Term
| Trade or Elasticity Approach |
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Definition
| The theory or approach that stresses the role of trade or the flow of goods and services in the determination of exchange rates. This model is more useful in explaining exchange rates in the long run than in the short run. |
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| A deliberate (policy) increase in the exchange rate by a nation's monetary authorities from one fixed or pegged level to another. |
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| The appreciation of a nation's currency resulting from the exploitation of a domestic resource that was previously imported, and the resulting loss of international competitiveness in the nation's traditional sector. |
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| Stable foreign exchange market |
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Definition
| The condition in a foreign exchange market where a disturbance from the equilibrium exchange rate gives rise to automatic forces that push the exchange rate back toward the equilibrium rate. |
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| Unstable forieng exchange market |
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Definition
| The condition in a foreign exchange market where a disturbance from equilibrium pushes the exchange rate further away from equilibrium. |
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Term
| Marshall-lerner condition |
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Definition
| Indicates that the foreign exchange market is stable when the sum of the price elasticities of the demands for imports and exports is larger than 1 (when the supply elasticities of imports and exports are infinite). |
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The belief, arising from the emperical studies of the 1940s, that foreign exchange markets were eithier unstable or barely stable. |
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The inability of the regression technique to identify shifts in demand curves from shifts in supply curves, leading to the underestimation of price elasticities in emperical studies of international trade. |
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| The deterioration before a net improvement in a country's trade balance resulting from a depreciation or devaluation. |
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| The proportion of an exchange rate change that is reflected in export and import price changes. |
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| The international monetary system operating from about 1880-1914 under which gold was the only international reserve, exchange rates fluctuated only within the gold points, and BOP adjustment was described by the price-specie-flow mechanism. |
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| The fixed exchange rates resulting under the gold standard from each nation defining the gold content of its currency and passively standing ready to buy or sell any amount of gold at that price. |
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Definition
| The mint parity plus the cost of shipping an amount of gold equal to one unit of the foreign currency between the two nations. |
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| The mint parity minus the cost of shipping an amount of gold equal to one unit of the foreign currency between the two nations. |
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Term
| Price-specie-flow mechanism |
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Definition
| The automatic adjustment mechanism under the gold standard. It operates by the deficit nation losing gold and experiencing a reduction in its money supply. This in turn reduces domestic prices, which stimulates the naton's exports and dscourages its imports until the deficit is eliminated. A surplus is corrected by the opposite process. |
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Definition
| Postulates that the naton's money supply times the velocity of circulation of money is equal to the nation's general price index times physical output at full employment. With V and Q assumed constant, the change is P is directly proportional to the change in M. |
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Term
| Rules of the game of the gold standard |
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Definition
| The requirement under the gold standard that monetary authorities restrict credit in the deficit nation and expand credit in the surplus nation (thus reinforcing the effect of changes in international gold flows on the nation's money supply) |
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