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International Economics: Markets, States, and Policy in the Global…

- - - - Spot Exchange Rate- an agreement between two parties to buy one currency against selling another currency at an agreed price for settlement on the spot date.
        
        Spread- A spread is the difference between the bid and the ask price of a security or asset. It can also refer to an options position established by purchasing one option and selling another option of the same class but of a different series.
        
        Market friction-is anything which prevents a trade from being executed smoothly, in layman terms. It could mean any reason which influences the process of decision-making of the investor.
    - - Derivatives- is a contract between two parties which derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards and swaps.
        
        Swap- refers to an exchange of one financial instrument for another between the parties concerned. This exchange takes place at a predetermined time, as specified in the contract.
        
        Forward- is a non-standardized contract between two parties to buy or to sell an asset at a specified future time at a price agreed upon today, making it a type of derivative instrument.
        
        Futures- is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.
        
        Options- options are contracts through which a seller gives a buyer the right, but not the obligation, to buy or sell a specified number of shares at a predetermined price within a set time period. Options are derivatives, which means their value is derived from the value of an underlying investment.
- - - - Covered interest parity (CIP)- is the closest thing to a physical law in international finance. It holds that the interest rate differential between two currencies in the cash money markets should equal the differential between the forward and spot exchange rates.
      - Expected exchange rate- is the price of a nation's currency in terms of another currency. Thus, an exchange rate has two components, the domestic currency, and a foreign currency, and can be quoted either directly or indirectly.
      - Rate of return- s the net gain or loss on an investment over a specified time period, expressed as a percentage of the investment's initial cost. Gains on investments are defined as income received plus any capital gains realized on the sale of the investment.
      - Risk- is the chance that macroeconomic conditions like exchange rates, government regulation, or political stability will affect an investment, usually one in a foreign country.
        
        Liquidity-market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity is about how big the trade-off is between the speed of the sale and the price it can be sold for.
        
        Expected rate of return- is the profit or loss an investor anticipates on an investment that has known or expected rates of return. It is calculated by multiplying potential outcomes by the chances of them occurring and then summing these results.
        
        Uncovered interest parity (UIP)- theory states the difference in interest rates between two countries will equal the relative change in currency foreign exchange rates over the same period.
        
        Expected rate of depreciation- Percent rate at which an asset is depreciated in any one of the methods for computing depreciation. It is computed by dividing the depreciable cost of the asset by the number of years in (or by the number of units of output or usage during) the asset's estimated productive or useful life..
        
        Forward premium- is a situation in which the forward or expected future price for a currency is greater than the spot price. It is an indication by the market that the current domestic exchange rate is going to increase against the other currency.
- - - - Real appreciation- is what happens when domestic inflation goes faster than currency depreciation – the process that makes a currency overvalued.
        
        Values:
        
        Overvalued- overestimate the importance of.
        
        Undervalued- ate (something) insufficiently highly; fail to appreciate. Underestimate the financial value
      - Real depreciation- refers to the purchasing power of each currency.
  - - - Nominal anchor for monetary policy - is a single variable or device which the central bank uses to pin down expectations of private agents about the nominal price level or its path or about what the central bank might do with respect to achieving that path.
        
        central bank independence- fter inflation ran amok in the 1960s and 1970s, many central bankers fought for, and won, more freedom to control interest rates and set other monetary policy decisions without political interference. Their shields began to crack after the 2008 financial crisis.
        
        Money Supply Target- the Fed uses its tools to reach a certain level of money in the economy. The equilibrium interest rate falls when the Fed expands its money supply target. An increase in the money supply aimed at increasing aggregate output (Y) is called expansionary monetary policy.
        
        Exchange rate target- A monetary policy strategy aiming for a given (usually a stable or even fixed) exchange rate against another currency or group of currencies.
        
        Inflation target plus interest rate policy- is a monetary policy regime in which a central bank has an explicit target inflation rate for the medium term and announces this inflation target to the public. An inflation-targeting central bank will raise or lower interest rates based on above-target or below-target inflation, respectively.
      - Monetary regimes- The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals. The different types of policy are also called monetary regimes, in parallel to exchange-rate regimes.
  - - - Real demand for money- is defined as the nominal amount of money demanded divided by the price level. For a given money supply the locus of income-interest rate pairs at which money demand equals money supply is known as the "LM curve".
    - - The real interest rate is the rate of interest an investor, saver or lender receives after allowing for inflation. It can be described more formally by the Fisher equation,
- - - - nominal rigidity- also known as price-stickiness or wage-stickiness, describes a situation in which the nominal price is resistant to change. Complete nominal rigidity occurs when a price is fixed in nominal terms for a relevant period of time.
      - The overshooting model, or the exchange rate overshooting hypothesis, first developed by economist Rudi Dornbusch, is a theoretical explanation for high levels of exchange rate volatility.
      - trilemma- a situation in which a difficult choice has to be made between three alternatives, especially when these are equally undesirable.
        "a wise decision on the trilemma we face"
- - - - The trade balance, also known as the balance of trade (BOT), is the calculation of a country's exports minus its imports.
      - Net factor income from abroad is the difference between the factor income earned from abroad by normal residents of a country (say, India) and the factor income earned by non-residents (foreigners) in the domestic territory of that country (i.e., India).
      - A unilateral transfer is a one-way transfer of money, goods, or services from one country to another. The prefix "uni" means one. In a unilateral transfer, one party is making a transfer to the other party. They are not receiving anything back from the other party.
      - Gross national disposable income may be derived from gross national income by adding all current transfers in cash or in kind receivable by resident institutional units from non-resident units and subtracting all current transfers in cash or in kind payable by resident institutional units to non-resident units
      - In economics, a country's current account is one of the two components of its balance of payments, the other being the capital account. The current account consists of the balance of trade, net primary income or factor income and net cash transfers, that have taken place over a given period of time.
      - A financial account is a component of a country's balance of payments that covers claims on or liabilities to nonresidents, specifically with regard to financial assets.
      - capital account, in international economics, is the part of the balance of payments which records all transactions made between entities in one country with entities in the rest of the world. These transactions consist of imports and exports of goods, services and capital, as well as transfer payments such as foreign aid and remittances.
      - National Income Identity: GDP = consumption + investment + government spending + (exports − imports).
      - n economics, a country's national savings is the sum of private and public savings. It is generally equal to a nation's income minus consumption and government purchases.
      - In economics, saving-investment balance or I-S balance is a balance of national savings and national investment, which is equal to current account. This relationship is obtained from the national income identity.
      - private saving- In economics, a country's national savings is the sum of private and public savings. It is generally equal to a nation's income minus consumption and government purchases.
      - Public savings is synonymous with government savings and is defined as government revenue less government spending, or, taxes minus government spending and is often written as (T-G)
      - Private savings is disposable income less consumption, or, income minus taxes minus consumption, often written as (Y-T)-C
      - External Asset Manager (EAM) Back to glossary overview. An external asset manager (EAM) is a wealth manager which works “outside” of a bank. In other words, a stand-alone company which is “independent” of banks.
      - External Liabilities Definition: The total amount of debts payable by a business to the outsiders (other than the owners) are called external liabilities e.g., creditors, bills payable etc.
      - The Balance Of Payments Identity. ‡ Balance of payment identity equation indicates that country can run a balance of payments surplus or deficit by increasing or decreasing its official reserves. BCA+BKA+BRA=0 Where, BCA=Balance on the Current Account. BKA= Balance on the Capital Account.
      - The balance of payments (BOP) is the method countries use to monitor all international monetary transactions at a specific period. ... Thus, the BOP can tell the observer if a country has a deficit or a surplus and from which part of the economy the discrepancies are stemming
      - The balance of payments (BOP) is the place where countries record their monetary transactions with the rest of the world. Transactions are either marked as a credit or a debit. ... And in the financial account, assets pertaining to international monetary flows of, for example, business or portfolio investments, are noted.
      - Net lending is also a term that describes the amount of extra funds that a sector has available to provide for either direct and indirect lending purposes to other similar counterparts. Net lending is used as a balancing item in the capital account.
      - A net borrower is an entity that borrows more than it saves or lends out. A net borrower could be an individual or company, but it usually refers to a government that finances a fiscal deficit or a country that finances a current account deficit.
      - The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries.
      - creditor nation has positive net investment after recording all of the financial transactions completed between it and the rest of the world.
      - Debtor nation is a nation with a cumulative balance of payments deficit. A debtor nation has a negative net investment after recording all of the financial transactions it has completed worldwide
- - - - The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.
        
        A perpetual subordinated loan is a type of junior debt that continues indefinitely and has no maturity date. Perpetual subordinated loans pay creditors a steady stream of interest forever.
        
        sudden stop- n capital flows is defined as a sudden slowdown in private capital inflows into emerging market economies, and a corresponding sharp reversal from large current account deficits into smaller deficits or small surpluses.
        
        In economics and finance, present value, also known as present discounted value, is the value of an expected income stream determined as of the date of valuation.
        
        Precautionary saving is saving (non-expenditure of a portion of income) that occurs in response to uncertainty regarding future income. The precautionary motive to delay consumption and save in the current period rises due to the lack of completeness of insurance markets.
        
        Precautionary saving is saving (non-expenditure of a portion of income) that occurs in response to uncertainty regarding future income. The precautionary motive to delay consumption and save in the current period rises due to the lack of completeness of insurance markets.
        
        A sovereign wealth fund (SWF) or sovereign investment fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds. Sovereign wealth funds invest globally.
        
        Foreign-exchange reserves is money or other assets held by a central bank or other monetary authority so that it can pay its liabilities if needed, such as the currency issued by the central bank, as well as the various bank reserves deposited with the central bank by the government and other financial institutions.
        
        production function gives the technological relation between quantities of physical inputs and quantities of output of goods.
        
        Then the marginal product of capital (MPK) and marginal product of labor (MPL) are given by: In the "law" of diminishing marginal returns, the marginal product initially increases when more of an input (say labor) is employed, keeping the other input (say capital) constant.
        
        Productivity describes various measures of the efficiency of production. A productivity measure is expressed as the ratio of output to inputs used in a production process, i.e. output per unit of input. Productivity is a crucial factor in production performance of firms and nations.
        
        The idea of convergence in economics (also sometimes known as the catch-up effect) is the hypothesis that poorer economies' per capita incomes will tend to grow at faster rates than richer economies. As a result, all economies should eventually converge in terms of per capita income.
        
        divergence generally means moving apart. In the world of finance and trading, convergence and divergence are terms used to describe the directional relationship of two trends, prices or indicators.
        
        Technical efficiency is the effectiveness with which a given set of inputs is used to produce an output. A firm is said to be technically efficient if a firm is producing the maximum output from the minimum quantity of inputs, such as labour, capital, and technology.
        
        Technical efficiency refers to how productive a business can be given the fewest inputs, or resources, necessary to do the job. An input is any quantifiable resource necessary to create an output, or the product. Labor is a form of input, as are materials and equipment.
        
        Foreign assistance is aid given by the United States to other countries to support global peace, security, and development efforts, and provide humanitarian relief during times of crisis. It is a strategic, economic, and moral imperative for the United States and vital to U.S. national security.
        
        The World Bank is an international financial institution that provides loans to countries of the world for capital projects. It comprises two institutions: the International Bank for Reconstruction and Development, and the International Development Association. The World Bank is a component of the World Bank Group.
        
        diversification is the process of allocating capital in a way that reduces the exposure to any one particular asset or risk. A common path towards diversification is to reduce risk or volatility by investing in a variety of assets.
        
        Home bias is the tendency for investors to invest in a large number of domestic equities, despite the purported benefits of diversifying into foreign equities.
- - - - marginal propensity to consume- is a metric that quantifies induced consumption, the concept that the increase in personal consumer spending occurs with an increase in disposable income. The proportion of disposable income which individuals spend on consumption is known as propensity to consume.
        
        expenditure is an aggregate transaction amount on a country's national income accounts representing government expenditure on goods and services that are used for the direct satisfaction of individual needs or collective needs of members of the community.
        
        a transfer payment (or government transfer or simply transfer) is a redistribution of income and wealth (payment) made without goods or services being received in return. These payments are considered to be non-exhaustive because they do not directly absorb resources or create output.
        
        mandatory financial charge or some other type of levy imposed upon a taxpayer by a governmental organization in order to fund various public expenditures. A failure to pay, along with evasion of or resistance to taxation, is punishable by law.
        
        Expenditure switching is a macroeconomic policy that affects the composition of a country's expenditure on foreign and domestic goods. More specifically it is a policy to balance a country's current account by altering the composition of expenditures on foreign and domestic goods
        
        This equation is called the Fisher equation. For example, if your nominal interest rate is 5 percent and the average inflation range is 1.35 percent for year one, subtract 1.35 percent from 5 percent to get 3.65 percent.
        
        The real effective exchange rate (REER) is the weighted average of a country's currency in relation to an index or basket of other major currencies, adjusted for the effects of inflation. The weights are determined by comparing the relative trade balance of a country's currency against each country within the index.
        
        pass-through: the act, action, or process of offsetting increased costs by raising prices.
        
        J curve' is the time path of a country's trade balance following a devaluation or depreciation of its currency, under a certain set of assumptions.A J curve is any of a variety of J-shaped diagrams where a curve initially falls, then steeply rises above the starting point.
        
        Keynesian cross diagram demonstrates the relationship between aggregate demand and real GDP. In the Keynesian cross diagram, a desired total spending curve is drawn as a rising line since consumers will have a larger demand with a rise in disposable income, which increases with total national output.
        
        goods market equilibrium condition- The goods market is in equilibrium when aggregate demand is equal to income. The aggregate demand is determined by consumption demand and investment demand.
        
        The investment/saving (IS) curve is a variation of the income-expenditure model incorporating market interest rates (demand), while the liquidity preference/money supply equilibrium (LM) curve represents the amount of money available for investing (supply).
        
        monetary policy- is the process by which the monetary authority of a country, typically the central bank or currency board, controls either the cost of very short-term borrowing or the monetary base, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.
        
        fiscal policy is the use of government revenue collection and expenditure to influence the economy. According to Keynesian economics, when the government changes the levels of taxation and government spending, it influences aggregate demand and the level of economic activity.
        
        stabilization policy is a package or set of measures introduced to stabilize a financial system or economy. The term can refer to policies in two distinct sets of circumstances: business cycle stabilization and economic crisis stabilization. In either case, it is a form of discretionary policy.
- - - - Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration.
        
        symmetry-integration diagram features two regions, divided by a 45-degree line with slope of -1. This line can shift to the left or to the right ...
        
        Fear of floating refers to situations where a country prefers a fixed exchange rate to a floating exchange rate regime. ... Since then, this widespread phenomenon of reluctance to adjust exchange rates in emerging markets is usually called "fear of floating".
        
        asymmetric shock- When an economic event affects one economy or part of an economy more than another.
        
        fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime in which a currency's value is fixed against either the value of another single currency to a basket of other currencies or to another measure of value, such as gold.
        
        A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The reserve currency is commonly used in international transactions, international investments and all aspects of the global economy.
        
        devaluation-the reduction in the official value of a currency in relation to other currencies.
        
        cooperative arrangement may refer to another document containing the specific method of determining costs or other financial arrangement details, providing that such referenced documents are provided to the court or law enforcement official working under the cooperative arrangement.
        
        Revaluation is a change in a price of a good or product, or especially of a currency, in which case it is specifically an official rise of the value of the currency in relation to a foreign currency in a fixed exchange rate system.
        
        beggar-thy-neighbour policy is an economic policy through which one country attempts to remedy its economic problems by means that tend to worsen the economic problems of other countries.