Glossary of Terms
Glossary of Terms

Balance of payments: The Balance of Payments (BOP) is a statistical statement that summarizes, for a specific period (typically a year or quarter), the economic transactions of an economy with the rest of the world. It covers:

  • All the goods, services, factor income and current transfers an economy receives from or provides to the rest of the world
  • Capital transfers and changes in an economy’s external financial claims and liabilities

Bond: A certificate issued by a government or company representing a promise by the bond issuer to pay the bondholder interest in addition to the principal amount of the bond after a specified period of time. For example, a 10-year bond purchased today costs $35. When you “redeem” or cash in the bond after ten years, the issuer repays the $35 principal plus interest at a rate established when the bond was issued.

Debt/equity ratio: The debt/equity ratio measures the extent to which a firm’s capital is provided by lenders (through debt instruments such as fixed-return bonds or owners (through variable-return stocks). A greater reliance on financing through debt can mean greater profitability for shareholders, but also greater risk in the event things go sour.

Domestic content requirements: These require foreign investors to purchase a certain percentage of intermediate goods from the host country.

Economies of scale: Produces are often able to enjoy considerable production cost savings by buying inputs in bulk, mass-producing or retailing their end product. These lower costs achieved through expanded production are called economies of scale.

The exchange rate of a nation’s currency: Currency like other commodities, rises or falls in “price” with demand. When investors leave, they sell their holdings in a country’s currency and as demand falls, the “price” of that currency will also fall. This “price” change of currency is what the exchange rate refers to.

Export Processing Zones (EPZs): EPZs are special arrangements, often a distinct geographic area near a port, which are set up to promote export industries.

Foreign Direct Investment (FDI): This category refers to international investment in which the investor obtains a lasting interest in an enterprise in another country. Most concretely, it may take the form of buying or constructing a factory in a foreign country or adding improvements to such a facility, in the form of property, plants or equipment.

Foreign Portfolio Investment (FPI): FPI is a category of investment instruments that are more easily traded, may be less permanent, and do not represent a controlling stake in an enterprise. These include investments via equity instruments (stocks) or debt (bonds) of a foreign enterprise that does not necessarily represent a long-term interest. 

Gold standard: When a country is said to be on the gold standard, the value of its currency and the quantity of its currency in circulation is tied the nation’s reserve of gold. Such a system tends to restrict the country’s monetary supply.

Import Substitution Industrialization: An international economic and trade policy based on the belief that a nation should reduce its dependency on foreign investment and goods by domestic production of industrial goods

International Monetary Fund: The IMF is an international organization of 185 member countries, established in 1947 to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.

Interest rates: Interest rates have a powerful effect on the volume of a nation’s money supply. By raising interest rates, i.e., making the cost of borrowing money more expensive, governments or banks can decrease the money supply. A decrease in the money supply tends to be counter-inflationary, which makes a currency more valuable compared to other currencies.

Moral hazard: Critics of the IMF often assert that the knowledge that bad economic decisions, e.g., imprudent bank loans, are often bailed out by the IMF is likely to make lenders and investors less cautious, and only increase the number of economic crises. The “moral hazard” is that economic actors will not have to face the consequences of their own actions.

Most Favored Nation Treatment: The phrase “most favored nation” refers to the obligation of the country receiving the investment to give that investment the same treatment as it gives to investments from its “most favored” trading partner.

National treatment: This has been a core element of most agreements on trade in goods and services, and is also a critical issue pertaining to international investment. Typically, these provisions ensure that foreign investors and their subsidiary companies are “treated at least as well as their domestic counterparts,” or “no less favorably” than domestic industries.

OECD:The Organization for Economic Cooperation and Development (OECD) is a descendant of the U.S.-European cooperation required to execute the Marshall Plan and rebuild Europe after World War II. A tribute to the success of that effort is the fact that the 30 or so members of the OECD now include Japan and Korea as well, are thought of as the wealthy nations of the world.

Stock: A certificate issued by a corporation that represents partial ownership of the corporation (equity). Different kinds of stock confer different rights and responsibilities on the stockholder, including the right to receive dividends and the ability to participate in corporate decision-making.

Stocks:

  • dividend payments
  • holder owns a part of a company
  • possible voting rights
  • open-ended holding period

Bonds:

  • interest payments
  • ownership of bond rights only
  • no voting rights
  • specific holding period

Subprime credit: General term for borrowings of low-quality debt—such as mortgages, loans, et. al—made to people with less-than-perfect credit or short credit histories.  Subprime credit includes the original borrowing itself, as well as any derivative products such as securitizations that are based on subprime loans and then sold to investors in the secondary markets.

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