Macro 4

define globalisation

the increasing integration of national economies in terms of trade, financial flows, ideas, information and technology, causing a sustained increase in capital flows between countries and an increase in trade

define outsourcing

when key functions of a firm are contracted out to another company

define a transnational/multinational country (TNC)

a corporation which produces and operates in more than one country

define international trade

the exchange of goods and services between countries

define absolute advantage

when a country is able to produce a good more efficiently than another country

define comparative advantage

when a country is able to produce a good at a lower opportunity cost than another country

define trade creation

when a country moves from trading with a high cost producer to a lower cost producer

define trade diversion

when a country moves from trading with a low cost producer to a higher cost producer

define terms of trade

the ratio of export prices to import prices

the rate at which one nation’s output exchanges for another nation’s output

calculation for index of terms of trade

index of export prices / index of import prices x 100

define protectionist policies

policies adopted to distort market forces in order to give a competitive advantage to the domestic industry of an economy

define the balance of payments

a record of the financial transactions between one country and the rest of the world over a period of a year

the balance of payments accounts

current account

capital account

financial account

describe capital account

records transactions in fixed assets, mostly to do with migration

e.g. as immigration into UK increases, the assets of immigrants become assets of the UK

define the marshall lerner condition

depreciation will improve the current account if the combined elasticities of demand for exports and imports are greater than 1

describe floating exchange rate

the value of a currency is determined by market forces of demand and supply

describe managed exchange rate

value of the currency is officially determined by market forces

but governments and central banks may manipulate exchange rate by trading their currency in the FX market

describe fixed exchange rate

the gov/central bank pegs their currency to the value of another currency

may be fully fixed or fluctuate within target band

currency can be revalued or devalued by changing rate at which it is pegged

define speculation

buying and selling assets or financial instruments with the primary goal of profiting from short-term price movements, rather than holding the asset for its long-term value or income-generating potential

define depreciation

when the value of a currency has fallen by market forces

define appreciation

when the value of a currency has risen through market forces

define relative poverty

when a person is poor compared to others in society

the percentage of households on about 50% or less of median income

define absolute poverty

the inability to produce the basic necessities of life causing a person’s continued daily existence to be threatened

someone who lives on less than $3 per day in purchasing power parity terms

income vs wealth

income is a flow of money paid to the factors of production

wealth is a stock of assets

describe the lorenz curve

a measure of inequality that plots cumulative shares of income against the cumulative share of households with that income

define the gini coefficient

the distance between the 45 degree line of inequality and the lorenz curve

gini coefficient formula

A / (A+B)

interpreting gini coefficient

0-1

0 represents total equality

define financial institutions

financial intermediaries such as retail banks, commercial banks, investment banks, building societies, insurance companies and pension funds whose main role is to channel funds from savers to borrowers

define financial markets

any set of arrangements where buyers can buy and sell a range of services or assets that are fundamentally monetary in nature

define adverse selection

when buyers and sellers have access to different information

define moral hazard

a situation where a person or business is more willing to take risks to benefit themselves because any negative consequences will be felt by someone else

define a speculative bubble

an unsustainable increase in the value of an asset, typically house prices or stock market values

normally caused by exaggerated expectations of future growth in the value of an asset

define market rigging

where a group of individuals or institutions collude to fix prices or exchange information that will lead to gains for themselves at the expense of other participants in the market