Edexcel IAL Economics - Unit 4

Economic growth (actual growth)

the rate of change of real Gross Domestic Product (GDP) as a measure of economic growth and living standards

Economic growth (potential growth)

an increase in an economy's productive potential

Economic development

the process of improving people's wellbeing and quality of life, and is commonly measured by HDI

Sustainable development

development that meets the needs of the present without compromising the ability of future generations to meet their own needs

Gross Domestic Product (GDP)

the value of all final goods and services produced in a country in one year

Human Development Index (HDI)

a measure of a country's economic development that combines measures of health (life expectancy), education (average and expected years in school), and the standard of living (real GNI per capita)

GNI (Gross National Income)

the value of all final goods and services produced by a country's nationals in one year

Absolute poverty

the state of not being able to afford a basic bundle of goods and services necessary for survival

OR

earning less than $1.90 per day (PPP)

Relative poverty

the condition in which people lack the minimum amount of income needed in order to maintain the average standard of living in the society in which they live

OR

earning less than 60% of the median income in one's own country

Income inequality

the unequal distribution of income across a population

Lorenz Curve

a graphical representation of the cumulative distribution of income in an economy

Gini Coefficient

measures the extent to which the distribution of income within an economy deviates from a perfectly equal distribution

Absolute advantage

a country is said to have an absolute advantage in the production of a good if it can produce it using fewer resources than another country

Comparative advantage

a country is said to have a comparative advantage in the production of a good if it can produce it at a lower opportunity cost than another country

Trading bloc

an agreement between 2 or more nations through which trade barriers are reduced or eliminated

Trade liberalisation

reducing trade barriers to make international trade easier between countries

Protectionism

a set of policies by which a government seeks to shelter its industries from foreign competition and/or help them increase exports to international markets

Tariff

a tax placed on an imported good to make it more expensive and encourage consumers to switch to domestic goods

Quota

a physical limit on the number or value of foreign goods that can be imported into a country

Terms of trade

an index that shows the ratio of a country's weighted average of export prices to its weighted average of import prices

MNC/TNC

a corporation that has its facilities and other assets in at least one country other than its home country

Foreign Direct Investment (FDI)

when a firm based in one country makes an investment in a different country

International Monetary Fund (IMF)

an international institution that aims to help stabilise exchange rates and provide loans to countries in need

World Bank

an international financial institution that provides loans to developing countries

Lewis dual-sector model

a theory that states how as countries develop they transform structures, away from the agricultural sector - which has low productivity of labour - and towards the industrial sector - which has high productivity of labour as they develop

Prebisch-Singer Hypothesis

theory that suggests that the trend of primary commodity prices will deteriorate in the long run compared to those of manufactured goods, therefore reducing the terms of trade for countries that specialise in commodities (;As global incomes rise, people spend a larger proportion of their money on manufactured goods and advanced services rather than basic food or raw materials.)

Harrod-Domar growth model

the rate of growth of GDP is determined by the ratio between the national savings ratio and the capital-output ratio in the economy (;It argues that more investment requires higher savings, and improving capital efficiency drives long-term prosperity. — The basic idea of the Harrod-Domar model is that economic growth depends on the amount of capital that is available for investment, and that the rate of capital accumulation is proportional to the rate of savings. The model assumes that the economy is closed, meaning that there is no international trade or foreign investment.)

World Trade Organisation (WTO)

an international body which hosts negotiations concerning the reduction of trade barriers between its member nations

Free trade area

member countries remove tariffs and quotas between themselves but each member determines its own tariff on trade with non-member countries, e.g. NAFTA

Customs union

member countries trade freely among themselves and adopt common external tariffs on all trade with non-members, e.g. Mercosur

Common market

an extension of the customs union concept, with the additional feature that it provides for the free movement of labour and capital among the members.

Monetary union

a common market with a common currency managed by a single central bank

Subsidy

an amount of money paid by the government to the domestic producers of a certain product

Current account

a record of all money flows to and from a country arising from exports and imports of goods and services as well as transfers of income and other net transfers

Fixed exchange rate

a type of exchange rate regime under which the government or central bank ties the official exchange rate to another country's currency (or the price of gold)

Floating exchange rate

a type of exchange rate regime in which a currency's value is allowed to fluctuate in response to changes in market conditions

Managed exchange rate

an exchange rate that is basically floating in the foreign exchange markets but is subject to intervention from time to time by the monetary authorities, in order to resist fluctuations that they consider to be undesirable

Purchasing Power Parity

refers to the quantity of the currency needed to purchase a given unit of a good, or common basket of goods and services

Currency revaluation

the value of a currency is revised upward in a fixed exchange rate system

Currency appreciation

the value of a currency rises in a floating exchange rate system

Currency devaluation

the value of a currency is revised downward in a fixed exchange rate system

Currency depreciation

the value of a currency falls in a floating exchange rate system

Interest rate

the price of borrowed money

Exchange rate

the value of one currency expressed in terms of another currency

Globalisation

a process by which the world's economies are becoming more closely integrated and interdependent

Progressive taxation

the average rate of tax rises as incomes increase

Proportional taxation

the average rate of tax remains unchanged as incomes increase

Regressive taxation

the average rate of tax falls as incomes increase

Laffer curve

describes the relationship between the direct tax rate and the amount of tax revenue that a government may collect

Fiscal deficit

when government spending exceeds government tax receipts over a fiscal year

Fiscal surplus

when government spending is less than government tax receipts over a fiscal year

Crowding out

the idea that a fiscal deficit and subsequent government borrowing leads to increased interest rates and lower levels of private sector investment

Microfinance

a type of banking service that is provided to unemployed or low-income individuals or groups who would otherwise have no other means of gaining financial services

Fair trade

trade between firms in developed countries and producers in developing countries in which fair prices are paid to the producers

Privatisation

the sale of national assets to the private sector

Capital flight

when money and other assets flow out of a country to seek a "safe haven" in another country

Marshall-Lerner condition

states that reducing the value of the exchange rate will only be successful in reducing a current account deficit if the total value of the price elasticity of demand for exports (PEDX) and the price elasticity of demand for imports (PEDM) is larger than one

J-curve effect

a current account deficit may be reduced by a depreciation/devaluation, but due to the inelastic demand for exports and imports in the short run, the current account balance is likely to worsen before it gets better

Dumping

selling a product in large quantities at a price below cost in a foreign market

Trade creation

occurs when a country joins a trading bloc and production shifts from a high-cost producer to a low-cost producer

Trade diversion

occurs when a country joins a customs union and production shifts from a low-cost producer outside the trading bloc to a high-cost producer within the trading bloc

Discretionary fiscal policy

implies government actions above and beyond existing fiscal policies, and often occurs in periods of recession or economic turbulence

Automatic stabilisers

those government spending and taxation rules which cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands, without requiring any deliberate action by policy makers

PSNCR (Public Sector Net Cash Requirement)

the amount of money the government has to borrow to meet its expenditure

Debt relief

the partial or total remission of debts, especially those owed by developing countries to external creditors

Foreign aid

money, food, or other resources given or lent by one country to another

Savings gap

occurs when high levels of poverty make it almost impossible to generate sufficient savings to provide the funds needed to fund investment projects

Foreign exchange gap

occurs when a country's current account deficit is greater than the value of capital inflows

Non-convertible currency

one that is used only for domestic transactions and is not openly traded on a forex market

Multiplier effects

an exogenous increase in an injection will lead to an even larger increase in national income