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1. Absolute PPP: PPP holds when price levels in two countries are equal when expressed in a common
currency
2. Appreciation: if one currency buys more of another currency. A currency’s value has risen,
appreciated, strengthened
3. Asymmetric shock: When an economic event affects one economy or part of an economy more than
another. A fixed exchange rate can lead to costs when one country experiences a country-specific,
asymmetric shock that is not shared by the other country. Can lead to a conflict between the policy
goals of the two countries
4. Balance of payments accounts: A list, or accounting, of all of a country's international transactions for a
given time period, usually one year. Payments into the country (receipts) are entered as positive
numbers, called credits; payments out of the country (payments) are entered as negative numbers
called debits. A single number summarizing all of a country's international transactions: the balance of
payments surplus.
5. Beggar-thy-neighbor policy: For a country to use a policy for its own benefit that harms other
countries; noncooperative. Examples are optimal tariffs and, in a recession, tariffs and/or devaluation
to create employment.
6. Capital account (KA): the value of capital transfers from the rest of the world minus those to the rest of
the world. Covers two remaining areas of asset movement of minor quantitative significance. 1. The
acquisition and disposal of nonfinancial, nonproduced assets (e.g., patents, copyrights, trademarks,
etc.). 2. Capital transfers (i.e., gifts of assets), an example of which is the forgiveness of debts. KA = KAIN
− KAOUT
7. Consumption: The simplest model of aggregate private consumption relates household consumption
C to disposable income Yd. The Keynesian consumption function relates private consumption, C, to
disposable income, Y − T. The slope of the function is the marginal propensity to consume, MPC.
8. Crowding out: The effect that an increase in one kind of spending can have in reducing another kind of
spending. Most frequently mentioned is the effect of an increase in government spending on
investment, which falls when an increase in the budget deficit drives up the interest rate.
9. Currency (or monetary) union: under this there is some form of transnational structure such as a
single central bank or monetary authority that is accountable to the member nations. An example is
the Eurozone.
10. Currency board: An extreme form of pegged exchange rate in which management of both the exchange
rate and the money supply are taken away from the central bank and given to an agency with
instructions to back every unit of circulating domestic currency with foreign currency. Operates
similarly to the gold standard. a type of fixed regime that has special legal and procedural rules
designed to make the peg “harder”—that is, more durable.
11. Current account (CA): A country's international transactions arising from current flows, as opposed to
changes in stocks which are part of the financial account (formerly the capital account). Includes trade
in goods and services (including payments of interest and dividends on capital) plus inflows and
outflows of transfers. which measures external imbalances
in goods, services, factor services, and
unilateral transfers.
the current account identity: S = I + CA. The current account equals investment
minus saving. Movements in investment or saving, all else equal, feed directly into the current account.
12. Depreciation: if a currency buys less of another currency. It’s value has fallen, depreciated, or
weakened.
13. Devaluation: 1. Depreciation. 2. A fall in the value of a currency that has been pegged, either because of
an announced reduction in the par value of the currency with the peg continuing, or because the
pegged rate is abandoned and the resulting floating rate declines. 3. A fall in the value of a currency in
terms of gold or silver, meaningful only under some form of gold standard or silver standard.
14. Disposable income: Income minus taxes. More accurately, income minus direct taxes plus transfer
payments; that is, the income available to be spent (including on imports) and saved.
15. Dollarization: 1. The official adoption by a country other than the United States of the U.S. dollar as its
local currency. Or more generally the adoption by a country of another country's currency rather than
a.
29. Gross domestic product (GDP): is the value of all (intermediate and final) goods and services produced
as output by firms, minus the value of all goods and services purchased as inputs by firms. C+I+G+(EX-
IM).
30. Gross national disposable income (GNDI): In an open economy, the true level of disposable income is
best measured by gross national disposable income or Y = GNDI. GNDI need not equal GNI because net
unilateral transfers (NUT) to foreigners may be positive, due to foreign aid and other nonmarket gifts
31. Gross national expenditure (GNE): is the total expenditure on final goods and services by home entities
in any given period. GNE is made up of three parts: personal consumption C, investment I, and
government spending G. measures an economy’s total spending on final goods. It is the sum of
consumption, investment, and government consumption. GNE=C+I+G
32. Gross national income (GNI): measures the total payments to an economy’s domestic factors. Gross
national income equals gross domestic product (GDP) plus net factor income from abroad (NFIA)
33. Inflation: Increase in the overall price level of an economy, usually as measured by the CPI or by the
implicit price deflator.
34. Keynesian cross: depicts the goods market equilibrium. Equilibrium is where demand, D, equals real
output or income, Y.
35. Law of one price (LOOP): states that in the absence of trade frictions (such as transport costs and
tariffs), and under conditions of free competition and price flexibility (where no individual seller or
buyer has the power to manipulate prices and prices can freely adjust), identical goods sold in
different locations must sell for the same price when prices are expressed in a common currency
36. Marginal propensity to consume (MPC): The slope of the consumption function is called the marginal
propensity to consume (MPC). It tells us how much of every extra $1 of disposable income received by
households is spent on consumption
37. Monetary approach to exchange rates: combining the monetary theory of price level determination
with the purchasing power theory of exchange rate determination. This is a long-run theory.
38. Monetary policy: policy actions implemented through changes in the money supply. A temporary
monetary expansion under floating exchange rates is effective in combating economic downturns by
boosting output. It raises output at home, lowers the interest rate, and causes a depreciation of the
exchange rate. What happens to the trade balance cannot be predicted with certainty. Monetary policy
under fixed exchange rates is impossible to undertake. Fixing the exchange rate means giving up
monetary policy autonomy. Countries cannot simultaneously allow capital mobility, maintain fixed
exchange rates, and pursue an autonomous monetary policy.
39. National income identity: Y=C+I+G+CA. It tells us that the current account represents the difference
between national income Y (or GNDI) and gross national expenditure GNE
40. Net factor income from abroad (NFIA): The value of factor service exports minus factor service
imports is known as net factor income from abroad (NFIA), and thus GDP plus NFIA equal GNI, the
total income earned by domestic entities from all sources, domestic and foreign.
41. Net unilateral transfers (NUT): equals the value of unilateral transfers the country receives from the
rest of the world minus those it gives to the rest of the world. NUT = UTIN − UTOUT . Adding net
unilateral transfers to gross national income, gives a full measure of national income in an open
economy, known as gross national disposable income (GNDI),
42. Nominal rigidity: sticky prices. A predetermined, fixed variable. The inability of a nominal variable,
such as a price or a wage expressed in money terms (as opposed to real), to change quickly so as to
achieve equilibrium. Nominal rigidities tend to be needed in Keynesian macroeconomic models.
43. Overvalued: if the real exchange rate qus/eur is above 1 by x%, then foreign goods are relatively
