant industry argument: oldest economic argument for government

intervention

Strategic trade policy: new trade have proposed the strategic trade policy
argument, raise national income and might pay a government

Smoot-Hawley act: enormous wall of tariff barriers made-to-order

Services and intellectual property: long extensions of GATT rules to cover
services and intellectual property may be particularly significant

World trade organization: clarification and strengthening of GATT rules and

the creation of the WTO also hold out the promise of more effective policing
and enforcement of GATT rules.

WTO as global police: suggest that its policing and enforcement mechanisms
are having a positive effect

Expanding trade agreement: as explained above the Uruguay round of GATT

negotiations extended global trading rules to cover trade in services

Antidumping actions: proliferated during the 1990. WTO rules allow countries
to impose antidumping duties on foreign goods that are being sold cheaper
than at home or below their cost of production, when domestic producers can
show that they are being harmed.

Protectionism in agriculture: another recent focus of the WTO has been the
high level of tariffs and subsides in the agricultural sector of many economies

Protecting intellectual property: issue that has become increasingly important

to the WTO has been protecting intellectual property

Market Access for nonagricultural goods and services: although the WTO and
the GATT have mode big strides in reducing the tariff rates on nonagricultural
products, much work remains

New round of talks Doha: antidumping actions trade in agricultural products

better enforcement os intellectual property law expanded market access
were four of the issues the WTO wanted to tackle at the 1999 meetings in
Seattle, but those meetings were derailed

Chapter 7

Greenfield investment: involves the establishment of a new operation in a

foreign country.

Flow of FDI (Foreign Direct Investment): Refers to the amaunt of FDI

undertaken over a given time period (normally a year).

The Stock of FDI: refers to the total accumulated value of foreign-owned

assets at a given time.

Outflows of FDI: Meaning the flow of FDI out of a country

Inflows of FDI: The FLow of FDI into a country

Gross fixed capital formation: Summarizes the total amount of capital
invested in factories, stores, office buildings, and the like.

Eclectic paradigm: Attempts to combine the tow other perspectives into a

single holistic explanation of foreign direct investment

Exporting: involves producing good at home and then shipping them to the
receiving country for sale.

Licensing: Involves grating a foreing entity (the licensee) the right to produce
and sell the firm's product in return for a royalty fee on every unit sold.

Internalization theory: seeks to explain why firms often prefer foreign direct
investment over licensing as a strategy for entering foreign markets (this
approach si also known as Market Imprefetions aproach).

Oligopoly: Is an industy composed of a limited number of large firms

( Example: an industryin wich four firms control 80% of a domestic market
would be defined as an oligopoly)

Multipoint Competition: Arises when two or more enterpises encounter each

other in different regional markets, national markets, or industires.

Location-specific advantages: means the advantages that arise from utilizing

resource endowments or assets that are tied to a particular foreing location
and that a firm finds valuable to combine with its own unique assets.

Balance-of-paymentes accounts: Track both its payments to and its receipts

from other countries.

Current account: Track the export and import of goods and services.

Chaptes 8

Regional economic integration: We mean agreements among countries in a

geographic region to reduce, and ultimately remove, tariff and nontraiff
barriers to the free flow of goods, servces, and factors of production between
each other.

Free trade area: all barriesrs to the trade of goods and services
amongmember countries are removed.

European Free Trade Associaton (EFTA): Is the most enduring free trade area
in the world.
Custom Union: eliminates trade barriers between member countries and
adopts a common external trade policy.

Common market: has no barriers to trade between member countries,

includes a common external trade policy, and allows factors of production to
move free between members.

Economic union: involves the free flow of products and factors of production
between member countries and the adoption of a common external trade
policy, but it also requires a common currency, harmonization of members'
tax rates, and a common monetary and fiscal policy.

Political union: A central political apparatus coordinates the economic, social,

and foreign policy of the members states.

Trade Creation: occurs when low-cost producers within the free trade area
replace high-cost domestic producers.

Trade duversion: occurs when higher cost suppliers replace lower cost
external suppliers whithin the free trade area.

European Union (EU): is the product of two political factors:(1) the

devastation of western Europe during two world wars and the desire for a
lasting peace, and (2) the European nation's desire to hold their own on the
world's political and economic stage.

Treaty of Rome: signed in 1957, established the European Community.

European Commission: is responsible for proposing EU legislation,

implementing it, and monitoring compliance with EU laws by member states.

Council of the European Union: represents the interests of member states.

European Parliament: now has 732 members, is directly elected bye the
population of the member states.

The Court of Justice: which is compromised of one judge from each country, is
the supreme appeals court for EU law.

Single European Act: The member nation of the European COmmunity (EC)
adopted this act in 1987

Optimal Currency area: similarities in the underlying structure of economic

activity make it feasible to adopt a single currency and use a single exchange
rate as an instrument of macroeconomic policy.

North Ametican Free Trade Agreement (NAFTA): Free trade area Between
Canada, USA and Mexico
Andean Pact: was largely based on the EU model, but was far less successful
at achivening its stated goals.

MERCOSUR: organited in 1988 as a free trade pact between Brazil Adn

Argentina.

Central America Common Market: A trade pact between Costa Rica, El

Salvador, Guatemala, Honduras, and Nicaragua, which began in the early
1960's but collapsed in 1969 due the war.

Central America Free Trade Agreement: Is the agreement made by USA and
the 6 Countries for mos good and services. (Costa Rica, El Salvador,
Guatemala, Honduras, Nicaragua, Dominican Republic and USA)

CARICOM: An association of Enlish-speaking Caribbean states that are

attempting to establish a customs union.

Caribbean Single Market and Economy: Unites six CARICOM members in

agreeing to lower trade barriers and harmonize macroeconomic and
monetary policies.

Association of Southeast Asian Nations (ASEAN): Incldes Brunei, Cambodia,

Indonesioa, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and
Vietnam.

Chapter 9

Foreign exchange market: Is a market for converting the currency of one

country into that of another county.

Exchange rate: is simply the rate at which one currency is converted into
another.

Foreing exchange risk: By which we mean the adverse consequences of

unpredicable changes in exchange rates.

Currency Speculation: Is an other us of foreing exchange markets. Typically

involves the short-term movement of funds from one currency to another in
the hopes of profiting from shifts in exchange rates.

Foreing Exchange risk: Is the possibility that unpedicted changes in future

exchange rates will have adverse consequences for the firm.

Spot Exchange rate: Is the rate at which a foreign exchange delaer converts
one currency into another currency on a particular day.
Foward exchange: Occurs when two parties agree to exchange currency and
execute the deal a some specific date in the future.

Forward exchange rates: Exchange rates governing such future transactions

Law of one price: states that in competitive markets free of transportation

costs and barriers to trade (such as tariffs), identical products sold in
different countries must sell for the same price when their price is expressed
in therms of the same currency.

Efficient market: It has no impediments to the free flow of goods and

services, such as trade barriers.

Fhisher Effect: States that a country's "nominal" interest rate (i) is the sum of
the required "real" rate of interest (r) and the expected rate of inflation over
the period for which the funds are to be lent (I). ( i=r+I )

International Fisher Effect: States that for any two countries, the spot
exchange rate should change in an equal amount but in the opposite
direction to the difference in nominal interest rates between the two
countries.

Bandawagon Effect: when the traders moving as a herd in the same direction
at the same time.

Efficient market: is one in which prices reflect all available public information.

Inefficient market: is one in which prices do not relfected all available

information

Freely Convertible: when the country's government alloes both resisdents

and nonresidents to purchase unlimited amounts of foreing currency with it.

Externeally Convertible: when only nonresidents may convert into a foreings

currency without any limitations.

Nonconvetible: when neither residents nor nonresidents are allowed to

comvert it into a foreign currency.

Capital flight: When residents and nonresidents rush to convert their holding
of domestic currency into a foreign currency

Countertrade: refers to a range of barterlike agreement by which goods and

services can be traded for other goods and services.

Transaciton exposure: is the extent to which fluctuations is foreign exchange

values affect the income from individual transactions.

Translation Exposure: is the impact of currency exchange rate chanes on the

reported financial statementes of a company.

Economic exposure: is the extendt to which a firms's future international

earing power is affected by changes in exchange rates.

Lead strategy: involves attempting to collect foreign currency recevables

(payments from customers) early when a foreign currency is expected to
depreciate and paying foreign currency payables (to suppliers) before they
are due when a currency receivables (payments fromm customers) early
when a foreign currency is expected to depreciate and paying foreing
currency payanles (to suppliers) before the are due when a currency is
expected to appreciate.

Lag strategy: involves delayingcollection of foreign currency receivables if

that currency is expected to appreciate and delaying payables if the currency
is expected to depreciate.

Chapter 10

International monetary system: Refers to the institutional arrangements that

govern exchange rates.

Floating exchange rate: is when the foreign exchange market determines the
relative value of a currency.

Pegged exchange rate: means the value of the currency is fixed relative to a
reference currency, such as the U.S. dollar, and then the exchange rate
between that currency and other currencies is determined by the reference
currency exchange rate.

Fixed exchange rate: Is the when the values of a set currencies are fixed
against each other at some mutually agreed-on exchange rate.

Gold Standard: is the pegging currencies to gold and guaranteeing

convertibility

Gold par value: Is the amount of a currency needed to purchase one ounce of
gold

Balance-of-trade equilibrium is when the income its residents earn from

exports is equal to the money its resident pay to other countries for imports
(the current account of its balance of payments is in balance).

Managed-floats system: is the frequency of government intervetion in the

foreign exchange market

Currency Board: a country that introduce this commits itself to converting its
domestic currency on demand into another currency at a fixed exchange
rate.

Currency Crisis: occours when a speculative attack on the exchange value of

a currency results in a sharo depreciation of tis value or forces authorities to
expend large volumes of international currency reserves and sharply increas
interest rates to defend the orevailing exchange rate.

Bank crisis: occurs when a speculative attack on the exchange value of a

currency results in a sharp depreciation of its value or forces authorities to
expend large volumes of international currency reserves and sharpy increase
interest rates to defend the prevailing exchange rate.

Foreign debt crisis: is a situation in which a country cannot service its foreign
debts obligation, whether private-sector or government bebt.

Moral hazard: arises when people behave recklessly because they know they
will be saved if things go wrong.