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International Business
Flascards for chapters 5-10 (John J. Wild's Book)
175
Business
Undergraduate 2
03/22/2012

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Term
International Trade
Definition
The purchase, sale, or exchange of goods and services across national borders
Term
ad valorem tariff
Definition
A tariff levied as a percentage of the stated price of an imported product.
Term
specific tariff
Definition
A tariff levied as a specific fee for each unit (measured by a number, weight...etc.)
Term
compound tariff
Definition
A tariff levied on an imported product and calculated partly as a percentage of its stated price and partly as a specific fee for each unit.
Term
quota
Definition
A restriction on the amount (measured in units or weight) of a good that can enter or leave a country during a certain period of time
Term
voluntary export restraint (VER)
Definition
A quota that a nation imposes on its own exports, usually at the request by another nation
Term
tariff-quota
Definition
A lower tariff rate for a certain quantity of imports and a higher rate for quantities that exceed the quota
Term
embargo
Definition
A complete ban on trade (imports and exports) in one or more products with a particular country
Term
administrative delays
Definition
A nontariff barrier that uses regulatory controls or bureaucratic rules designed to impair the flow of imports into a country
Term
local content requirements
Definition
Laws stipulating that producers in the domestic market must supply a specified amount of a good or service
Term
currency controls
Definition
Restrictions on the convertibility of a currency into other currencies
Term
zero-sum game
Definition
Mercantilist nations' belief that the world's wealth was limited and that a nation could increase its share of the pie only at the expense of its neighbors
Term
neomercantilism/economic nationalism
Definition
The act of trying to maintain a trade surplus and expand national treasuries at the expense of other nations
Term
absolute advantage
Definition
The ability of a nation to produce a good more efficiently than any other nation
Term
mercantilism
Definition
The trade theory that nations should accumulate financial wealth, usually in the form of gold, by encouraging exports and discouraging imports
Term
trade surplus
Definition
When a nation's exports are greater than its imports
Term
trade deficit
Definition
when a nation's imports are greater than its exports
Term
comparative advantage
Definition
When a country is unable to produce a good more efficiently than other nations, but produces the good more efficiently than it does any other good
Term
Factor proportions theory
Definition
countries produce and export goods that require resources that are abundant and import goods that require resources in short supply
Term
Leontief Paradox
Definition
The paradox that exists between the factor proportions theory and the actual trade flow
Term
international product life cycle theory
Definition
Raymond Vernon's theory that a company will begin by exporting its product, but later, it will undertake foreign direct investment as the product moves through its life cycle; a country's export will eventually become its import. The life cycle will typically go through 3 stages (the new product stage, the maturing product stage, and the standardized product stage)
Term
new trade theory
Definition
The theory that states 1.) there are gains to be mode from specialization and increasing economies of scale, 2.) the companies first to market can create barriers to entry, 3.) government may play a role in assisting its home companies. This theory is in line with the comparative advantage theory, but at odds with the factor proportions theory.
Term
first-mover advantage
Definition
The economic and strategic advantage gained by being the first company to enter an industry
Term
national competitive advantage theory
Definition
Michael Porter's theory that states that a nation's competitiveness in an industry depends on the capacity of the industry to innovate and upgrade.
Term
The Porter Diamond
Definition
The four elements Porter identifies that present the varying degrees in every nation that form the basis of nation competitiveness. Consists of 1.) factor conditions 2.) demand conditions 3.) related and supporting industries and 4.) firm strategy, structure, and rivalry
Term
exporting clusters
Definition
Those that export products or make investments to compete outside the local area. A small number usually account for a major share of regional economic activity
Term
free trade
Definition
The pattern of imports and exports that occurs in the absence of trade barriers
Term
infant industry argument
Definition
a country's emerging industries need protection from international competition during their development phase until they become sufficiently competitive internationally
Term
Strategic Trade policy
Definition
the policy that companies should earn a good profit if they obtain first-mover advantages and solidify positions in their markets around the world
Term
chaebol
Definition
global conglomerates in South Korea that dwarf competitors; an example would be the government subsidies South Korean shipbuilders received to help South Korea emerge from the global economic crisis
Term
subsidy
Definition
financial assistance to domestic producers in the form of cash payments, low-interest loans, tax breaks, product price supports, or other forms
Term
loan guarantee
Definition
an option that a government will guarantee that it will repay the loan of a company if the company should default on repayment; used to encourage investment
Term
Export-Import Bank of the United States
Definition
an institution that finances the export activities of companies in the US and offers insurance on foreign accounts receivable
Term
Overseas Private Investment Corporation (OPIC)
Definition
provides insurance insurance services for investors; companies that invest abroad can insure against losses due to expropriation, currency inconvertibility, and war revolution and insurrection
Term
foreign trade zone (FTZ)
Definition
a designated geographic region through which merchandise is allowed to pass with lower customs duties and/or fewer customs procedures
Term
maquiladoras
Definition
the result of the creation of a free trade zone along the northern border of Mexico and the united states; these companies import materials/parts from the US duty free, modify them a little, and export them back to the US
Term
General Agreement on tariffs and Trade (GATT)
Definition
a treaty designed to promote free trade by reducing both tariff and nontariff barriers to international trade; formed in 1947 by 23 nations and enacted in January 1948; later revised
Term
The "Uruguay Round"
Definition
Modified GATT in several ways; 1.) Agreements on services (cross-border supply, consumption abroad, commercial presence, and presence of natural persons) 2.) agreement on intellectual property (trying to restrict international poverty), 3.) Agreement on agricultural subsidies (addressed the main issues of agricultural tariffs and non tariff barriers)
Term
normal trade relations
Definition
a requirement that WTO members extend the same favorable terms of trade to all members that they extend to any single member
Term
World Trade Organization (WTO)
Definition
one of the greatest achievements of the Uruguay Round; the international organization that currently has 153 members and 31 observers that regulates trade among nations that has three main goals: 1.) to help the free flow of trade 2.) to help negotiate further opening of markets 3.) to settle trade disputes among its members
Term
dumping
Definition
when a company exports a product at a price that is either lower than the price normally charged in its domestic market or lower than the cost of production; WTO settles disputes with dumping
Term
antidumping duty
Definition
an additional tariff placed on an imported product that a nation believes is being dumped on its market
Term
countervailing duty
Definition
an additional tariff placed on an imported product that a nation believes is receiving an unfair subsidy
Term
foreign direct investment (FDI)
Definition
the purchase of physical assets or a significant amount of the ownership (stock) of a company in another country to gain a measure of management control; two main drivers are globalization and international mergers and acquisitions
Term
portfolio investment
Definition
an investment that does not involve obtaining a degree of control in a company
Term
international product life cycle theory
Definition
the theory that states that a company will begin by eporting its product and later undertake foreign direct investment as a product moves through its life cycle
Term
Market imperfections theory
Definition
the theory that states that, when an imperfection in the market makes a transaction less efficient than it could be, a company will undertake foreign direct investment to internalize the transaction and, thereby, remove the imperfection; two market imperfections include trade barriers and specialized knowledge
Term
eclectic theory
Definition
the theory that states that firms undertake direct investment when the features of a particular location combine with ownership and internalization advantages to make a location appealing for investment; applies when location, ownership, and internalization advantages take place
Term
location advantage
Definition
the advantage of locating a particular economic activity in a specific location because of the characteristics (natural/acquired) of that location
Term
ownership advantage
Definition
refers to company ownership of some special asset, such as brand recognition, technical knowledge, or management ability
Term
internalization advantage
Definition
an advantage that arises from internalizing a business activity rather than leaving it to a relatively inefficient market
Term
market power theory
Definition
the theory that states that a firm tries to establish a dominant market presence in an industry by undertaking foreign direct investment; can be achieved through vertical integration
Term
vertical integration
Definition
the extension of company activities into stages of production that provide a firm's inputs (backward integration) or absorb its outputs (forward integration)
Term
greenfield investment
Definition
a company's decision to build a subsidiary from the ground up
Term
rationalized production
Definition
a system of production in which each of a product's components in produced where the cost of producing that component is lowest
Term
balance of payments
Definition
a national accounting system that records all payments to entities in other countries and all receipts coming into the nation
Term
current account
Definition
a national account that records transactions involving the import and export of goods and services, income receipts on assets abroad, and income payments on foreign assets inside the country; a surplus means that the country exports more than it imports, a deficit means that the country imports more than it exports
Term
capital account
Definition
a national account that records transactions involving the purchase or sale of assets
Term
sunset industries
Definition
industries that use outdated an obsolete technologies or employ low-wage workers with few skills; often encourage FDI
Term
free trade area
Definition
lowest level of economic integration that is possible between two or more countries; economic intergration whereby countries seek to remove all barriers to trade among themselves, nit each country determines its own barriers against nonmembers (ex: NAFTA)
Term
customs union
Definition
2nd lowest level of economic integration whereby countries remove all barriers to trade among themselves, but erect a common trade policy against nonmembers
Term
common market
Definition
3rd highest level of economic integration whereby countries remove all barriers to trade and the movement of labor and capital among themselves, but erect a common trade policy against nonmembers
Term
economic union
Definition
2nd highest level of economic integration whereby countries remove barriers to trade and the movement of labor and capital among members, erect a common trade policy against nonmembers, and coordinate their economic policies
Term
political union
Definition
highest level of economic integration whereby countries coordinate aspects of their economic and political systems (ex: the European Union is currently taking steps to this)
Term
trade creation
Definition
the increase in the level of trade between nations that results from regional economic integration
Term
trade diversion
Definition
the diversion of trade away from nations not belonging to a trading bloc and toward member nations; can actually result in increased trade with a less efficient producer
Term
Single European Act (SEA)
Definition
a commission formed to analyze potential for a common market by the end of 1992 whose goal was to remove remaining barriers, increase harmonization, and thereby enhance the competitiveness of European companies (went into effect in 1987)
Term
Maastricht Treaty
Definition
The treaty that further integrated Europe with three aims: 1.) called for banking in a single, common currency after Jan. 1 1991 and circulation of coins and paper currency on Jan 1 2002 2.) set up monetary and fiscal targets for countries that wished to take part in monetary union 3.) called for political union of the member nations including development of a common foreign and defense policy and common citizenship
Term
European Monetary Union
Definition
the European plan that established its own central bank and currency in January 1999
Term
Maastricht Treaty Economic Criteria
Definition
member nations must comply to the following criteria in order to partake in the euro: 1.) consumer price inflation must be below 3.2 percent and must not exceed that of the three best performing countries by more than 1.5 percent 2.) the gov debt must be 60 percent of GDP or lower 3.) the general gov deficit must be at or below 3 percent of GDP 4.) interest rates on long-term gov securities must not exceed those of the three countries with the lowest inflation rates by more than 2 percent
Term
Copenhagen Criteria
Definition
requires each of the countries in the European Union (currently 27) to 1.) have stable institution which guarantee democracy 2.)have a functioning market economy 3.)be able to assume the obligations of membership including adhere to the aims of economic, monetary, and political union, have the ability to adopt rules and regulations of the community, rulings of the European Court of Justice, and the treaties
Term
European parliament
Definition
consists of 736 members elected by popular vote within each member nation every 5 years; adopts EU law by debating and amending legislation proposed by the European Commission and exercises political supervision over all EU institutions giving it the power to supervise commissioner appointments and to censure the commission
Term
Council of the European Union
Definition
the legislative body of the EU; brings together representatives of member states at the ministerial level and the makeup changes depending on the topic of discussion; no legislation becomes law unless this body votes it into law
Term
European Commission
Definition
the executive body of the EU; it comprises commissioners appointed by each member country (larger nations get 2, smaller nations get 1); member nations appoint the president and commissioners after being approved by the Parliament and this body has the right to draft legislation,is responsible for managing and implementing policy, and monitors member nations' implementation of EU law
Term
European Court of Justice
Definition
the court of appeals of the EU that is composed of 27 judges (one from each member nation) and 8 advocates general who hold renewable six-year terms
Term
European Court of Auditors
Definition
comprises 27 members (one from each member nation) appointed for renewable six-year terms; assigned the duty of auditing the EU accounts and implementing its budget
Term
European Free Trade Association (EFTA)
Definition
a free trade agreement implementing non EU members so they can not join the EU and still receive the benefits of free trade (consists of Iceland, Liechtenstein, Norway, and Switzerland)
Term
European Economic Area (EEA)
Definition
a combination of EFTA and EU created to cooperate on matters such as the free movement of goods, persons, services, and capital among member nations
Term
North American Free Trade Agreement (NAFTA)
Definition
seeks to eliminate all tariffs and nontariff trade barriers on goods origination from within North America; the traded good, however, must meet the criteria of 1.)being wholly produced or obtained in the NAFTA region 2.) containing non-origination inputs, but meeting Annex 401 origin rules 3.)being produced in the NAFTA region wholly from origination materials 4.)being assembled goods and goods classified in the same harmonized system category as their parts that have sufficient regional content
Term
Central American Free Trade Agreement (CAFTA-DR)
Definition
a free trade agreement established in 2006 between the United States and Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and the Dominican Republic
Term
Latin American Free trade Association (LAFTA)
Definition
Formed in 1961; this agreement was the first attempt at the creation of a free trade area; led to the creation of the Andean Community and the Latin American integration Association
Term
Andean Community
Definition
a group formed in 1969 that attempts to reduce tariffs for trade among member nations, implement a common external tariff, and implement common policies in transportation and certain industries among the nations of Bolivia, Colombia, Ecuador, and Peru
Term
Latin American Integration Association (ALADI)
Definition
formed in 1980 and consisting of 11 countries; this group calls for the preferential tariff agreements (bilateral agreements) to be made between pairs of member nations that reflect the economic development of each nation...didn't really work and called for the creation of MERCOSUR
Term
Southern Common Market (MERCOSUR)
Definition
a free trade agreement consisting of Argentina, Brazil, Paraguay, Uruguay, and Venezuela that acts as a customs union and boasts a market of more than 266 million consumers and a GDP of around $2.8 trillion, Bolivia, Chile, Colombia, Ecuador, and Peru are associate members and Mexico has observer status in the bloc
Term
The Caribbean Community and Common Marktet (CARICOM)
Definition
a trading bloc formed amongst Caribbean countries in 1973 that has 15 full members, 5 associate members, and 7 observers; main problem is that member countries trade with other nations more than member nations bc they don't have the stuff the other members want
Term
Free Trade Area of the Americas (FTAA)
Definition
an ideal/daunting trading bloc that would extend from the northern tip of North America to the southern tip of South America
Term
Association of Southeast Asian Nations (ASEAN)
Definition
A trading bloc among Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos and Myanmar, and Cambodia aimed to promote economic, cultural, and social development in the region, safeguard the region's economic and political stability, and serve as a forum in which differences can be resolved fairly and peacefully
Term
Asian Pacific Economic Cooperation (APEC)
Definition
an organization formed in 1989 that now has 21 members and has an aim to strengthen the multilateral trading system and expand the global economy by simplifying and liberalizing trade and investment procedures among member nations; hopes to have free trade/investment by 2020
Term
Closer Economic Relations Agreement (CER)
Definition
A free trade agreement between Australia and New Zealand that slashed tariffs and quotas by 80 percent by 1980
Term
Gulf Cooperation Council (GCC)
Definition
a trading bloc created amongst middle eastern nations that evolved into as much of a political entity as an economic one
Term
Economic Community of West African States (ECOWAS)
Definition
the goal of this body is to create a customs union, and eventual common market, and a monetary union amongst west african states; has made little progress due to political instability, poor governance, and poor economic policies
Term
African Union (AU)
Definition
A group of 53 nations on the African continent that joined forces (as a result of the Sirte Declaration) to rid the continent of the remaining vestiges of colonialism and apartheid, promote unity and solidarity among African states, coordinate and intensify cooperation for development,safeguard the sovereignty and territorial integrity of members, and promote international cooperation within the framework of the United Nations
Term
capital market
Definition
a system that allocates financial resources in the form of debt and equity accordinf to their most efficient uses; its main purpose is to provide a mechanism through which those who wish to borrow or invest money can do so efficiently
Term
debt
Definition
consists of loans for which the borrower promises to repay the borrowed amount (the principal) plus a predeteremined rate of interest
Term
bonds
Definition
instruments that specify the timing of principal and interest payments; the holder of this entity can force the borrower into bankruptcy if the borrower fails to pay on a timely basis
Term
equity
Definition
part ownership of a company in which the equity holder participates with other part owners in the company's financial gains and losses
Term
stock
Definition
shares of ownership in a companyy's assets that give shareholders a claim on the company's future cash flows; shareholders may be rewarded with dividends
Term
liquidity
Definition
a feature of both debt and equity markets; refers to the ease with which bondholders and chaseholders may convert their investments into cash
Term
international capital market
Definition
a network of individuals, companies, financial institutions and governments that invest and borrow across national boundaries; consists of both electronic networkds and formal exchanges
Term
securitization
Definition
the unboundling and repackaging of hard-to-trade financial assets into more liquid, negotiable, and marketable financial instruments (or securities)
Term
offshore financial center
Definition
a country or territory whose financial sector features very few regulations and few, if any, taxes; fall into two categories: operational centers and booking centers
Term
international bond market
Definition
consists of all bonds sold by issuing companies, governments, or other organizations outside their own countries
Term
Eurobond
Definition
a bond issued outside the country in whose currency it is denominated (example: a bond issued by a venezuelan company, denominated in US dollars and sold in Britain)
Term
foreign bonds
Definition
bonds sold outside the borrower's country and denominated in the currency of the country in which they are sold (ex: a yen-denominated bond issued by a German company and sold in Japan)
Term
samurai bonds
Definition
foreign bonds issued in japan
Term
international equity market
Definition
consists of all stocks bought and sold outside the issuer's home country; four factors are responsible for its growth: 1.) spread of privatization 2.) economic growth in emerging markets 3.) activity of investment banks 4.) advent of cybermarkets
Term
Interbank interest rates
Definition
rates that the world's largest banks charge one another for loans; determined on the free market
Term
London interbank Offer Rate (LIBOR)
Definition
the interest rate that London banks charge other large banks that borrow Eurocurrency
Term
London Interbank Bid Rate (LIBID)
Definition
the interest rate offered by London banks to large incestors for Eurocurrency deposits
Term
foreign exchange market
Definition
a market in which currencies are bought and sold and their prices are determined
Term
exchange rate
Definition
the rate at which one currency is exchanged for another
Term
bid quote
Definition
the price at which the bank will buy currency
Term
ask quote
Definition
the price at which banks will sell currency
Term
currency hedging
Definition
the practice of insuring against potential losses that result from adverse changes in exchange rates; international companies use this for two main reasons 1.) to lessen the risk associated with international transfers of funds 2.)to protect themselves in credit ransactions in which there is a time lag between billing and receipt of payment
Term
currency arbitrage
Definition
the instantaneous purchase and sale of a currency in different markets for profit
Term
interest arbitrage
Definition
the profit-motivated purchase and sale of interest paying securities denominated in different currencies; companies use this to find better interest rates abroad than those that are available in their home countries
Term
currency speculation
Definition
the purchase or sale of a currency with the expectation that its value will change and generate a profit
Term
quoted currency
Definition
the rate over the base currency; the numerator
Term
base currency
Definition
the quoted currency over the rate; the denominator
Term
direct quote
Definition
ex: when we say it costs 84 yen to buy one dollar, the yen is the....on the yen
Term
indrect quote
Definition
ex: when we say it costs 84 yen to buy a dollar, the dollar is the....on the dollar
Term
exchange-rate risk (foreign exchange risk)
Definition
the risk of adverse changes in exchange rates
Term
cross rate
Definition
an exchange rate calculated using two other exchange rates (ex: it costs .78 euros to buy a dollar and 84 yen to buy a dollar so you can take .78/84 to get euro per yen)
Term
spot rates
Definition
exchange rates that require delivery of the traded currency within two business days
Term
spot market
Definition
the market for currency transactions at spot rates; assists in performming any one of three functions: 1.) converting income generated from sales abroad into their home-country currency 2.)converting funds into the currency of an international supplier 3.) converting funds into the currencu of a country in which they wish to invest
Term
forward rate
Definition
an exchange rate at which two parties agree to exchange currencies on a specified future date
Term
forward market
Definition
market for currency transactions at forward rates
Term
forward contract
Definition
a contract that requires the exchange of an agreed-upon amount of a currency on an agreed-upon date at a specific exchange rate
Term
derivatives
Definition
instruments whose values derive from other commodities or financial instruments; ex: currency swaps, forward contracts, options, and futures
Term
currency swap
Definition
the simultaneous purchase and sale of foreign exchange for two different dates (ex: a swedish carmaker imports parts from Turkey and pays lira for the parts when they are delivered the next day, at the same time, the company agrees to receive lira for cars sold in 90 days, so Sweden agrees to get kronor for lira on the spot market today and agrees to a forward contract for the forward rate of a lira in 90 days)
Term
currency option
Definition
an option to exhange a specific amount of a currency on a specific date at a specific rate
Term
currency futures contract
Definition
a contract requiring the exchange of a specific amount of currency on a specific date at a specific exchange rate with all conditions fixed and not adjustable
Term
vehicle currency
Definition
a currency used as an intermediary to convert funds between two other currencies (most common are the US dollar, the British pound, the euro, and the Japanese yen)
Term
interbank market
Definition
the world's largest banks exchange currency at spot and forward rates in this market
Term
clearing
Definition
the process of aggregating the currencies that one bank owes another and then carrying out that transaction
Term
securities exchanges
Definition
specialize in currency futures and options transactions; buying and selling currencies on these exchanges entails the use of securities brokers who facilitate transactions by transmitting and executing clients' orders
Term
over-the-counter market (OTC market)
Definition
a decentralized exchange encompassing a global computer network of foreign exchange traders and other market participants
Term
convertible (hard) currency
Definition
a currency traded freely in the foreign exchange market, its price is determined by the forces of supply and demand; countries that allow full convertibility are those that are in strong financial positions and have adequate reserves of foreign currencies
Term
currency restrictions
Definition
blocs on currency; have four main goals: 1.) to preserve a country's reserve of hard currencies with which to repay debts 2.) to preserve hard currencies to pay for imports and to finance trade deficits 3.) to protect a currency from speculators 4.) to keep resident individuals and businesses from investing in other nations
Term
import deposit requirements
Definition
a requirement for businesses to deposit certain percentages of their foreign exchange funds in special accounts before being granted import licenses
Term
quantity restrictions
Definition
limit the amount of foreign currency that residents can take out of the home country when traceling to other countries as tourists, students, or medical patients
Term
countertrade
Definition
the practice of selling goods or services that are paid for, in whole or in part, with other goods or services (ex: barter)
Term
devaluation
Definition
the intential lowering of the value of a currency by the nation's gov
Term
revaluation
Definition
the intentional raising of a currency's value by the nation's gov
Term
law of one price
Definition
tells us what the exchange rate should be; stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency
Term
purchasing power parity
Definition
the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries
Term
monetary policy
Definition
refers to the activities that directly affect a nation's interest rates or money supply because investors pay money to the gov's treasury to acquire the securities
Term
fiscal policy
Definition
involves using taxes and gov spending to influence the money supply indirectly
Term
Fisher effect
Definition
the principle that the nominal interest rate is the sum of the real interest rate and the expected rate of inflation over a specific period (nominal interest rate= real interest rate + inflation rate)
Term
international fisher effect
Definition
the principle that a difference in nominal interest rates supported by two countries' currencies will cause an equal, but opposite change in their spot exchange rates
Term
efficient market view
Definition
holds that prices of financial instruments reflect all publicly abailable info at any given time and that forward exchange rates are accurate forecasts of future exchange rates
Term
forward exchange rate
Definition
reflects a market's expectations about the future values of two currencies
Term
inefficient market view
Definition
holds that prices of financial instruments do not reflect all publicly available info bc the cost of searching for new info may not outweigh the benefit of discovery
Term
fundamental analysis
Definition
uses statistical models based on fundamental economic indicators to forecast exchange rates
Term
technical analysis
Definition
a technique that uses charts of past trends in currency prices and other factors to forecast exchange rates
Term
international monetary system
Definition
the collection of agreements and institutions that govern exchange rates
Term
gold standard
Definition
an international monetary sustem in which nations linked the value of their paper currencies to specific values of gold
Term
fixed exchange rate system
Definition
when the exchange rate for converting one currency into another is fixed by international governmental agreement
Term
Bretton Woods Agreement
Definition
an accord among nations to create a new international monetary system on the value of the US dollar, the new system was designed to balance the strict discipline of the gold standard with the flexibility that countries needed to deal with temporary domestic monetary difficulties
Term
fundamental disequilibrium
Definition
an economic condition in which a trade deficit causes a permanent negative shift in a country's balance of payments
Term
World Bank (officially called the International Bank for Reconstruction and development or IBRD)
Definition
an entity created by the Bretton Woods Agreement that provided funding for countries' efforts toward economic development and whose main purpose was to finance European reconstruction following the Second World War (later shifted to the needs of developing countries)
Term
International Monetary Fund (IMF)
Definition
the agency created by the Bretton Woods Agreement to regulate the fixed exchange rates and enforce the rules of the itnernational monetary system; has 185 members today
Term
special drawing right (SDR)
Definition
an IMF asset whose balue is based on a weighted "basket" of four currencies (US dollar, European Union euro, Japanese yen, British pound)
Term
Smithsonian Agreement
Definition
created to restructure and strengthen the international monetary system; three main accomplishments: 1.) to lower the value of the dollar in terms of gold to $38/oz 2.) to increase the values of other countries' currencies against the dollar, and 3.) to increase to 2.25 percent from 1 percent the band within which currencies were allowed to float
Term
Jamaica Agreement
Definition
an accord among members of the IMF to formalize the existing sustem of floating exchange rates as the new international monetary system
Term
managed float system
Definition
endorsed by the Jamaica agreement, a system in which currencies float against one another, with govs intervening to stabilize their currencies at particular target exchange rates
Term
free float system
Definition
a system in which currencies float freely against one another without govs intervening in currency markets (contrast to a managed float system)
Term
Plaza Accord
Definition
an agreement in 1985 among the g5 nations to act together in forcing down the value of the US dollar; caused traders to sell the dollar and its value fell
Term
G5 nations
Definition
France, Germany, United States, Japan, and the United Kingdom
Term
G7 nations
Definition
Germany, United States, the United Kingdom, Japan, France, Canada, and Italy
Term
Louvre Accord
Definition
a 1987 agreement among the G7 nations that affirmed that the US dollar was appropriately valued and that they would intervene in currency markets to maintain its currenct market value
Term
currency board
Definition
a monetary regime that is based on an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate
Term
European Monetary System (EMS)
Definition
established to help stabilize exchange rates, promote trade among nations, and keep inflation low through monetary discipline; phased out when the EU adopted a single currency
Term
exchange rate mechanism (ERM)
Definition
limited the fluctuations of European Union members' currencies within a specified trading range; members were required to keep their currencies within 2.25 percent of the highest and lowest-valued currencies
Term
ERM II
Definition
seeks to support nations that seek future membership in the European monetary union by linking their currencies to the euro (only Denmark participates today)
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