Glossary of Economic and Business Terms - L, Glossary of International Economics, Business and Economic Terms, Abbreviations, Terms List, MBA Exam

"L"

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 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.
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.
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 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, signed in 1955 and expired in 1974, 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.
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.
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.
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 2007, 49 countries are 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.
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.
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 objective of those who advocate protection on the grounds the foreign firms have an unfair advantage. A level playing field would remove such advantages, although it is not usually clear what sorts of advantage (including comparative advantage) would be permitted to remain. See fairness argument for protection.
Levy	1. To impose and collect a tax or tariff. 2. A tax or tariff.
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.
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.
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.
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 regression model	A linear relationship between a dependent variable and one or more independent variables plus a stochastic disturbance: Yi=b0+b1X1i+...+bnXni+ui.
Linearly homogeneous	Homogeneous of degree 1. Sometimes called linear homogeneous.
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.
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.
Local content requirement	See 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 was 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.
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.
Ltd	The abbreviation used in the United Kingdom to represent a limited liability company, thus analogous to "Inc", for incorporated, in the United States.
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.

(DOU 20082007)