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amounts and in a specific geographic location

values of their currencies in terms of gold or, alternatively, the gold content of the U.S. dollar

to produce the identical product in the host country


gold standard

a monetary system in


gains from international trade


trading partners simultaneously enjoy due to specialization and the division of


General Agreement on Tariffs and Trade (GATT) signed in 1947, GATT was crafted as an agreement

among contracting parties, the member nations, to decrease trade barriers and to place all nations on an equal footing

in trading relations; GATT was never intended to become an organization; instead it was a set of bilateral agree- ments among countries around the world to reduce trade barriers

General Arrangements to Borrow initiated in 1962, 10 leading industrial nations, called the Group of Ten, orig- inally agreed to lend the fund up to a maximum of $6 billion; in 1964, the Group of Ten expanded when Swit- zerland joined the group; by serving as an intermediary and guarantor, the fund could use these reserves to offer compensatory financial assistance to one or more of the participating nations

w h i c h e a c h m e m b e r n a t i o n s m o n e supply consisted of gold or paper money backed by gold, where each member nation defined the official price of gold in terms of its national currency and was prepared to buy and sell gold at that price; free import and export of gold was permitted by mem- y

ber nations goods and services balance

the result

of combining the balance of trade in services and the merchandise trade balance

Group of Five (G-5)

five industrial

nationsthe United

States, Japan,


the United Kingdom, and

Francethat sent officials

to a world

trade meeting at New Yorks Plaza Hotel in 1985 to try to correct the overvalued dollar and the twin U.S. deficits

Group of Seven (G-7)

seven indus-

trial nationsthe United states, Canada, Japan, the United Kingdom,

Germany, France, and Italythat

launched coordinated purchases of the

euro to boost its value

IMF drawings

the transactions by

which the fund makes foreign-currency

loans available

importance of being unimportant when one trading nation is significantly larger than the other, the larger nation attains fewer gains from trade while the smaller nation attains most of the gains from trade

import license

used to administer an

import quota; a license specifying the volume of imports allowed

import quota

a physical restriction

on the quantity of goods

that may be


during a specific

time period

import substitution a policy that involves extensive use of trade barriers to protect domestic industries from import competition

impossible trinity

a restriction


a country can maintain only

two of

the following

three policies

free capital flows, a fixed exchange rate,

and an independent monetary policy

income adjustment mechanism


generalized system of preferences (GSP) a system in which industrial- ized nations attempt to promote eco- nomic development in developing countries through lower tariffs and increased trade, rather than foreign aid


the process of greater

interdependence among countries and

their citizens

guest workers

foreign workers, when

needed, allowed to immigrate on a temporary basis


HeckscherOhlin theory


in relative factor endowments among nations that underlie the basis for trade

1930s, John Maynard Keynes formu- lated this theory that focuses on auto-

matic changes in income to bring about adjustment in a nations current account


opportunity costs


each additional unit of one good pro- duced requires the sacrifice of increas-

ing amounts of

the other good

increasing returns to scale


global quota

a technique permitting

a specified number of goods to be imported each year, but does not specify where the product is shipped from or who is permitted to import


the process of avoiding or

covering a foreign-exchange risk

home market effect

countries will

specialize in products for which there is

large domestic demand


all inputs by the same pro-

portion results in a total output to increase by a greater proportion

indifference curve

a curve depicting

the various

combinations of

two com-

gold exchange standard a system of fixed exchange rates, with gold serving as the primary reserve asset; member nations officially agreed to state the par

horizontal diversification

in the case

of an MNE, occurs when a parent company producing a commodity in the source country sets up a subsidiary

modities that are equally preferred the eyes of the consumer


indirect currency quote

a currency

pair is one in which foreign currency is

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