Economics Definitions.txt

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Economics Definitions.txt
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IB Revision: Economics Definitions
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  1. Economics
    The study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants.
  2. Utility
    The benefit or satisfaction that consumers derive from consuming a good or service.
  3. Scarcity
    The condition in which available resources are not enough to produce everything that human beings need and want.
  4. Opportunity cost
    The benefit foregone from not choosing the next best alternative.
  5. Free goods
    Goods that are not scarce, and has zero opportunity cost.
  6. Factors of Production
    The resources and inputs used to produce goods and services. Includes land, labor, capital, and entrepreneurship.
  7. Ceteris Paribus
    Latin expression for "other things equal". An economics assumption where everything else other than the variables we are studying, does not change.
  8. Positive statements
    Statements about something that is, was or will be. Positive statements may be true or false.
  9. Normative statements
    Statements involving beliefs, or what ought to be. Normative statements cannot be true or false, they can only be assessed relative to beliefs and value judgements.
  10. Absolute advantage
    The ability of a country to produce a good using fewer resources than another country.
  11. Explicit costs
    The payments made by a firm to outsiders in order to acquire resources for use in production.
  12. Actual Output
    The quantity of output actually produced by an economy. Occurs inside the PPC.
  13. Ad valorem tax
    Taxes calculated as a fixed percentage of the price of the good or service. The amount of tax increases as the price of the good or service increases.
  14. Aggregate Demand
    The total quantity of goods and services that all buyers in an economy want to buy over a given time period at a given price level.
  15. Aggregate Supply
    The total quantity of goods and services produced in an economy over a particular time period at different price levels.
  16. Allocative efficiency
    When firms produce the particular combination and quantitates of goods and services that consumers mostly prefer. The condition for allocative efficiency is given by P=MC.
  17. Anti-Dumping Policies
    Protectionist measures such as tariffs or quotas to limit quantities of the dumped goods in the domestic economy.
  18. Appreciation
    An increase in the value of a currency in the context of a floating exchange rate system.
  19. Average costs
    Costs per unit of output.
  20. Average fixed costs
    Fixed cost per unit of output.
  21. Average product
    The total quantity of output of a firm per unit of variable input.
  22. Average revenue
    Revenue per unit of output sold.
  23. Average total costs
    Total costs per unit of output
  24. Average variable costs
    Variable cost per unit of output
  25. Balance of payments
    A record of all transactions between the residents of a country and the residents of all other countries. In the course of a year, the sum of all the credits must equal the sum of all the debits.
  26. Balance of trade
    Part of the balance of payments, it is the value of exports minus the values of imports over a period of time.
  27. Barriers to entry
    Anything that can prevent a firm from entering an industry and beginning production.
  28. Bilateral aid
    Foreign aid that is offered by an individual country to another country
  29. Break even price
    The price at which a firms total revenues are just equal to its total costs of production. At this point, the firm is earning zero abnormal profits, but is earning normal profits.
  30. Business cycles
    Fluctuations in the growth of real output, or real GDP, consisting of alternating periods of expansion and contractions.
  31. Capital Account
    Part of the balance of payments, and is the inflows of funds for the purchase of assets that have not been produced minus outflows for the same purpose.
  32. Cartel
    A formal agreement between firms in an industry to undertake concerted actions to limit competition.
  33. Circular flow model
    A model showing the flow of resources from consumers to firms, and the flow of products from firms to consumers, as well as money flows consisting of consumers' income arising from the sale of their resources and firms' revenues arising from the sale of their products. It illustrates the equivalence of expenditure flows, value of output flows, and income flows.
  34. Collusion
    An agreement among firms to fix prices, or divide the market between them, so as to limit competition and maximize profit.
  35. Collusive oligopoly
    The type of oligopoly where firms agee to restrict output and fix the price, in order to limit competition, increase monopoly power and increase profits.
  36. Commodity agreements
    Agreements among producers that attempt to increase or stabilize world prices of commodities on which developing countries depend for their export earnings, so as to protect members against price fluctuations and falling prices.
  37. Common Market
    A type of trading bloc in which countries that have formed a customs union proceed further to eliminate any remaining tariffs in trade between them. Examples include European Economic Community (EEC)
  38. Comparative Advantage
    When a country has a lower relative cost, or opportunity cost in the production of a good than another country.
  39. Competition
    When there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market.
  40. Complementary goods.
    Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other.
  41. Consumption
    Spending by households on goods and services.
  42. Contestable market
    A market that new firms can enter and exit at a low cost. In a contestable market, the threat of possible new entrants causes existing firms in the industry to behave competitively even though the industry may be a monopoly or an oligopoly.
  43. Convertible currency
    A currency that can be freely exchanged for other foreign currencies.
  44. Cost-push inflation
    A type of inflation caused by a fall in aggregate supply, in turn resulting from increases in wages or prices of other inputs.
  45. Costs of production
    The total opportunity costs incurred by firms in order to acquire resources for use in production. Includes explicit and implicit costs.
  46. Cross-elasticity of demand.
    A measure of the responsiveness of the demand for one good to a change in the price of another good.
  47. Crowding-out effect
    The possible impacts on real GDP of increased government spending financed by borrowing; if increased government borrowing results in a higher rate of interest, this could reduce private investment spending, thus reversing the impacts of the government's expansionary fiscal policy.
  48. Current account
    In the balance of payments, this is the sum of the balance of trade plus the balance on services or invisible balance, plus net income plus net transfers. The most important part of the current account in most countries is the balance of trade.
  49. Customs union
    A type of trading bloc, consisting of a group of countries that fulfill the requirements of a free trade area and in addition adopt a common policy towards all non-member countries; members of a customs union also act as a group in all trade negotiations and agreements with non-members. It achieves a higher degree of economic integration than a free trade area, but lower than a common market.
  50. Cyclical Unemployment
    A type of unemployment that occurs during the downturns of the business cycle, when the economy is in a recessionary gap.
  51. Deficit
    In the balance of payments, it is when the credits are smaller than the debits.
  52. Deflation
    A continuing decrease in the average price level.
  53. Deflationary gap
    A situation where real GDP is less than potential GDP and unemployment is greater than the natural rate of unemployment.
  54. Demand
    The quantity of goods and services that consumers are willing and able to buy at a given price level in a given time period.
  55. Demand pull inflation
    A type of inflation caused by an increase in aggregate demand.
  56. Demand side policies
    Policies that attempt to change aggregate demand in order to achieve the macroeconomic objectives.Consists of fiscal and monetary policies.
  57. Demerit goods
    Goods that are considered to be undesirable for consumers and are over provided by the free market.
  58. Depreciation
    A decrease in the value of a currency in the context of a floating exchange rate system.
  59. Devaluation
    A decrease in the value of a currency in the context of a fixed exchange rate system.
  60. Direct taxes
    Taxes paid directly to the government tax authorities by the tax payer. Eg, Income tax, corporate tax.
  61. Diseconomies of scale
    Increase in the average costs of production that occur as a firm increases its output by increasing all its inputs.
  62. Distribution of income
    How much of an economy's total income different people or different groups in the population will receive.
  63. Diversification
    Increasing the variety of goods and services produced or exported by a country.
  64. Dumping
    The practice of selling a good in international markets at a price that is below the cost of producing it.
  65. Economic costs
    The sum of explicit costs and all other opportunity costs.
  66. Economic development
    Rises in the standard of living and wellbeing of a population. Increased income levels, reduced poverty, income equality and provision to necessary goods and services.
  67. Economic goods.
    Goods that are scarce and have an opportunity cost, due to it being scarce, or it being made from scarce resources.
  68. Economic growth
    Increases in total real output produced by an economy over time.
  69. Economic integration
    Refers to economic interdependence between countries, usually achieved by agreement between countries to reduce of eliminate trade barriers between them
  70. Economies of scale
    Decreases in the average costs of production that occur as a firm increases its output by increasing all its inputs.
  71. Entrepreneurship
    One of the factors of production, involving a special human skill that includes the ability to innovate by developing new ways of doing things, to take business risks and to seek new opportunities for opening and running a business.
  72. Exchange rate
    The value of a currency expressed in terms of another currency.
  73. Expenditure method.
    A method used to measure the value of aggregate output of an economy, which adds up all spending on final goods and services produced within a country within a given time period.
  74. Expenditure reducing policies
    Policies that involve reducing expenditures in the domestic economy so as to bring about a decrease in imports in order to correct a current account deficit.
  75. Expenditure switching policies
    Policies that involve switching consumption away from imported goods and towards domestically produced goods in order to correct a current account deficit.
  76. Export-led growth
    Refers to a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports.
  77. Externality
    Occurs when the actions of consumers or producers give rise to positive of negative side-effects on third parties.
  78. Factor endowments
    The factors of production that a country possesses.
  79. Factors of production
    All resources or inputs used to produce goods and services. Land, labor, capital, enterpeneurship.
  80. Fair trade organizations
    Organizations in developed countries that have established a trading system promoting equitable and fair trading relationships between poor and marginalized producers in developing countries and consumers in developed ones.
  81. Financial account
    In the balance of payments, the financial account refers to inflows of funds into the country due to investments of foreigners in the country, and to foreign foreign lending to the country, minus outflows of funds due to investments abroad and loans to other countries, plus changes in official reserves.
  82. Fiscal policy
    Manipulations by the government of its own expenditures and taxes in order to influence the level of aggregate demand.
  83. Fixed costs
    Costs that arise from the use of fixed inputs, which do not change as output increases or decreases.
  84. Fixed exchange rate system
    • An exchange rate system where exchange rats are fixed by the central bank of each country, and are not permitted to change in response to changes in the supply and demand for currencies.
    • Flat rate taxes
    • Taxes calculated as an absolute amount per unit of the good or service sold
  85. Floating exchange rate system
    An exchange rate system where exchange rates are determined entirely by market forces with no government intervention.
  86. Foreign aid
    Consists of concessional financial flows from the developed world to less developed countries, and includes loans and grants.
  87. Foreign Direct Investments
    The investments by multinational firms based in one country in productive activities in another country.
  88. Formal Economy
    The part of an economy that is registered and legally regulated by the country's existing legal regulatory framework.
  89. Free good
    Any good that is not scarce, and therefore has zero opportunity cost.
  90. Free trade area
    A type if trading bloc consisting of a group of countries that agree eliminate trade barriers between themselves.
  91. Frictional unemployment
    A type of unemployment that occurs when workers are between jobs.
  92. Full employment
    The maximum use of all resources in the economy to produce the maximum quantity of goods and services that the economy is capable of producing.
  93. Full employment level of output
    The level of output at which unemployment is equal to the natural rate of unemployment.
  94. Giffen good.
    A kind of inferior good whose demand curve is upward sloping due to the income effect of a price change being larger than the substitution effect.
  95. Gini coefficient
    A measure of income inequality from 0-1.
  96. Grants
    A type of foreign aid consisting of funds do not need to be repaid.
  97. Gross domestic product
    The market value of all final goods and services produced within a country during a given time period.
  98. Gross National Product
    The market value of all final goods and services produced by the factors of production of a country regardless of where the factors are located.
  99. Import quota
    A type of trade protectionism that involves setting a legal limit to the quantity of a good that can be imported over a particular time period.
  100. Import substitution
    A growth and trade strategy where a country begins to manufacture simple consumer goods oriented towards the domestic market in order to promote its domestic industry.
  101. Indirect taxes
    Taxes levied on spending to buy goods and services, VAT etc.
  102. Infant industry
    A new domestic industry that has not had time to establish itself and achieve efficiencies in production and may therefore be unable to compete with more "mature" competitor firms from abroad.
  103. Inferior good
    A good where the demand varies inversely with income.
  104. Inflation
    A persistent increase in the average price level.
  105. Inflationary gap
    A situation where real GDP is greater than potential GDP, and unemployment is smaller than the natural rate of unemployment
  106. Informal economy
    The part of an economy that lies outside the formal economy, and consists or economic activities that are unregistered and legally unregulated.
  107. Infrastructure
    Numerous types of physical capital resulting from investments. Eg, public utilities, public works, transport.
  108. Interest
    A payment, per unit of time, for the use of borrowed money.
  109. IMF
    An international financial institution composed of 185 countries whose purpose is to make short-term loans to government on commercial terms in order to stabilize exchange rates and alleviate balance of payments difficulties.
  110. Interventionist strategy
    A strategy characterized by strong government interference in the market through a variety of interventionist policies which are designed to limit the operation of the free market and control the allocation of resources. Eg, Subsidies, trade barriers, etc.
  111. Investment
    Includes spending by firms or the government on capital goods and all spending on new construction.
  112. Invisible balance
    In the balance of payments, this is the value of exports of services minus the value of imports of services.
  113. Inward orientation
    An orientation of an economy in which efforts are made to limit imports of goods and services through protectionist policies and to achieve self-sufficiency in production
  114. J-Curve
    A curve that plots the balance of trade on the vertical axis and time on the horizontal axis, showing that a country with a devaluing.depreciating currency may see a worsening in its trade balance in the period immediately following the devaluation or depreciation, while in a later period the trade deficit will begin to shrink provided the Marhsall-Lerner condition holds.
  115. Kinked demand curve
    A model developed to explain price inflexibility of oligopolistic firms that do not collude.
  116. Laffer curve
    A curve showing the relationship between income tax rates and government revenues. It indicates the particular tax rate for which revenues are maximum.
  117. Law of diminishing marginal returns
    A law that states that as more and more units of a variable input are added to one or more fixed inputs, the marginal product of the variable input at first increases, but there comes a point when the marginal product of the variable input begins to decrease.
  118. Long run
    In microeconomics, it is a time period in which all inputs can be changed. In macroeconomics, it is the period of time in which the nominal prices of all resources, including the price of labor, change so as to reflect fully any change in the price level.
  119. Lorenz curve
    A curve illustrating the degree of equality of income distribution in an economy. It plots the cumulative percentage of income received by cumulative shares of the population. Perfect income equality would be represented by a straight line.
  120. Managed exchange rates
    A system where exchange rates are for the most part free to float to their market levels over long periods of time, however, central banks periodically intervene in order to stabilize them over the short term.
  121. Marginal cost
    The extra or additional cost of producing one more unit of output
  122. Marginal product
    The extra or additional output that results from one additional unit of a variable input
  123. Marginal revenue
    The additional revenue arising from the sale of an additional unit of output
  124. Market economy
    An economy based on private ownership of all resources and private decision-making, and relying on prices determined in free markets and price rationing to allocate resources and distribute income.
  125. Market failure
    Occurs when the market fails to allocate resources efficiently, or to provide the quantity and combination of goods and services mostly wanted by society.
  126. Marshall Lerner condition
    A condition stating when depreciation or devaluation of a country's currency will lead to an improvement in that country's balance of trade. The sum of the price elasticities of demand for the imports and exports must be greater than 1 for the trade balance to improve.
  127. Maximum price
    A legal price set by the government, which is below the market equilibrium price, this does not allow the price to rise to its equilibrium level determined by a free market.
  128. Merit goods
    Goods that are held to be desirable for consumers, but which are under provided by the free market.
  129. Micro-credit scheme
    A program me to provide credit in small amounts to people who do not ordinarily have access to credit.
  130. Minimum price
    A legal price set by the government which is above the market equilibrium price; this does not allow the price to all to its equilibrium level determined by a free market.
  131. Mixed economy
    An economy that relies on a mix of public and private resource ownership and decision making. It is a mix between the market economy and government intervention.
  132. Monetary integration
    The highest form of economic integration. Involves the adoption by a group of countries of a single currency, such as the European Union and the Euro.
  133. Monetary policy
    Policies carried out by the central bank, aiming to change interest rates and supply of money in order to influence aggregate demand.
  134. Monopolistic competition
    One of the four market structures, where there is a large number of firms each with substantial control over market price. There is also no barriers to entry, and there is a lot of product differentiation.
  135. Monopoly
    One of the four market structures, where a single large firm in the industry has significant control over the price, and produces and sells a unique product. There are also high barriers to entry into the industry.
  136. Multilateral Aid
    Refers to foreign aid that is offered by an international organization.
  137. Multinational corporation (MNC)
    A firm involved in foreign direct investment. It is a firm that is based in one country and that undertakes productive investments in another country.
  138. Multiplier effect
    The impact on real GDP of a change in any of the components of aggregate spending, which is likely to be larger than the initial change in any of the components of aggregate spending.
  139. Natural monopoly
    A single firm can produce for the entire market at a lower average cost than two or more smaller firms.
  140. Natural rate of unemployment
    Unemployment that occurs when the economy is producing at its potential or full employment level of output.
  141. Negative externality
    A type of externality where the side-effects on third parties are negative or harmful.
  142. Net investment
    That part of investment that does not include depreciation.
  143. NAIRU
    Non-accelerating inflation rate of unemployment. The unemployment rate that is consistent with a constant rate of inflation.
  144. Non-collusive oligopoly
    A type of oligopoly where firms of not make agreements among themselves in order to fix prices or collaborate in some way.
  145. NGO
    • Non governmental organizations
    • Non-profit organizations that provide a very wide range of services and humanitarian functions, such as giving grants to developing countries, emergency assistance, etc.
  146. Non-price competition
    Occurs when firms compete with each other on the basis of methods other than price, such as branding or product differentiation.
  147. Normal good
    A good where the demand varies directly with income.
  148. Normal Profit
    The minimum amount of revenue that a firm must receive so that it keeps the business running.
  149. Normative statements
    Statements involving beliefs, or what ought to be. Normative statements cannot be true of false, they can only be assessed relative to beliefs and value judgements.
  150. Official aid
    Foreign aid that is offered by countries or by international organizations composed of a number of countries.
  151. Oligopoly
    One of the four market structures, where there are a small number of large firms in the industry, each with significant control over price. The firms are interdependent, and the products may be differentiated or undifferentiated. There are high barriers to entry.
  152. Opportunity cost
    The benefit foregone from not choosing the next best alternative.
  153. Outward orientation
    An orientation of an economy in which efforts are made to seek integration of the economy with the world market through an expansion of exports.
  154. Perfect competition
    One of the four market structures where there are a large number of small firms with no control over price. ALl firms sell a standardized product, and there is no barriers to entry or exit.
  155. Positive externality
    A type of externality where the side-effects on third parties are positive or beneficial.
  156. Positive statements
    Statements about something that is, was or will be. Positive statements may be true or false.
  157. Potential output
    The level of output that can be produced when there is "full employment", meaning that unemployment is equal to the natural rate of unemployment.
  158. Price controls
    Setting of minimum or maximum prices by the government so that prices are unable to adjust to their equilibrium level determined by demand and supply.
  159. Price discrimination
    The practice of charging a different price for the same product when the price difference is not justified by differences in costs of production.
  160. Product differentiation
    Occurs when each firm in an industry tries to make its product different from those of its competitors, usually in order to create some monopoly power.
  161. Production possibilities curve
    Represents all combinations of the maximum amounts of two goods that can be produced by an economy.
  162. Production subsidies
    Payments per unit of output granted by the government to domestic firms. These may form a type of trade protectionism when granted to firms producing goods that compete with imports.
  163. Productive efficiency
    Occurs when firms produce at the lowest possible cost.
  164. Progressive taxation
    Taxation where as income increases, the fraction if income paid as taxes increases. There is an increasing tax rate.
  165. Property rights
    Laws and regulations that define rights to ownership, use and transfer of property. They are very important to the functioning of a market economy, as economic activities are less likely to be undertaken if property rights are not secure.
  166. Proportional taxation
    Taxation where, as income increases, the fraction of income paid as taxes remains constant. There is a constant tax rate.
  167. Protectionism
    Government intervention in international trade through the imposition of trade restrictions to prevent the free entry of imports into a country and protect the domestic economy from foreign competition.
  168. Public good
    A good that is non-rivalrous and non-excludable. Since firms do not have the incentive to produce it, public goods are provided by the government. This is a type of market failure.
  169. Purchasing power
    The quantity of goods and services that can be bought by a unit of money.
  170. Real wage unemployment
    A type of unemployment that arises where there is a disequilibrium in the labor market. It occurs when the actual real wage is higher than the equilibrium real wage, giving rise to a labor surplus, or unemployed labor.
  171. Recession
    An economic contraction, where there is falling real GDP and increasing unemployment of resources which last six months or more.
  172. Regressive taxation
    Taxation where, as income increases, the fraction of income paid as taxes decreases. There is a decreasing tax rate.
  173. Resource allocation
    Assigning available resources, or factors of production, to specific uses chosen among many possible and competing alternatives.
  174. Revaluation
    Refers to an increase in the value of a currency in the context of a fixed exchange rate system.
  175. Scarcity
    The condition in which available resources are limited; they are not enough to produce everything that human beings need and want.
  176. Seasonal unemployment
    A type of unemployment that occurs when the demand for labor in certain industries changes on a seasonal basis because of variations in needs.
  177. Short run
    In microeconomics, it is a time period during which at least one input is fixed and cannot be changed by the firm. In macroeconomics, it is the period of time during which the nominal prices of resources, particularly the price of labor, do not change in response to changes in the price level; we can think of resource prices as being constant.
  178. Shut down price
    The price at which a firm that is making losses will stop producing in the short run, which is given by price=minimum average variable cost.
  179. Specialization
    Occurs when a firm or a country concentrates its production on one or a few goods and services.
  180. Speculation
    Buying and selling of something in the hope of making a profit.
  181. Structural unemployment
    A type of unemployment that occurs as a result of technological changes, changing patterns of demand that determine growing and declining industries, and changes in the geographical location of jobs, etc.
  182. Substitutes
    Two or more goods that satisfy a similar need, so that one good can be used in place of another.
  183. Supernormal profit
    Any profit made by a firm over and above normal profit.
  184. Supply
    The quantity of a good that firms are willing and able to produce and sell at different prices during a particular time period.
  185. Supply side policies
    A variety of policies that focus on shifting the LRAS curve to the right in order to achieve long-term economic growth. Market orientated and interventionist.
  186. Sustainable development
    Development which meets the needs of the present without compromising the ability of future generations to meet their own needs.
  187. Tariffs
    Taxes on imported goods to protect a domestic industry from foreign competition or to raise revenue for the government.
  188. Terms of trade
    Relates the prices a country receives for its exports to the prices paid for its imports, and is given by the ratio of average export prices to average import prices.
  189. Tied aid
    The practice whereby donors make the recipients of foreign aid spend a portion of the borrowed funds on the purchase of goods and services from the donor country.
  190. Total costs
    The sum of fixed and variable costs
  191. Total product
    The total quantity of output produced by a firm
  192. Total revenue
    The amount of money received by firms when they sell a good or service.
  193. Tradable permits
    Permits that can be issued to firms by a government or an international body, and that can be traded in a market, the objective being to limit the total amount of pollutants emitted by the firms.
  194. Trade creation
    The replacement of higher cost products by lower cost imports that results when a trading bloc is formed and trade barriers are removed.
  195. Trade diversion
    The replacement of lower cost imports by higher cost imports that results when a truing bloc is formed and trade barriers are removed.
  196. Trading bloc
    A group of countries that have agreed to reduce tariff and other barriers to trade for the purpose of encouraging the development of free trade and cooperation between them.
  197. Transfer payments
    Payments made by the government to individuals specifically for the purpose of redistributing income, thus transferring income from those who work and pay taxes towards those who cannot work and need assistance.
  198. Underemployment
    The number of underemployed people, defined as all people above a particular age who have part-time jobs when they would prefer to have full-time jobs; or have jobs that do not make full use of their skills and education
  199. Unemployment
    The number of unemployed people, defined as all people above a particular age who are not working and who are actively seeking a job.
  200. Unemployment rate
    A measure of the amount of unemployment in an economy. Calculated by taking the total number of unemployed people in an economy and dividing by the labor force, and multiplying by 100.
  201. Utility
    The benefit or satisfaction that consumers derive from consuming a good or service.
  202. Variable costs
    Costs that arise from the use of variable inputs, and that vary or change as output changes.
  203. Veblen goods
    Goods that have an upward-sloping demand curve. Veblen goods arise from a pretentious display of wealth, or a belief that a lower price of a good means lower quality.
  204. Wage
    A payment, per unit of time, to those who provide labor, this includes all wages and salaries, as well as supplements.
  205. World Bank
    A development assistance organization, composed of 185 member countries that extends long term credit to developing countries for the purpose of promoting economic development and structural change.
  206. World Trade Organization
    An international organization that provides the institutional and legal framework for the trading system that exists between member nations worldwide, responsible for liberalizing trade, operating a system of trade rules and providing a forum for trade negotiations between governments, and for settling trade disputes.

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