Origins of Terms in International Economics

This page records what I have been able to learn about the origins of some of the terms we use in international economics. If I attribute a concept or a term naming it to a particular author, that means I have personally checked the source and seen it used there in the way that I describe. However, if I say or imply that this was the first use of a concept or term, I obviously cannot always know that for certain. If you know of prior uses that should be mentioned, please let me know, preferably by e-mail to
Balance of trade
Price (1905) examines the origins of this concept, the exact wording of which appeared in 1615 and the concept of which, without the wording, can be found as early as 1381 in England, when writers were concerned that by importing a greater value than it was exporting, England was losing money -- i.e., gold and silver. Somewhat before the term "balance of trade" appeared, similar concerns were said in 1601 to be due to "overbalancing of foreign commodities." From the discussion by Price, it appears that "balance of trade" in this early use referred to a situation in which values of exports and imports were equal, rather than today's use measuring the extent to which they are unequal.

Fetter (1935) dates the term to 1623, apparently disagreeing with Price that its use in 1615 was comparable. His main concerns are with the common attribution that a positive balance of trade is "favorable" and with whether the term includes only trade in goods or instead extends beyond that to include other payments such as we today would include in the balance on current account or even balance of payments. It appears that early writings used the term variously in each of these senses.

[I was alerted to the articles by Price and Fetter by Obstfeld (2012).]

Barter terms of trade
See terms of trade for Taussig's (1927) refinements of Marshall's "terms of trade."
CES function
Arrow et al. (1961, pp. 225-226) described their empirical motivation to "derive a mathematical function having the properties of (i) homogeneity, (ii) constant elasticity between capital and labor, and (iii) the possibility of different elasticities for different industries." They named it the CES function and estimated it across industries and countries.
Comparative advantage
Ruffin (2002) credits the concept of comparative advantage and the law of comparative advantage to Ricardo (1951-1973), in a discovery that Ruffin dates to early October 1816. The law was developed in Ricardo's celebrated chapter on foreign trade, while the term "comparative advantage" seems to have first appeared in a later chapter (Ricardo (1951-1973), Vol I, p. 263). In crediting Ricardo, Ruffin disagrees with Chipman (1965) who credits Torrens (1815). From what I see in this debate, Torrens deserves credit for first stating the possibility that a country will import a good in which it has an absolute advantage, even though he seems not to have recognized its importance, and he certainly did not work out the full conditions needed for this to happen, as Ricardo did.
Continuum of goods
The first to model trade with a continuum of goods were Dornbusch, Fischer, and Samuelson (1977), who also use that term in their title. They cite an unpublished paper by Charles Wilson, also dated 1977, that further explores their model, but in the published version of that paper, Wilson (1980) credits them with having suggested this modification of traditional trade theory.
Currency area
Mundell (1961, p. 657) spoke of "...defining a currency area as a domain within which exchange rates are fixed...". Perhaps because the exchange rates among separate national currencies are seldom if ever truly fixed, the term has come to mean a group of countries that share a common currency. Mundell also coined the term "optimum currency area" which is now more commonly expressed as optimal currency area.
Diversification cone
Dixit and Norman (1980, p. 52) attribute this to Lerner (1952) and McKenzie (1955). I see nothing in Lerner to justify this. McKenzie, however, makes considerable use of the concept in the form of a set of factor endowments within which factor price equalization occurs, though he does not give it a name. Since he projects factor requirements and factor endowments onto a simplex, his set appears as a triangle, though a cone is implicit. I do not yet know who may have preceded Dixit and Norman in using this term.
DUP activity
Bhagwati (1982) introduced this acronym for directly unproductive profit-seeking activity. After listing a variety of activities that fit this description, including rent seeking, revenue seeking, and others, he said (p. 990), "Thus, these are aptly christened DUP activities."
Dutch disease
Term was coined by The Economist in an article "The Dutch Disease" in the issue of November 26, 1977, pp. 82-83, which included the passage "... in the words of Lord Kahn [1905-1989], 'when the flow of North Sea oil and gas begins to diminish, about the turn of the [21st] century, our island will become desolate.' Any disease which threatens that kind of apocalypse deserves close attention." The article attributes the problems of the Dutch economy (an external appearance of strength but internally high unemployment and a declining manufacturing sector) to "three causes, only one of them external." These are (1) a strong currency; (2) high industrial costs; and (3) use of government gas revenues to increase spending rather than investment. As used since, the term has been focused primarily on the real exchange rate. The term was used by Corden and Neary (1982), whose reference to it as "... sometimes referred to as the 'Dutch Disease'" suggested that it had passed into common usage.
Edgeworth-Bowley box
The origins of this are examined by Tarascio (1972). The Edgeworth-Bowley box diagram got its name when Bowley (1924) drew a box around a rotated version of an indifference curve diagram of Edgeworth (1881). However, Bowley did not claim originality, and Pareto (1906) had actually been the first to draw and use the actual box diagram.
Factoral terms of trade
See terms of trade for Viner's (1937) introduction of both single and double factoral terms of trade.
Used to mean a splitting up of production processes, the term fragmentation was first introduced by Jones and Kierzkowski (1990), who start their analysis by noting (p. 31) that increasing returns and specialization encourage a growing firm to "switch to a production process with fragmented production blocks connected by service links.... Such fragmentation spills over to international markets." (Italics in original.) Many other terms have been used with the same, or related, meanings, as listed here, but "fragmentation" seems to have caught on most widely.
This term first appeared in print in Buiter and Rahbari (2012). DeTraci Regula, in an undated posting on, suggests that the term was coined by the second author, Citigroup's Ebrahim Rahbari. She also points out the prior existence of, an e-mail storage and organizing tool.
Immiserizing growth
The term "immiserizing growth" was used by Bhagwati (1958) and it seems unlikely that anyone used it before him, since he seems to have coined the word "immiserizing." As for the concept, Bhagwati credits Johnson (1953, 1955) with identifying a form of immiserizing growth and also with working out the conditions for Bhagwati's form of it in an unpublished note. Long before both of them, Edgeworth (1894, p. 39-40) had shown, though only by example, that increased production of exports could so reduce their relative price that the country loses or, as Edgeworth put it, is "damnified by the improvement." He in turn credits Mill (1821) with noting the possible worsening of the terms of trade, though Mill apparently incorrectly equated this worsening with a necessary decline in welfare. (I have not read Mill and am taking Edgeworth's word for this.)
Income terms of trade
Dorrance (1948) suggested this measure of the terms of trade as an alternative to the net barter terms of trade and the gross barter terms of trade that, he argued, gave a misleading indication of the extent to which a country was gaining from trade when markets were in disequilibrium, as had become more common in the mid-20th century than it was when the earlier terms were coined in the 19th century. A rise in a country's barter terms of trade, due to a rise in its prices relative to the price of imports, could be harmful if it mainly caused a fall in the quantity it was able to sell. The income terms of trade, because it relates the value of exports -- price times quantity -- to the price of imports, will correctly record a decline if the price increase is more than offset by a quantity decrease.
Law of comparative advantage
See comparative advantage.
Lerner diagram
The Lerner Diagram was first drawn by Lerner in an unpublished seminar paper in 1933. He used unit-value isoquants together with unit isocost lines to show the relationship between goods prices and factor prices in the H-O model. That paper was reproduced, "as it was originally written" according to the journal editor, as Lerner (1952). I don't know who first called it the Lerner diagram, although Findlay and Grubert (1959) made extensive use of the diagram, attributing it to Lerner.

Some (including myself, until I learned better) have called it the Lerner-Pearce diagram, giving credit also to Pearce (1952). In fact, although Pearce in this article was debating Lerner regarding the likelihood of factor price equalization, he used unit isoquants, not unit-value isoquants, for the purpose. Since these do not align in equilibrium with a single unit isocost line, they cannot be used in the same way, and they do not achieve the essential simplicity of Lerner's construction.

Meade Index
Meade (1955a) did not put his calculation into the form of an index, except in an appendix, but rather suggested adding up the increases in trade and the decreases in trade separately, each weighted by tariffs, and concluding that there had been a gain from trade (in his context of formation of a customs union) if the former were larger than the latter.

In his example of the duty on Dutch and Belgian beer, Meade said (p. 66): "What we need to do, therefore, is to take all the changes in international trade which are due directly or indirectly to the reduction in the Dutch duty on Belgian beer; value each change at its supply price in the exporting country and weight it by the ad valorem rate of duty in the importing country; add up the resulting items for all increases of trade and do the same for all decreases of trade; if the resulting sum for the increases of trade is greater than that for the decreases of trade, than [sic] there is an increase of welfare; and vice versa."

Meade's main point was that one should not look only at the product on which the tariff is being reduced, but rather at all changes in trade that will be caused, both positive and negative, by that change. Of course if tariffs on all other products were universally zero, then the contributions to his calculation for them would also be zero. Hence, this is a simple way of taking account of the second-best nature of a tariff reduction when tariffs on other products are not zero.

In his Appendix II (pp. 120-121), Meade formalized his calculation and called it "an index of the change in world welfare," which he derived as

      dU = uΣi{dxi(pici)}

where U is world utility, u is the common marginal utility, dxi is the change in trade of good i, pi is price to consumers, and ci is price (i.e., cost) to producers.

It seems to have been Vanek (1965, p. 15) who first called this the Meade Index.

Peso problem
The term is often attributed to Milton Friedman, who apparently commented on the market for the Mexican peso in the early 1970s and explained Mexico's high (relative to the US) interest rate by the concern that the peso would be devalued, which it later was. It is not clear that Friedman actually used the term "peso problem," however. Paul Krugman, in his blog on July 15, 2008, says that the term was coined in the "MIT grad student lunchroom," perhaps by him or perhaps by Bill Krasker, who he says "published the first paper using the term" in Krasker (1980).
Policy space
Although the term or a variant began to be used in UNCTAD discussions and documents in the early 2000s, it was defined explicitly in the São Paulo Consensus of UNCTAD (2004, p. 2): "...the space for national economic policy, i.e., the scope for domestic policies, especially in the areas of trade, investment and industrial development, is now often framed by international disciplines, commitments and global market considerations."
Purchasing power parity
It was Cassel (1918, p. 413) who introduced the term in the context of discussing how exchange rates should be reset after World War I and the large differences in inflation that occurred in different countries, especially Sweden and England. "...the rates of exchanges should accordingly be expected to deviate from their old parity in proportion to the inflation of each country. .... I propose to call this parity 'the purchasing power parity.'" The idea, though not the name for it, is much older than that, said to date back at least to the 16th century.
Rent seeking
Rent seeking was introduced to the trade literature by Krueger (1974), who defined it generally but applied it to quantitative restrictions on trade. She noted (p. 291) that government restrictions on economic activity "give rise to rents ..., and people often compete for the rents." She called this competition rent seeking, a term that she apparently coined and that has caught on hugely.
Second-best argument for protection
The introduction of the term "second best" in the context of protection was by Meade (1955b), who included four chapters on "The Second-Best Argument for Trade Control" with subheadings "The raising of revenue," "The Partial Freeing of Trade," "Domestic Divergences," and "Dumping as a complex case."

The classic paper establishing that trade policy is only second best in general for dealing with domestic distortions is by Bhagwati and Ramaswami (1963), who do not cite Meade. However, they also do not use the term "second best," and the point of their contribution is to argue for policies superior to trade policies. The term "second best" was adopted by Lipsey and Lancaster (1956), attributing it to Meade, but their application to tariffs is concerned only with the optimal level of one tariff when another is non-zero. By Bhagwati et al. (1969), Bhagwati too was using the "second-best" terminology, but again his and his co-authors' main point was that tariffs are not even second best but only at most third best when other policies can be adjusted. Thus trade economists have generally used the second-best argument against protection rather than for protection.

If policies superior to tariffs are not available, however, the argument may become one in favor of protection. Thus in its simplest form, a government that is unable to levy any other kind of tax but requires revenue in order to function will use tariffs no matter how far down the list from first-best tariffs may lie. This has presumably been understood since long before the distorting effects of tariffs were examined by economists. And even here, the argument is subject to the caveat that the benefits from the government activity must outweigh the welfare losses due to the tariff.

This is equally true in more complex cases. The infant industry argument depends on distortions that prevent infant industries from reaping the full benefits of their production. The first-best policy is to correct or offset that distortion, perhaps by a production subsidy. But if production subsidies are unavailable (not just rejected politically, since that should in principle apply even more to a tariff, if it were fully understood), then a second-best tariff will be beneficial if not too large.

Technology gap model
Those who write about technology gap models routinely cite Posner (1961) as the first of several papers with this idea. However, Posner's paper includes neither the word "technology" nor the word "gap." It was Hufbauer (1966) who elaborated Posner's idea and spoke of a "technological gap account" of trade. Krugman (1986) may have been the first to formalize the model to modern standards, and he certainly used the words. One source cites the same Krugman (1986) paper but listed as "Conference of the International Economic Association, Sweden, 1982," suggesting that the switch from "technological" to "technology" may have originated then with Krugman. I have found no earlier use of the term "technology gap."
Terms of trade
It appears that the phrase "terms of trade" was first used with more or less its modern meaning by Marshall (1923), p. 161. In an example involving countries E and G, he speaks of "the amounts to which E and G would be severally willing to trade at various 'terms of trade'; or, to use a phrase which is more appropriate in some connections, at various 'rates of exchange.'" He then explains his preference for the new term on the grounds that "rates of exchange" may be understood to connote monetary exchange rates, while he meant the rate at which goods are traded for other goods.

Having introduced the expression in the book, Marshall then uses it in subsequent discussions, but he does not use it exclusively. He seems to alternative between "terms of trade" and "rate of interchange," which seem to be synonyms as he uses them.

There is a slight uncertainty as to whether this is Marshall's first use of the expression. This is because it also appears in Appendix J of the same book, which a footnote explains was largely written much earlier, between 1869 and 1873, and which was "privately printed and circulated among economists at home and abroad in 1879." (p. 330). However, Appendix J with only very few exceptions does not use "terms of trade," but rather alternates between "rate of interchange" and "exchange index." It seems likely that the few (I only found two) occurrences of "terms of trade" in that appendix were added when it was presumably revised for its 1923 publication. This is supported by the fact that "terms of trade" does not appear at all in the 1920 8th edition of Marshall's (1890) Principles.

Was Marshall the first to use the term? Taussig (1927) says so, citing Marshall (1923). And I have confirmed that Mill (1848) did not use the term. That of course leaves open a great many others who might have. But from the way Marshall introduces the term, it at least appears that he thought it was new.

Taussig (1927), after explaining Marshall's preference for "terms of trade" over "rate of exchange," goes on "to reduce still further the possibilities of misunderstanding" by refining the expression as barter terms of trade, emphasizing that it refers to the rate at which goods are exchanged for other goods.

Taussig also distinguishes net and gross barter terms of trade, the latter allowing for total amounts paid even when they differ from prices due to trade imbalance that might arise from, say reparation payments.

Viner(1937) argued that the classical economists were concerned not just with the rates at which goods exchanged for one another, but also with the rates at which factors exchange, through their production of goods and trade. He therefore introduced the factoral terms of trade, both single and double.

Thank-you note
As a policy to respond to a foreign subsidy. I attribute this to Paul Krugman fairly early in his career. I have, however, been unable to track down where he actually said it. I once asked him directly, but he couldn't recall.
Third World
"But the term third world did not originally refer to geopolitics. The first to use it in its modern sense was Alfred Sauvy, a French demographer who drew a parallel with the 'third estate' (the people) during the French revolution. In 1952 Sauvy wrote that 'this ignored, exploited, scorned Third World, like the Third Estate, wants to become something, too.' He was paraphrasing a remark by Emmanuel-Joseph Sieyès, a delegate to the Estates-General of 1789, who said the third estate is everything, has nothing but wants to be something. The salient feature of the third world was that it wanted economic and political clout." From "Seeing the World Differently," The Economist, June 10, 2010.
Trade deflection
Shibata (1967, p. 151) defines this as a "redirection of imports from third countries through the partner country with the lowest tariff, with the sole aim of realizing tax advantage by exploiting the rate differentials between the member countries within an economic union." He notes that trade deflection had previously been defined in the Stockholm Convention, which established the European Free Trade Association, but somewhat more narrowly and differently as arising from difference in tariffs on raw materials or intermediate inputs that allows a final good to be exported from one member to another of an FTA.