What is a Free Trade Area? A free trade area (FTA) refers to a specific region wherein a group of countries signs a trade agreement that seals the economic cooperation among them. The FTA’s main goals are to bring down barriers in trading, specifically tariffs and import quotas, and encourage the free trade of goods…
What is an Economic Union? An economic union is one of the different types of trade blocs. It refers to an agreement between countries that allows products, services, and workers to cross borders freely. The union is aimed at eliminating internal trade barriers between the member countries, with the goal of economically benefitting all the…
What is the Balance of Trade (BOT)? The balance of trade (BOT), also known as the trade balance, refers to the difference between the monetary value of a country’s imports and exports over a given time period. A positive trade balance indicates a trade surplus while a negative trade balance indicates a trade deficit. The…
What is the International Fisher Effect (IFE)? The International Fisher Effect (IFE) states that the difference between the nominal interest rates in two countries is directly proportional to the changes in the exchange rate of their currencies at any given time. Irving Fisher, a U.S. economist, developed the theory. The International Fisher Effect is based…
What is a Price Bubble? The sustained rise in the price of an asset above its “normal market value” results in the formation of a price bubble. Price bubbles are sustained by expectations of future increases in the price of an asset. Historical Examples of a Price Bubble The market for tulips in the Netherlands…
What is the Paper Economy? The paper economy, or financial economy, refers to the part of the economy that is made up of non-real or financial variables. All transactions and activities in the paper economy take place on paper, i.e., there is no exchange of real goods and services. Consider the following example: Investor A…
What is the Law of Diminishing Marginal Utility? The Law of Diminishing Marginal Utility states that the additional utility gained from an increase in consumption decreases with each subsequent increase in the level of consumption. Marginal Utility is the change in total utility due to a one-unit change in the level of consumption. The Law…
What is Autarky? Autarky is the term used to describe a country or economy that operates independently. Autarky, in its most basic sense, means “self-sufficient,” though it’s almost always used in correlation with a political or economic system, meaning that the entity – whatever it is – can operate and exist free of outside influence,…
What is NAIRU? NAIRU is the acronym for Non-Accelerating Inflation Rate of Unemployment. It is the level of unemployment below which the rate of inflation is expected to rise. It means that, theoretically, the rate of inflation increases when the rate of unemployment goes below the NAIRU level. For example, if the actual unemployment rate…
What are Transaction Costs? Transaction costs are costs incurred that don’t accrue to any participant of the transaction. They are sunk costs resulting from economic trade in a market. In economics, the theory of transaction costs is based on the assumption that people are influenced by competitive self-interest. At the highest level, only markets exist,…
