Global Economics Definitions

Exports: Goods and services produced domestically and sold to other countries.

Imports: Goods and services produced in other countries and purchased domestically.

Free Trade: International trade that takes place without government restrictions such as tariffs and quotas.

Specialization: When a country focuses its resources on producing the goods and services it can produce most efficiently.

Economies of Scale: The fall in the average cost of production per unit as the scale of output increases.

Absolute Advantage: The ability of a country to produce more of a good or service than another country using the same amount of resources.

Comparative Advantage: The ability of a country to produce a good or service at a lower opportunity cost than another country.

Protectionism: The use of government policies to shield domestic producers from foreign competition.

Tariff: A tax placed on imported goods and services.

Quota: A limit on the quantity of a good that can be imported in a given time period.

Subsidies (to domestic producers): Financial assistance from the government to domestic firms that lowers their costs, helping them compete against imports.

Export Subsidies: Financial assistance from the government to firms that sell goods abroad, lowering their costs so they can sell at lower prices in world markets.

Administrative Barriers: Bureaucratic rules and regulations, such as licenses and product standards, that make importing goods more difficult and costly.

Embargo: A complete ban on trade with a particular country or of a particular good or service.

Welfare Loss: The reduction in social surplus caused by an inefficient allocation of resources, such as when a tariff or quota distorts the market.

Infant Industries: New domestic industries that have not yet developed the scale or experience to compete with established foreign firms.

Dumping: The sale of goods in a foreign market at a price below their cost of production or below the price charged in the home market.

Trade War: A situation where countries repeatedly raise trade barriers against each other in response to retaliation, harming trade for all sides.

Economic Integration: The process of countries becoming more economically interdependent and unified with each other.

Bilateral Trade Agreement: An agreement between two countries to reduce barriers to trade with each other.

Regional Trade Agreement: An agreement between countries in the same geographic region to reduce barriers to trade with each other.

Multilateral Trade Agreement: An agreement between many countries to reduce barriers to trade, usually negotiated and overseen through the World Trade Organization.

Trading Bloc: A group of countries that reduce or remove trade barriers between themselves.

Free Trade Area: A trading bloc where members trade freely with each other, but each member sets its own trade barriers on non-members.

Customs Union: A free trade area where members also impose a common external tariff on non-members.

Common Market: A customs union where factors of production, such as labor and capital, can also move freely between members.

Monetary Union: A common market where members also share a common currency and a common monetary policy.

Trade Creation: When the removal of trade barriers between members shifts purchases from domestic firms to more efficient producers in other member countries, increasing trade.

Trade Diversion: When a trading bloc shifts trade away from more efficient non-member countries towards less efficient member countries, because of the removal of trade barriers between members.

World Trade Organization: An international organization that sets and enforces the rules of global trade, promotes trade liberalization, and settles trade disputes between members.

Exchange Rate: The price of one currency in terms of another currency.

Foreign Exchange Market: The market where currencies are bought and sold.

Floating Exchange Rate: An exchange rate determined by the demand for and supply of a currency in the foreign exchange market, without government intervention.

Appreciation: An increase in the value of a currency relative to another currency in a floating exchange rate system.

Depreciation: A decrease in the value of a currency relative to another currency in a floating exchange rate system.

Fixed Exchange Rate: An exchange rate set at a specific value against another currency by the central bank, which buys and sells currencies to maintain it.

Managed Exchange Rate: An exchange rate that is allowed to float within a target range, with the central bank intervening to keep it inside that range.

Central Bank Intervention: When a central bank buys or sells currencies in order to influence the exchange rate.

Speculation: The buying or selling of a currency in order to profit from expected changes in its value.

Imported Inflation: A rise in domestic prices caused by an increase in the price of imported goods, such as when a currency depreciates.

Balance of Payments: A record of all financial transactions between a country and the rest of the world over a given period of time.

Credit Items: Payments received by a country from foreign consumers, firms, or governments, bringing money into the economy.

Debit Items: Payments made by a country to foreign consumers, firms, or governments, taking money out of the economy.

Current Account: The part of the balance of payments that records trade in goods and services, income flows, and current transfers.

Current Transfers: One-way payments between countries where nothing is received in return, such as foreign aid and remittances.

Capital Account: The part of the balance of payments that records capital transfers, such as debt forgiveness, and the sale or purchase of non-produced assets, such as land and intellectual property rights.

Financial Account: The part of the balance of payments that records flows of investment and lending between countries.

Foreign Direct Investment (FDI): Investment by a firm in real assets in another country, such as building a factory or buying a controlling stake in a foreign company.

Marshall-Lerner Condition: States that a devaluation or depreciation will improve the current account balance only if the sum of the price elasticities of demand for exports and imports is greater than 1.

J-Curve Effect: The tendency for a current account deficit to worsen before it improves after a depreciation or devaluation, because demand for exports and imports is inelastic in the short run.

Expenditure Switching: Policy that encourages households and firms to switch their consumption of imported goods and services over to domestic alternatives. 

Sustainable Development: Development that meets the needs of the present without reducing the ability of future generations to meet their own needs.

Social Sustainability: When an economy develops social systems that allow both its current and future populations to live better lives.

Economic Sustainability: When an economy allocates its scarce resources so that neither its current nor its future population is disadvantaged.

Environmental Sustainability: When an economy uses natural resources at a rate that does not disadvantage its current or future population.

Sustainable Development Goals (SDGs): The 17 goals set by the United Nations in 2015, to be achieved by 2030, aimed at ending poverty, protecting the planet, and ensuring prosperity for all.

Economic Development: The improvement in the standard of living and wellbeing of people in a country, including income, health, education, and freedom.

Composite Indicators: Measures that combine several single indicators into one value to assess the level of economic development.

Human Development Index (HDI): A composite indicator for measuring economic development with values from 0 to 1 that combines life expectancy, years of schooling, and GNI per capita at purchasing power parity.

Poverty Cycle: A self-reinforcing loop where low incomes lead to low savings, investment and education, which keeps incomes low over time.

Infrastructure: Public goods, typically provided by the government, that facilitate the production and consumption of goods and services.

Primary Sector Dependence: When an economy relies heavily on the production and export of raw materials, leaving it exposed to volatile prices and low value added.

Informal Economy: Economic activity that is not registered, taxed, or regulated by the government.

Import Substitution: A strategy that reduces reliance on imports by producing goods domestically, often protected by tariffs and subsidies.

Export Promotion: A strategy that grows the economy by encouraging exports, using measures such as export subsidies and a competitive exchange rate.

Social Enterprise: A business that trades to achieve social or environmental goals, reinvesting most of its profits into that purpose instead of paying owners.

Trade Liberalization: The reduction or removal of trade barriers such as tariffs and quotas.

Privatization: The transfer of ownership of state-owned firms to the private sector.

Deregulation: The removal or reduction of government rules that restrict how firms operate.

Foreign Aid: The transfer of money, goods, or expertise from one country or organization to another to support development.

Official Development Assistance (ODA): Government aid given to developing countries to promote their economic development and welfare.

Debt Relief: The cancellation or reduction of the debt a country owes to foreign lenders.

World Bank: An international organization that provides loans and technical support to developing countries for development projects and poverty reduction.

International Monetary Fund (IMF): An international organization that promotes global financial stability and lends to countries with balance of payments problems, often with policy conditions attached.

Microfinance: The provision of small loans and other financial services to low-income households who cannot access traditional banking.