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Labeling A requirement to label imported goods with information about how they were produced. This is often suggested as an alternative to trade restrictions as a means to pursue particular trade-related objectives involving, for example, environment or labor standards.
Labor abundant A country is labor abundant if its endowment of labor is large compared to other countries. Relative labor abundance can be defined by either the quantity definition or the price definition.
Labor augmenting Said of a technological change or technological difference if one production function produces the same as if it were the other, but with a larger quantity of labor. Same as factor augmenting with labor the augmented factor. Also called Harrod neutral.
Labor force The number of available workers in a country, defined as the sum of those who are employed and those who are classed as unemployed.
Labor intensive Describing an industry or sector of the economy that relies relatively heavily on inputs of labor, usually relative to capital but sometimes to human capital or skilled labor, compared to other industries or sectors. See factor intensity.
Labor market A market for labor. Can refer to anything from local interactions between workers and employers to country-wide (not usually world-wide) markets dominated by broadly based labor unions, industry associations, and sometimes governments.
Labor market restriction A market restriction in the labor market, most often limits on wages and on the ability of firms to terminate workers.
Labor mobility The ability of workers to move between industries and locations to obtain higher wages or more favorable working conditions. Most models of international trade assume that labor is perfectly mobile within a country between industries and locations but not mobile at all between countries.
Labor productivity The value of output per unit of labor input. The reciprocal of the unit labor requirement.
Labor right See labor standard.
Labor-saving A technological change or technological difference that is biased in favor of using less labor, compared to some definition of neutrality.
Labor scarce A country is labor scarce if its endowment of labor is small compared to other countries. Relative labor scarcity can be defined by either the quantity definition or the price definition.
Labor standard Any of many conditions of workers in the workplace that are viewed as important for their well being, and minimum levels of which are advocated by labor rights activists and have been agreed to by many of the countries that are members of the ILO.
Labor standards argument for protection The view that trade restrictions (trade sanctions) should be used as a tool to improve labor standards, limiting imports, for example, from countries that do not enforce such labor rights as freedom of association and collective bargaining.
Labor theory of value The theory that the value of any produced good or service is equal to the amount of labor used, directly and indirectly, to produce it. Sometimes said to underlie the Ricardian Model of international trade.
Labor-using A technological change or technological difference that is biased in favor of using more labor, compared to some definition of neutrality.
Lading See bill of lading.
Lafay index An index of specialization or revealed comparative advantage that takes account of both exports and imports and is therefore more suitable for a country with intraindustry trade. Due to Lafay (1992). This index for country i good j is LIij = 100[(Xij−Mij)/(Xij+Mij)−Σk(Xik−Mik)/Σk(Xik+Mik)] (Xij+Mij)/Σk(Xik+Mik) where X and M are exports and imports.
Laffer Curve An inverse-U-shaped curve representing tax revenue as a function of the tax rate, attributed to Arthur Laffer. Although the idea that a rise in tax rate can reduce tax revenue is mostly based on induced reduction of work effort, for some types of taxes -- especially corporate -- movement of activity to another tax jurisdiction or country can have the same effect.
LAFTA Latin American Free Trade Association
Lagging indicator A measurable economic variable that varies over the business cycle, reaching peaks and troughs somewhat later than other macroeconomic variables such as GDP and unemployment. Contrasts with leading indicator.
Lagrangian A function constructed in solving economic models that include maximization of a function (the "objective function") subject to constraints. It equals the objective function minus, for each constraint, a variable "Lagrange multiplier" times the amount by which the constraint is violated.
LAIA Latin American Integration Association
Laissez faire Free enterprise. The doctrine or system of government non-interference in the economy except as necessary to maintain economic freedom. Includes free trade.
Land reform The process of changing the pattern of ownership of land in a country, usually by breaking up large holdings and distributing smaller parcels of land to a larger portion of the population. This can be done in various ways, including with or without compensation of the previous owners.
Landed duty paid The landed value of a good plus any import duties.
Landed value CIF value.
Large country A country that is large enough for its international transactions to affect economic variables abroad, usually for its trade to matter for world prices. Contrasts with a small open economy.
Latin American Debt Crisis The default on government debt, and subsequent rescheduling, by more than two dozen less developed countries including many in Latin America, in the early 1980s starting with Mexico on August 12, 1982.
Latin American Free Trade Association A group of Latin American countries formed in 1960 with the aim of establishing a free trade area. This aim was never achieved, and LAFTA was replaced in 1980 with the Latin American Integration Association.
Latin American Integration Association An organization of Latin American countries that replaced the failed LAFTA. LAIA has the more limited goal of encouraging free trade but with no timetable for achieving it.
Laurel-Langley Agreement A trade agreement between the Philippines and the United States replacing the Bell Trade Act, signed in 1955 and expired in 1974. It made reciprocal a controversial "parity" clause of the Bell Act, whereby Americans were given some of the same rights as Filipinos within the Philippines.
Laursen-Metzler Effect See Harberger-Laursen-Metzler Effect.
Law of Comparative Advantage The principle that, given the freedom to respond to market forces, countries will tend to export goods for which they have comparative advantage and import goods for which they have comparative disadvantage, and that they will experience gains from trade by doing so. Idea due to Ricardo (1815).
Law of Demand The observation that when price rises, quantity demanded falls. This is not necessary in theory, but it is very rarely violated in practice, including in demands for imports and exports, as well as demand for foreign exchange (barring effects on expectations).
Law of Diminishing Returns The principle that, in any production function, as the input of one factor rises holding other factors fixed, the marginal product of that factor must eventually decline.
Law of One Price The principle that identical goods should sell for the same price throughout the world if trade were free and frictionless.
Law of similars Regulations that limit imports of a good, or alter its tariff if a "similar" good is produced in the country. Also called a market reserve policy.
Law of supply and demand This says, most simply, that prices depend on supply and demand. More precisely, price is determined so as to equate quantities supplied and demanded. Even more precisely, a price tends to rise when demand exceeds supply, and vice versa.
Lawson Doctrine The view, attributed to Nigel Lawson, U.K. Chancellor of the Exchequer in the 1980s, that a current account deficit that results from a shift in private-sector savings or investment, is not a cause for concern.
LDC For many years, the acronym LDC has stood for less developed country, which was more or less the same as developing country. However, in recent years LDC has also been used for Least Developed Country, which has a narrower and more formal definition.
LDP Landed duty paid
Lead time The amount of time between when an action is initiated and when it is completed, and thus the amount of time before you want it to be done that you must initiate the action. In commerce, this often refers to how long before you want something to be delivered that you must order it, a time that is likely to be longer if it involves transport from abroad.
Leading indicator A measurable economic variable that varies over the business cycle, reaching peaks and troughs somewhat earlier than other macroeconomic variables such as GDP and unemployment, and therefore useful for forecasting them. Contrasts with lagging indicator.
League of Arab States An association of mainly Arabic-speaking countries founded in Cairo in 1945 to strengthen ties amoung the members, coordinate policies among them, and promote their common interests. As of August 2012, it had 22 members.
League of Nations An intergovernmental organization founded at the end of World War I to prevent wars. Its main tool was economic sanctions to curb aggressive behavior. The US did not join, however, and although the League had some successes, it failed to prevent World War II and was replaced after that by the United Nations.
Leamer triangle A diagram introduced by Leamer (1987) depicting both relative factor endowments and relative factor intensities with three factors and any number of goods.
Leaning against the wind Use of exchange market intervention to try to slow the movement of the exchange rate under a managed float, and/or to reduce the amplitude of its fluctuations.
Learning by doing Refers to the improvement in technology that takes place in some industries, early in their history, as they learn by experience, so that average cost falls as accumulated output rises. See infant industry protection, dynamic economies of scale.
Learning curve A relationship representing either average cost or average product as a function of the accumulated output produced. Usually reflecting learning by doing, the learning curve shows cost falling, or average product rising.
Least Developed Country A country designated by the UN as least developed based on criteria of low per capita GDP, weak human resources (life expectancy, calorie intake, etc.), and a low level of economic diversification (share of manufacturing and other measures). As of August 2012, 49 countries were designated as LDCs.
Lender of Last Resort An institution that has the capacity and willingness to make loans when no one else can. Within a country, the central bank may play that role, since it can create money. Some have argued that the IMF or other institution should play that role internationally, to avert financial crises.
Lens condition In Heckscher-Ohlin trade theory with many goods, factors, and countries, a necessary condition for free and frictionless trade to lead to factor price equalization. The condition, due to Deardorff (1994), states that a lens-shaped set formed from countries' factor endowments must encompass another lens-shaped set formed from the factor intensities of the industries in an integrated world economy. It formalizes differences in factor intensities being smaller than differences in factor endowments.
Leontief composite A composite of two or more goods or factors that includes them in fixed proportions, analogous to the Leontief technology.
Leontief Paradox The finding of Leontief (1954) that U.S. imports embodied a higher ratio of capital to labor than U.S. exports. This was surprising because it was thought that the U.S. was capital abundant, and the Heckscher-Ohlin Theorem would then predict that U.S. exports would be relatively capital intensive.
Leontief production function See Leontief technology.
Leontief technology A production function in which no substitution between inputs is possible: F(V) = mini(Vi/ai), where V is a vector of inputs Vi, and ai are the constant per unit input requirements. Isoquants are L-shaped.
Lerner Diagram
This diagram, drawn for given prices and technology, uses unit-value isoquants of two or more goods to deduce patterns of specialization and factor prices as they depend on goods prices and factor endowments. Due originally to Lerner (1952) and popularized by Findlay and Grubert (1959).
Lerner paradox The possibility, identified by Lerner (1936), that a tariff might worsen a country's terms of trade. This can happen only if the country spends a disproportionately large fraction of the tariff revenue on the imported good, and it will not happen (from a stable equilibrium) if the tariff revenue is redistributed. See offer curve diagram.
Lerner-Pearce Diagram This name is sometimes given (for years, by me at least) to the Lerner Diagram. In fact, Pearce's (1952) diagram uses unit isoquants rather than unit value isoquants and is much more cumbersome.
Lerner Symmetry Theorem The proposition that a tax on all imports has the same effect as an equal tax on all exports, if the revenue is spent in the same way. The result depends critically on balanced trade, as in a real model, so that a change in imports leads to an equal change in the value of exports. Due to Lerner (1936).
Less developed country Refers to any country whose per capita income is low by world standards. Same as developing country.
Less-than-fair-value Less than fair value in a case of dumping.
Lesser duty rule Setting an anti-dumping duty equal to the injury margin when that is smaller than the dumping margin. This is the practice in the European Union, but not in the United States.
Letter of credit A common means of payment in international trade, this is a written commitment by a bank to make payment to an exporter on behalf of an importer, under specified conditions.
Level playing field The goal of those who advocate protection on the grounds that foreign firms have an unfair advantage. A level playing field would remove such advantages, although it is unclear what sorts of advantage (including comparative advantage) could remain. See fairness argument for protection.
Levy 1. To impose and collect a tax or tariff.
2. A tax or tariff.
LHS Left-hand side, usually referring to what appears to the left of the equal sign in an equation, and therefore usually the dependent variable that is explained by the right-hand side.
Liability An amount that is owed, in contrast to an asset. A liability may result from borrowing, from obligation to pay for a product or service received, etc.
Liberal Associated with freedom and/or generosity. Thus in England to be liberal (or to be a liberal) is to favor free markets, including free trade. But in the U.S. it tends to mean favoring a generous, active government pursuing social and redistributive policies, with no implication for views on free trade.
Liberal trade Free trade, or something approximating that. Thus a trade regime in which tariffs are low or zero and in which nontariff barriers are largely absent.
Liberalism The set of views associated with being liberal, in the sense of freedom.
Liberalization 1. The process of making policies less constraining of economic activity.
2. Reduction of tariffs and/or removal of nontariff barriers.
LIBOR London interbank offered rate.
LIC Low income country.
Licensing 1. The requirement that importers and/or exporters get government approval prior to importing or exporting. Licensing may be automatic, or it may be discretionary, based on a quota, a performance requirement, or some other criterion.
2. Granting of permission, in return for a licensing fee, to use a technology. When done by firms in one country to firms in another, it is a form of technology transfer. See compulsory licensing.
Life cycle See product cycle.
Life expectancy The expected value of the number of years a person has yet to live at a given age or, if age is unspecified, at birth, based on the distribution of actual deaths in the population to which the person belongs. Life expectancy in a country is an important indicator of its level of development and well-being.
Lifetime employment The practice, common in Japan since the early 20th century and covering about 20% of the labor force, of (male) workers remaining employed by the same large firm from graduation to retirement. This results from a non-contractual understanding that firms would not lay off workers and workers would not resign.
LIFFE London International Financial Futures and Options Exchange
Light manufacturing Sectors of the economy that produce manufactured goods without large amounts of physical capital, thus likely to be labor intensive.
Limit pricing The act of setting a selling price just below the level at which other sellers would find it profitable to enter a market.
Limited liability The maximum that an owner (or partial owner, such as a stockholder or partner) of a business can be required to lose in the event that the business fails or acquires financial obligations greater than its value. Some forms of business organization, such as a corporation or a limited partnership, set that maximum at the amount that the owner has contributed to the business.
Linder Hypothesis The theory that a country's ability to export depends on domestic demand, so that countries that demand similar goods will trade more with each other than will countries with dissimilar demands. From Linder (1961).
Linear cut A reduction in tariffs with the size of reduction linearly related to the initial tariff: %Δt = a + bt, where %Δt is the percent reduction in the tariff, t is the initial tariff, and a,b are constants. The simplest linear cut, a horizontal reduction, reduces all tariffs by the same percentage. Contrasts with the Swiss Formula.
Linear reduction Same as linear cut.
Linear regression model A linear relationship between a dependent variable Y and one or more independent variables X plus a stochastic disturbance u: Yi=b0+b1X1i+...+bnXni+ui.
Linearly homogeneous Homogeneous of degree 1. Sometimes called linear homogeneous.
Liner Code The United Nations Convention on a Code of Conduct for Liner Conferences
Liner conference An agreement between two or more shipping companies to coordinate schedules and prices. Likely to be anti-competitive.
LINK See Project LINK.
Linkage See forward linkage and backward linkage.
Linking scheme A requirement that, in order to get an import license, the importer must buy a certain amount of the same product from local producers.
Liquid Possessing liquidity.
Liquid assets The assets in a portfolio that possess liquidity, or the total value of those assets.
Liquidity The capacity to turn assets into cash, or the amount of assets in a portfolio that have that capacity. Cash itself (i.e., money) is the most liquid asset.
Liquidity crisis A financial crisis that occurs due to lack of liquidity. In international finance, it usually means that a government or central bank runs short of international reserves needed to peg its exchange rate and/or to service its foreign loans.
Liquidity trap A situation in which expansionary monetary policy fails to stimulate the economy. As used by Keynes (1936), this meant interest rates so low that expectations of their increase made people unwilling to hold bonds. Today it usually means a nominal interest rate so near zero that lowering it further is impossible or ineffective.
Lisbon Treaty The treaty that went into force on December 1, 2009, revising the institutions of the European Union. It is intended to make the EU more democratic and more efficient.
Living standard Standard of living
Living wage A real wage that is high enough for the worker and family to survive and remain healthy and comfortable, sometimes called meeting basic needs. Term is used in calling for higher wages in both developed and developing countries, where concepts of basic needs may be very different.
LM-Curve In the IS-LM model, the curve representing combinations of income and interest rate at which demand for money equals the money supply in the domestic money market. It is normally upward sloping because an increase in income increases demand for money while an increase in the interest rate reduces demand for money.
Loan An amount, usually of money, conveyed by one to another in the expectation that it will be returned, perhaps with specified interest, at a later date. When the lender and borrower are in different countries with separate monetary and legal systems, loans bear extra risk.
Lobby To attempt to influence government policy by talking to lawmakers and bureaucrats, and perhaps by using other means such as monetary contributions or assistance. Lobbyists often play a role in influencing trade policies, including tariffs and administered protection.
Local content requirement Same as domestic content requirement.
Local optimum An allocation that by some criterion is better than all those in its neighborhood.
Locational advantage Any reason for a firm to locate production, or a stage of production, in a particular place, such as availability of a natural resource, transport cost, or barriers to trade. May explain why a country's firms succeed in trade, or why a multinational firm locates there. (See OLI.)
Locomotive effect The effect that economic expansion in one large country can have on other parts of the world economy, causing them to expand as well, as the large country demands more of their exports.
Logarithm A particular mathematical transformation often used to express economic variables. Advantages: 1) If a variable grows at a constant percentage rate over time, the graph of its logarithm is a straight line. 2) A small change in the logarithm of a variable is approximately its percentage change.
Logrolling The exchange of political favors, especially among legislators who agree to support each others' initiatives. Logrolling contributed importantly to the Smoot-Hawley Tariff.
Lomé Convention An agreement originally signed in 1975 committing the EU to programs of assistance and preferential treatment for the ACP Countries. The Lomé Convention replaced the Yaoundé Convention and was itself replaced by the Cotonou Agreement in June 2000.
London interbank offered rate The interest rate that the largest international banks charge each other for loans, usually of Eurodollars. In fact, LIBOR includes rates quoted each day for many currencies, excluding the euro, but it is the rate for dollar loans that is used as a benchmark for other transactions.
London International Financial Futures and Options Exchange An organized market for a variety of financial instruments, including short term interest rate futures, bonds, swaps, equities, and commodities.
Long position Opposite of a short position, a person with a long position has acquired an asset (or a currency) and is holding it in expectation that it will rise in value.
Long run Referring to a long time horizon. This is not always well defined, but in trade models it usually means long enough for industries to vary the amounts of all factors they employ, and therefore for the factors to be mobile across industries. Contrasts with short run.
Long-term capital In the capital account of the balance of payments, long-term capital movements include FDI and movements of financial capital with maturity of more than one year (including equities).
Lorenz Curve The graph of the percent of income owned by the poorest x percent of the population, for all x. Provides a picture of the income distribution within the population, and is used to construct the Gini Coefficient.
Lost Decade There is, sadly, no single meaning for this term, as it has been applied to many episodes of economies that stagnated for most of a decade. Examples: Argentina and other Latin America in the 1980s; Japan in the 1990s; and the least developed countries in the 1990s.
Louvre Accord An agreement reached in 1987 among the central banks of France, Germany, Japan, US, and UK to stop the decline in the value of the US dollar that they had initiated at the Plaza Accord.
Love of variety Preference for variety.
Low Income Country The bottom income group in the World Bank's classification of countries by GNI per capita, calculated by the Atlas Method. Based on July 2010 data, these were countries with incomes of $1,005 or less. Other groups are Middle Income Countries and High Income Countries.
Lower-Middle Income Country See Middle Income Country.
LSE 1. London School of Economics and Political Science, an excellent university with a traditional strength in international economics.
2. London Stock Exchange, a company that handles the trading of the stocks of around 3000 companies from over 70 countries.
Ltd The abbreviation used in the United Kingdom to represent a limited liability company, thus analogous to "Inc", for incorporated, in the United States and AG in German speaking countriess.
Lucas critique The observation that economic equations estimated under one policy regime are unlikely to be valid under another policy regime, since market participants will take the policy regime into account in forming their behavior. What is needed is to model rational expectations, which internalize all information, including the policy regime. Due to Lucas (1976).
Lump sum Describes a tax or subsidy that does not distort behavior. By using a tax (or subsidy) in an amount (the lump sum) independent of any aspect of the payer's or recipient's behavior, it does not alter behavior. Nondistorting lump sum taxes and subsidies do not exist, but they are a convenient fiction for theoretical analysis, especially of gains from trade.