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credit risk the probability that part or all of the interest or principal of a loan will not be repaid

debit transaction

a balance of

payments transaction that leads payment to foreigners

to a


an official change in a

c u r r e n c y s p a r v a l u e , w h i c h c a u s e s t h e c u r r e n c y s e x c h a n g e v a l u e t o d e p r e c i a t e

credit transaction

a balance of

payments transaction that results in a

receipt of a payment from foreigners

cross exchange rate

the resulting rate

derived when the exchange rate between any two currencies can be derived from the rates of these two currencies in terms of a third currency

currency board

a monetary authority

that issues notes and coins convertible

into a foreign anchor currency at a fixed exchange rate

currency crashes financial crises that often end in currency devaluations or accelerated depreciations

currency crisis

a situation in which a

weak currency experiences heavy selling pressure, also called a speculative attack

currency risk investment risk associ- ated with currency depreciations and appreciations as well as exchange controls

currency swap the conversion of one currency to another currency at one point in time, with an agreement to reconvert it to the original currency at a specified time in the future

current account

the net value of

debt/equity swap

when a commercial

bank sells its loans at a discount to the debtor-nations government for local currency, which it then uses to finance

an equity investment in the debtor nation

debt forgiveness

any arrangement

that reduces the value of contractual

obligations of the debtor nation

debt reduction

any voluntary scheme

that lessens the burden on the debtor nation to service its external debt

debt service/export ratio

the sched-

uled interest and principal payments as

a percentage of export earnings

demand for international reserves the requirement for international reserves; depends on two related factors: (1) the monetary value of international transactions and (2) the disequilibrium that can arise in balance-of-payments positions; the requirements for international reserves include assets such as key foreign currencies, special drawing rights, and drawing rights at the International Monetary Fund

developing nations

most nations in

Africa, Asia, Latin America, and the Middle East

direct controls

consist of govern-

ment restrictions on the market economy

direct currency quote

one in which

the domestic currency

is the base cur-

rency and the foreign currency quote currency

is the

dirty float a condition under a man- aged floating system when free-market forces of supply and demand are not allowed to achieve their equilibrating role; countries may manage their exchange rates to improve the com- petitiveness of their producers


the valuation of a currency

when it is worth less in the forward market than in the spot market

distribution of income

the distribu-

tion of

wages earned across a country


occurs when residents

of a foreign country use the U.S. dollar alongside or instead of their domestic


monetary flows associated

with trans-


in goods

and services, invest-

ment income, employee compensation,

and unilateral transfers

customs union

an agreement among

two or more trading partners to remove all tariff and nontariff trade barriers among themselves; each member nation imposes identical trade restric-

demand-pull inflation

when a

nations capacity to produce has been achieved, and further increases in aggregate demand pull prices upward

demonetization of gold

occurred in

the 1970s when the official price of gold was abolished as the unit of account for

the international monetary system

domestic content requirements requirements that stipulate the mini- mum percentage of a products total value that must be produced domesti- cally if the product is to qualify for zero tariff rates

domestic production subsidy sidy that is sometimes granted

a sub- to pro-


of import-competing


tions against nonparticipants


(as applies to currency

domestic revenue effect

the amount

customs valuation

the process of

determining product

the value

of an imported

markets) when, over time, it takes more units of a nations currency to purchase

one unit of a foreign currency


tariff revenue shifted from domestic

consumers to the tariff-levying government


destabilizing speculation


tion that occurs when speculators

double-entry accounting

a system of

accounting in which each credit entry is

deadweight loss

the net loss of eco-

nomic benefits

to a domestic economy

due the protective effect and the con- sumption effect of a trade barrier

expect a current trend in exchange rates

to continue and their transactions accelerate the rise or fall of the target currencys value

balanced by a debit entry, and vice versa, so that the recording of any transaction leads to two offsetting entries

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