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Category: Article

Decision theory selection criteria

Decision making under uncertainty is not only characterized by ignorance of the final outcome, as with risk, but also by the impossibility of assigning a probability of the outcome’s distribution, as this is also unknown. Both subjective and objective information is unavailable. However, there are a few different criteria that can be applied in order to choose one strategy over others, when facing a decision under uncertainty. Considering three potential nature states (N1, N2, N3) and three poss...
Decision making under uncertainty is not only characterized by ignorance of the final outcome, as with risk, but also by the impossibility of assigning a probability of the outcome’s distribution, as ...

IS-LM-BP model

The IS-LM-BP model (also known as IS-LM-BoP or Mundell-Fleming model) is an extension of the IS-LM model, which was formulated by the economists Robert Mundell and Marcus Fleming, who made almost simultaneously an analysis of open economies in the 60s. Basically we could say that the Mundell-Fleming model is a version of the IS-LM model for an open economy. In addition to the balance in goods and financial markets, the model incorporates an analysis of the balance of payments. Even though both e...
The IS-LM-BP model (also known as IS-LM-BoP or Mundell-Fleming model) is an extension of the IS-LM model, which was formulated by the economists Robert Mundell and Marcus Fleming, who made almost simu...

Financial account

The financial account is one of the components of the balance of payments. It shows the net acquisition and disposal of both financial assets and liabilities. As stated in the sixth edition of the Balance of Payments Manual (BPM), by the International Monetary Fund, “The financial account records transactions that involve financial assets and liabilities and that take place between residents and nonresidents”. The table below, taken from the BPM, shows an overview of the financial account.  &nbs...
The financial account is one of the components of the balance of payments. It shows the net acquisition and disposal of both financial assets and liabilities. As stated in the sixth edition of the Bal...

Capital account

The capital account is one of the components of the balance of payments. It mainly reflects net foreign holdings of capital. When a country incurs on a deficit on current account, it needs to be financed by capital from abroad, it needs to have a capital account surplus. The opposite occurs in the case of current account surplus, there will be an outflow of capital to foreign countries. As stated in the sixth edition of the Balance of Payments Manual (BPM), by the International Monetary Fund, “t...
The capital account is one of the components of the balance of payments. It mainly reflects net foreign holdings of capital. When a country incurs on a deficit on current account, it needs to be finan...

Current account

The current account is one of the components of the balance of payments. It mainly shows the value of movements in exports and imports and income derived form transactions related to net purchases of goods and services. As stated in the sixth edition of the Balance of Payments Manual (BPM), by the International Monetary Fund, “the current account shows flows of goods, services, primary income, and secondary income between residents and nonresidents”. Let’s review all these components:   “Th...
The current account is one of the components of the balance of payments. It mainly shows the value of movements in exports and imports and income derived form transactions related to net purchases of ...

Balance of payments

The balance of payments consists of a series of accounts that reflect the transactions made between an open economy and the rest of the world. As stated in the sixth edition of the Balance of Payments Manual, by the International Monetary Fund, “the balance of payments [is] a statement that summarizes economic transactions between residents and nonresidents during a specific time period”. These international accounts, which grow greater every day thanks to globalization, are harmonized with the ...
The balance of payments consists of a series of accounts that reflect the transactions made between an open economy and the rest of the world. As stated in the sixth edition of the Balance of Payments...

Transformation curve

The transformation curve is defined, in international economics, as the maximum amount of commodity X obtainable for any given amount of commodity Y, and vice versa. This concept is basically the same as the production-possibility frontier studied in microeconomics. In this case, however, the transformation curve shows the trade-off (or opportunity cost) for a country when deciding to produce one commodity or good instead of some other.   Transformation curves may be graphically represented...
The transformation curve is defined, in international economics, as the maximum amount of commodity X obtainable for any given amount of commodity Y, and vice versa. This concept is basically the same...

Terms of trade

Terms of trade is used in international trade theory as a measure of the relative price of exports and imports. It is calculated as the ratio according to which two commodities are exchanged between two countries. Ricardian trade model delimits the boundaries within which the terms of trade must lay in international trade for countries to trade goods. However, it does not determine the exact proportion in which these occur.  Nevertheless, determining the exact terms of trade is an argued matter ...
Terms of trade is used in international trade theory as a measure of the relative price of exports and imports. It is calculated as the ratio according to which two commodities are exchanged between t...

Ricardian trade theory

David Ricardo developed this international trade theory based in comparative advantage and specialization, two concepts that broke with mercantilism that until then was the ruling economic doctrine. He introduced this theory for the first time in his book “On the Principles of Political Economy and Taxation”, 1817, using a simple numerical example concerning the trade between Portugal and the England in the following way:   Let’s say the labour costs per unit of cloth (C) and wine (W) produ...
David Ricardo developed this international trade theory based in comparative advantage and specialization, two concepts that broke with mercantilism that until then was the ruling economic doctrine. H...

Comparative advantage

The principle of comparative advantage explains why countries obtain gains from international trade. This term was first mentioned by Adam Smith when talking about specialization, and later by David Ricardo, who developed the concept as we know it nowadays in his trade theory explained in his book “On the Principles of Political Economy and Taxation”, 1817. When comparing two countries, even if one of them has absolute advantage in producing two goods compared to the other, it may be possible fo...
The principle of comparative advantage explains why countries obtain gains from international trade. This term was first mentioned by Adam Smith when talking about specialization, and later by David R...
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