Abandonment value: The value of a project if the project's assets were sold externally; or alternatively, its opportunity value if the assets were employed elsewhere in the firm.
ABC method of inventory control: Method that controls expensive inventory items more closely than less expensive items.
Absolute advantage: The ability to produce a good at lower cost, in terms of labor, than another country. An absolute advantage exists when a nation or other economic region is able to produce a good or service more efficiently than a second nation or region.
Absolute-priority rule: The rule in bankruptcy or reorganization that claims of a set of claim holders must be paid, or settled, in full before the next, junior, set of claim holders may be paid anything.
Absorption and balance of trade: Total demand for goods and services by all residents (consumers, producers, and government) of a country (as opposed to total demand for that country's output). The balance of trade is equal to income minus absorption.
Accelerated depreciation: Methods of depreciation that write off the cost of a capital asset faster than under straight-line depreciation.
Acceptance: A time draft that is accepted by the drawee. Accepting a draft means writing accepted across its face, followed by an authorized person’s signature and the date. The party accepting a draft incurs the obligation to pay it at maturity.
Accession: The process of adding a country to an international agreement, such as the GATT (General Agreement on Tariffs and Trade), WTO (World Trade Organization), EU (European Communities), or NAFTA (North American Free Trade Agreement).
Accommodating transaction: In the balance of payments, a transaction that is a result of actions taken officially to manage international payments; in contrast with autonomous transaction. Thus official reserve transactions are accommodating, as may be short-term capital flows that respond to expectations of intervention.
Accounting (translation) exposure: Changes in a corporation’s financial statements as a result of changes in currency values. The change in the value of a firm’s foreign-currency-denominated accounts due to change in exchange rates.
Accounts receivable: Amounts of money owed to a firm by customers who have bought goods or services on credit. A current asset, the accounts receivable account is also called receivables.
Accrued expenses: Amounts owed but not yet paid for wages, taxes, interest, and dividends. The accrued expenses account is a short-term liability.
Acid-test (quick) ratio: Current assets less inventories divided by current liabilities. It shows a firm's ability to meet current liabilities with its most liquid (quick) assets.
Acquisition of assets: In an acquisition of assets, one firm acquires the assets of another company. None of the liabilities supporting that asset are transferred to the purchaser.
Acquisition of stock: In an acquisition of stock, one firm buys an equity interest in another.
Acquisition premium: In a merger or acquisition, the difference between the purchase price and the pre-acquisition value of the target firm.
Act of State Doctrine: This doctrine says that a nation is sovereign within its own borders and its domestic actions may not be questioned in the courts of another nation.
Active fund management: An investment approach that actively shifts funds either between asset classes (i.e. asset allocation) or between individual securities (i.e. security selection).
Active income: In the U.S. tax code, income from an active business as opposed to passive investment income.
Activity based cost (i.e. ABC) : An accounting method that allocates costs to specific products based on breakdowns of cost drivers.
Activity ratios: Ratios that measure how effectively the firm is using its assets.
Ad valorem tariff: A tariff assessed as a percentage of the value of an import.
Additional paid-in capital: Funds received by a company in a sale of common stock that are in excess of the par or stated value of the stock.
Adjustable peg: An exchange rate that is pegged, but for which it is understood that the par value will be changed occasionally. This system can be subject to extreme speculative attack and financial crisis, since speculators may easily anticipate these changes.
Adjusted beta: An estimate of a security's future beta that involves modifying the security's historical (measured) beta owing to the assumption that the security's beta has a tendency to move over time toward the average beta for the market or the company's industry.
Adjusted for inflation: Corrected for price changes to yield an equivalent in terms of goods and services. The adjustment divides nominal amounts for different years by price indices for those years -- e.g. the CPI (Consumer price index) or the implicit price deflator -- and multiplies by 100. This converts to real values, i.e. valued at the prices of the base year for the price index.
Adjusted present value (APV): The sum of the discounted value of a project's operating cash flows (assuming equity financing) plus the value of any tax-shield benefits of interest associated with the project's financing minus any flotation costs. It is a valuation method that separately identifies the value of an un-levered project from the value of financing side effects. It is the net present value of a project using the all-equity rate as a discount rate. The effects of financing are incorporated in separate terms.
Administered price: A price for a good or service that is set and maintained by government, usually requiring accompanying restrictions on trade if the administered price differs from the world price.
Administered protection: Protection, tariff or NTB (Nontariff barrier), resulting from the application of any one of several statutes that respond to specified market circumstances or events, usually as determined by an administrative agency. Several such statutes are permitted under the GATT (General Agreement on Tariffs and Trade), including anti-dumping duties, countervailing duties, and safeguards protection.
Administrative agency: A unit of government charged with the administration of particular laws. In the United States, those most important for administering laws related to international trade are the ITC (International Trade Commission) and ITA (International Trade Administration).
Administrative pricing rule: IRS rules used to allocate income on export sales to a foreign sales corporation.
Advance deposit requirement: A requirement that some proportion of the value of imports, or of import duties, be deposited prior to payment, without competitive interest being paid.
Advance payment: Trading method in which the buyer pays for the goods before they are sent out , method is used when buyer is of unknown credit worthiness.
Advance pricing agreement (APA): Procedure that allows the multinational firm, the IRS, and the foreign tax authority to work out, in advance, a method to calculate transfer prices.
Adventure: It is also called marine adventure. It is a term of art in the marine insurance business. All insured cargo owners and every shipper on that vessel are part of the adventure.
Adverse Incentives: moral hazard.
Adverse selection: The possibility that only the highest-risk customers will seek insurance.
Adverse terms of trade: A terms of trade that is considered unfavorable relative to some benchmark or to past experience. Developing countries specialized in primary products are sometimes said to suffer from adverse or declining terms of trade.
Advising bank: Bank, usually in the country of the seller, whose primary function is to authenticate the letter of credit and advise it to the seller.
Advisory Capacity: Used to indicate that a shipper's agent or representative is not empowered to make definitive changes or adjustments without approval of the group or individual represented.
African Development Bank (AFDB): The AFDB makes or guarantees loans and provides technical assistance to member states for various development projects.
Agency (theory): A branch of economics relating to the behavior of principals (such as owners) and their agents (such as managers).
Agency costs: Costs that stem from conflicts between managers and stockholders and between stockholders and bondholders. The costs incurred to ensure that agents act in the best interest of the principal. Costs associated with monitoring management to ensure that it behaves in ways consistent with the firm's contractual agreements with creditors and shareholders.
Agent: In Principal-Agent Theory, the person whose job it is to act to the benefit of someone else (the principal), but who may require some incentive to do so. Agent(s) are the Individual(s) authorized by another person, called the principal, to act in the latter's behalf.
Agglomeration economy: Any benefit that accrues to economic agents as a result of having large numbers of other agents geographically close to them, thus tending to lead to agglomeration. This is a basic feature of the New Economic Geography.
Aggregate demand: The total demand of all potential buyers of a commodity or service. It is the total demand for a country's output, including demands for consumption, investment, government purchases, and net exports.
Aggregate measurement of support: The measurement of subsidy to agriculture used by the WTO as the basis for commitments to reduce the subsidization of agricultural products. It includes the value of price supports and direct subsidies to specific products, as well as payments that are not product specific.
Aggregate supply: The total supply of a country's output, usually assumed to be an increasing function of its price level in the short run but independent of the price level in the long run.
Aggregation: The combining of two or more kinds of an economic entity into a single category. Data on international trade necessarily aggregate goods and services into manageable groups. For macroeconomic purposes, all goods and services are usually aggregated into just one.
Aging accounts receivable: The process of classifying accounts receivable by their age outstanding as of a given date.
Agricultural good: A good that is produced by agriculture. Contrasts with manufactured good.
Agriculture: Production that relies essentially on the growth and nurturing of plants and animals, especially for food, usually with land as an important input; farming. Contrasts with manufacturing.
All-Equity Rate: The discount rate that reflects only the business risks of a project and abstracts from the effects of financing. It is the beta associated with the un-leveraged cash flows of a project or company.
All-in Cost: The effective interest rate on a loan, calculated as the discount rate that equates the present value of the future interest and principal payments to the net proceeds received by the borrower; it is the internal rate of return on the loan. The percentage cost of a financing alternative, including any bank fees or placement fees.
Allocation: An assignment of economic resources to uses. Thus, in general equilibrium, an assignment of factors to industries producing goods and services, together with the assignment of resulting final goods and services to consumers, within a country or throughout the world economy. The question is to whether or not an allocation is efficient. A change from an allocation that is not efficient to one that is may be termed an increase in efficiency.
Allocational efficiency: The efficiency with which a market channels capital toward its most productive uses.
Allocation-of-income rules: In the U.S. tax code, these rules define how income and deductions are to be allocated between domestic-source and foreign-source income.
Alternative minimum tax (AMT): An alternative, separate tax calculation based on the taxpayer's regular taxable income, increased by certain tax benefits, collectively referred to as tax preference items. The taxpayer pays the larger of the regularly determined tax or the AMT.
American Depository Receipt (ADR): A certificate of ownership issued by a U.S. bank as a convenience to investors in lieu of the underlying foreign corporate shares it holds in custody. Contrast with European option.
American option: An option that can be exercised anytime until expiration. It is an option that can be exercised at any time up to the expiration date.
American shares: Shares of a foreign corporation issued directly to U.S. investors through a transfer agent in accordance with SEC regulations. Securities certificates issued in the United States by a transfer agent acting on behalf of the foreign issuer. The certificates represent claims to foreign equities.
American terms: Method of quoting currencies; it is expressed as the number of U.S. dollars per unit of foreign currency. It is a foreign exchange quotation that states the U.S. dollar price per foreign currency unit. Contrast with European terms.
Amortization schedule: A table showing the repayment schedule of interest and principal necessary to pay off a loan by maturity.
Amortization: The deduction of an expense in installments over a period of time, rather than all at once.
Amplitude: The extent of the up and down movements of a fluctuating economic variable; that is, the difference between the highest and lowest values of the variable.
Annuity factor: The term used to calculate the present value of the stream of level payments for a fixed period.
Annuity: A level stream of equal dollar payments that lasts for a fixed time. An example of an annuity is the coupon part of a bond with level annual payments. It is a series of equal payments or receipts occurring over a specified number of periods. In an ordinary annuity, payments or receipts occur at the end of each period; in an annuity due, payments or receipts occur at the beginning of each period.
Anti-dumping duty: Tariff levied on dumped imports. The threat of an anti-dumping duty can deter imports, even when it has not been used, and anti-dumping is therefore a form of non-tariff barrier. Anti-dumping suit is a complaint by a domestic producer that imports are being dumped, and the resulting investigation and, if dumping and injury are found, anti-dumping duty.
Anti-dumping laws: Laws that are enacted to prevent dumping-offering prices in the overseas market that is lower than that at which a product is sold in its home domestic market.
Apparel Clothing: The apparel sector is important for trade because, as a very labor intensive sector, it is a likely source of comparative advantage for developing countries.
Apparent consumption: Production plus imports minus exports, sometimes also adjusted for changes in inventories. The intention here is not to distinguish different uses for a good within the country, but only to infer the total that is used there for any purpose.
Applied tariff rate: The actual tariff rate in effect at a country's border.
Appreciation: An increase in a currency value relative to another currency in a floating exchange rate system. A rise in the value of a country's currency on the exchange market, relative either to a particular other currency or to a weighted average of other currencies. The currency is said to appreciate, i.e., revaluation. Opposite of depreciation.
Arab Fund for Economic and Social Development (AFESD): A multilateral Arab fund that actively searches for projects in Arab League countries and then assumes responsibility for project implementation.
Arbitrage pricing theory (APT): A theory where the price of an asset depends on multiple factors and arbitrage efficiency prevails.
Arbitrage: The purchase of securities or commodities on one market for immediate resale on another in order to profit from a price discrepancy. A combination of transactions designed to profit from an existing discrepancy among prices, exchange rates, and/or interest rates on different markets without risk of these changing. Simplest is simultaneous purchase and sale of the same thing in different markets, but more complex forms include triangular arbitrage and covered interest arbitrage. It is finding two assets that are essentially the same, buying the cheaper, and selling the more expensive. The process of purchasing and selling foreign exchange, stocks, bonds and other commodities in several markets intending to make profit from the difference in price.
Arm’s-Length Price: Price at which a willing buyer and a willing unrelated seller would freely agree to transact (i.e., a market price).
Arrearage: A late or overdue payment, which may be cumulative.
Asiacurrency ( or Asiadollar) Market: Offshore financial market located in Singapore that channels investment dollars to a number of rapidly growing Southeast Asian countries and provides deposit facilities for those investors with excess funds.
Asian Development Bank (ADB): The ADB guarantees or makes direct loans to member sates and private ventures in Asian/Pacific nations and helps to develop local capital markets by underwriting securities issued by private enterprises.
Ask (i.e. offer) rates: The rate at which a market maker is willing to sell the quoted asset.
Ask: The price at which one can sell a currency. It is also known as the offer price.
Asset allocation policy: The target weights given to various asset classes in an investment portfolio.
Asset approach: It is for determination of the exchange rate that focuses on its role as the price of an asset. With high capital mobility, equilibrium requires that expected returns on comparable domestic and foreign assets be the same.
Asset securitization: The process of packaging a pool of assets and then selling interests in the pool in the form of asset-backed securities (ABS).
Asset: An item of property, such as land, capital, money, a share in ownership, or a claim on others for future payment, such as a bond or a bank deposit.
Asset-backed securities (ABS): Debt securities whose interest and principal payments are provided by the cash flows coming from a discrete pool of assets.
Assets-in-place: Those assets in which the firm has already invested. Compare to growth options.
Assigned (or stated) value: A nominal value assigned to a share of no-par common stock that is usually far below the actual issuing price.
Assignment problem: How to use macroeconomic policies to achieve both internal balance and external balance; specifically, with only monetary and fiscal policies available under fixed exchange rates, which instrument should be assigned to which goal? It is often the case that monetary policy should be assigned to external balance.
Asymmetric information: The failure of two parties to a transaction to have the same relevant information. Examples are buyers who know less about product quality than sellers, and lenders who know less about likely default than borrowers. Both are common in international markets.
Asymmetric shock: An exogenous change in macroeconomic conditions affecting differently the different parts of a country, or different countries of a region. Often it is mentioned as a source of difficulty for countries sharing a common currency, such as the Euro Zone.
At par: At equality. Two currencies are said to be at par if they are trading one-for-one. The significance is more psychological then economic, but the long decline of the Canadian dollar below par with the U.S. dollar, and the more recent decline of the euro from above to below par, also with the U.S. dollar, has been cause for concern.
Atlantic Development Group for Latin America (ADELA): An international private investment company dedicated to the socioeconomic development of Latin America. Its objective is to strengthen private enterprise by providing capital and entrepreneurial and technical services.
At-the-money option: An option with an exercise price that is equal to the current value of the underlying asset. An option whose exercise price is the same as the spot exchange rate.
Autarky price: Price in autarky; that is, the price of something within a country when it is not traded by that country. Relative autarky prices turn out to be the most theoretically robust (but empirically elusive) measures of comparative advantage.
Autarky: In models of international trade, a situation in which there is no cross-border trade. It is the situation of not engaging in international trade; self-sufficiency. Not to be confused with autarchy which in at least some dictionaries is a political term rather than an economic one, and means absolute rule or power?
Automated clearinghouse (ACH) electronic transfer: This is essentially an electronic version of the depository transfer check.
Automatic stabilizer: It is an institutional feature of an economy that dampens its macroeconomic fluctuations, e.g., an income tax, which acts like a tax increase in a boom and a tax cut in a recession.
Autonomous transaction: In the balance of payments, a transaction that is not itself a result of actions taken officially to manage international payments; in contrast with accommodating transaction.
Autonomous: Refers to an economic variable, magnitude, or entity that is caused independently of other variables that it may in turn influence; exogenous.
Aval: A guarantee of the buyer's credit provided by the guarantor, unless the buyer is of unquestioned financial standing. The aval is an endorsement note as opposed to a guarantee agreement.
Avalisation: Payment undertaking given by a bank in respect of a bill of exchange drawn.
Average accounting return (AAR): The average project earnings after taxes and depreciation divided by the average book value of the investment during its life.
Average cost: Total cost divided by output.
Average product: The average product of a factor in a firm or industry is its output divided by the amount of the factor employed.
Average tariff: An average of a country's tariff rates. This can be calculated in several ways, none of which are ideal for representing how protective the country's tariffs are. Most common is the trade-weighted average tariff, which under-represents prohibitive tariffs, since they get zero weight.
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