Economic Policies and International Trade

Flashcards covering key vocabulary terms related to economic policies, goals, and international trade concepts.

Stable Economy

An economy with fairly constant output growth and low and stable inflation.

Unstable Economy

An economy with frequent large recessions, a pronounced business cycle, very high or variable inflation, or frequent financial crises.

Full Employment

An economic situation in which all available labor resources are being used in the most efficient way, where no workers are involuntarily unemployed.

Price Stability

When there is little to no change in the prices in an economy over a period of time (when there is low or stable inflation).

Favorable Balance of Payment

Occurs when payments made by a country are less than payments received by the country (also known as balance of payments surplus).

Taxation

The primary source of revenue for governments.

Government Spending

The money spent by the public sector on the acquisition of goods, and provision of services such as education, healthcare, social protection and defense.

Transfer Policies

Policies used by governments to redistribute incomes from people who have higher incomes to those with lower incomes to reduce income inequality.

Progressive Taxes

Taxes that increase as taxable income increases.

Regressive Taxes

Taxes in which low-income owners pay a larger percentage of income than middle and high-income earners.

Direct Taxes

Taxes levied on income, wealth, and profit (e.g., income tax, corporation tax).

Indirect Taxes

Taxes levied on goods and services (e.g., value added tax, excise tax).

Closed Economy

An economy that has no trading activity with outside economics and is entirely self-sufficient, with no imports or exports.

Open Economy

An economy in which a significant percentage of its goods and services are traded internationally, with flows of goods and services into (imports) and out of (exports) the economy.

Circular Flow of Income

Looks at the flow of income and expenditure among the main economic agents.

Leakages or Withdrawals

Items that take money out of the circular flow of income, including savings, imports, and taxes.

Injection

Spending that puts money into the circular flow of income, including investments, exports, and government spending.

National Income

The total monetary value of all final goods and services produced by a country within a year.

Standard of Living

The amount of goods and services available to purchase in a country.

Gross Domestic Product (GDP)

The total value of all final goods and services produced within the boundaries of a country within a year.

Gross National Product (GNP)

The total market value of the final goods and services produced by a nation’s economy during a specific period of time, usually a year (GDP plus net property income from abroad).

Net National Income (NNI)

Gross national product minus depreciation of fixed assets.

Depreciation

The monetary value of assets decreasing over time due to use, wear and tear, or obsolescence.

Input Approach

Factor incomes (rent, wages, interest, & profit), and adds the rewards paid to the factors of production for services rendered in producing the national.

Output Approach

The combined value of the new and final output produced in all sectors of the economy, including manufacturing, financial services, transport, leisure and agriculture.

Expenditure Approach

Adds up all spending in the economy by households, firms, and government on final goods and services by the households, firms and government.

Nominal GDP

The market value of all final goods and services produced within a country within a year, without adjusting for inflation.

Real GDP

Nominal GDP adjusted for inflation.

Potential GDP

The highest level of output that a country can produce with all its resources fully and efficiently employed.

Economic Growth

An increase in real GDP over a period of time.

Economic Development

A sustained increase in the standard of living, including the quality of life measures, such as life expectancy at birth and adult literacy rates.

Developing Economy

An economy that has low levels of economic growth and standard of living and heavily relies on agriculture as the primary industry.

Developed Economy

An economy that has high levels of economic growth and standard of living and is more technologically advanced compared to other countries.

Disposable Income

The amount of money that an individual or household has to spend or save after income taxes have been deducted.

Savings

The part of disposable income that is not spent on goods and services.

Investment

The creation of capital goods or adding to the stock of productive assets in an economy.

National Budget or Government Budget

A statement outlining the expected revenue and expenditure of the government for a specific period of time.

Balanced budget

Where tax revenue is equal to government spending.

Budget or fiscal surplus

Where tax revenue is greater than government spending.

Budget for fiscal deficit

Where tax revenue is less than government spending.

National Debt (Public Debt)

The total amount owed by a government to its creditors.

Fiscal Policy

Involves the government changing the levels of taxation and government to influence aggregate demand and the level of economic activity in an economy.

Monetary Policy

Actions taken by the central bank to influence the amount of money in the economy, influencing interest rates to control the money supply.

Recession

A period of declining economic activity characterized by a fall in GDP, higher unemployment rates, and reduced consumer and business spending.

Inflation

The general increase in prices over time, which reduces the purchasing power of money.

Demand–Pull Inflation

Occurs when demand for goods and services exceeds supply, leading to price increases.

Cost–Push Inflation

Occurs when production costs rise (e.g., higher wages or raw material costs), causing businesses to raise prices to stay profitable.

Built-In Inflation (or Wage-Price Spiral)

Occurs when workers demand higher wages to keep up with rising prices, causing businesses to raise prices further.

Unemployment

When individuals actively looking for work are unable to find jobs.

Frictional Unemployment

Temporary unemployment, occurring when individuals switch jobs, enter the workforce, or search for better opportunities.

Cyclical Unemployment

Unemployment caused by economic downturns; as demand falls, businesses lay off workers.

Structural Unemployment

Unemployment that occurs as a result of a mismatch between workers’ skills and available jobs, often caused by technological advancements.

Seasonal Unemployment

Unemployment that occurs when jobs are only available during certain seasons.

Real-Wage Unemployment

Unemployment that occurs when wages are set too high, leading to fewer jobs available.

International Trade

The exchange of capital, goods, and services across international borders or territories.

Law of Absolute Advantage

A country has an advantage over another in the production of a good if an equal quantity of resources can produce more in the former country than the latter.

Law of Comparative Advantage

When a country has the ability to produce a good at a lower opportunity cost than another country.

Specialization

Focusing on producing the goods with lower opportunity costs to increase combined output.

Gains from Trade

The advantages that countries participating in international trade enjoy as a result of specialization and division of labor.

Protectionism (Trade Barriers)

Are import controls or restrictions imposed by governments to limit free movement of goods and services among countries.

Import Duty (Tariff)

A tax on imports.

Quota

A limit placed on the quantity that is imported.

Embargoes

Prevent certain goods from entering the country.

Excise duties

Are taxes charged on locally produced goods in an e ort to reduce consumption of undesirable goods (such as cigarettes & alcohol).

Import license

A requirement to conduct imports.

Exchange control

A limit on the amount of foreign currency leaving the country.

World Trade Organization (WTO)

An international organization established to supervise and liberalize world trade.

Balance of Payments

A statement that records the transactions between a country and the rest of the world for a given period of time, usually one year.

Trade in goods

Covers items that can be touched, weighted or counted as they are traded

Trade in Services

Covers exports and imports of services

Income Account

Made up of compensation of employees, remittances and income from investments abroad

Current Transfers

Made up of government transfers (such as foreign aid) and other transfers by private individuals (such as gifts of cash)

Capital Account

Records transactions which involve the transfer of ownership of fixed assets and the acquisition or disposal of non–financial assets (land purchased or sold by a foreign embassy)

Financial Account

records the forms of investment overseas by local residents and the inward flow of investment funds from foreign residents

Net International Reserves(NIR)

The difference between the amount of reserves that a central bank receives from other central banks and the amount that pays out to other central banks

Balance of Payments Surplus

Means that a country exports more goods and services than it imports

Balance of Payments Deficit

Means that a country imports more goods and services than it exports

Balance of Payments Disequilibrium

When there is either a surplus or a deficit on the balance of payments

Expenditure Switching Policies

Are policies designed to change the relative prices of exports and imports to help reduce the size of a country’s balance of payments deficits

Expenditure Reducing Policies

These policies are designed to lower real incomes & aggregate demand, therefore cutting the demand for imports.

Exchange Rate

The rate at which one currency trades against another on the foreign exchange market.

Exchange Rate Regime

how a nation manages its currency in the foreign exchange market

Fixed Exchange Rates

Is one where a government maintains a given exchange rate over a period of time

Floating Exchange Rates

Is where the rate of exchange is determined purely by the demand and supply of that currency on the foreign exchange market

Managed Float Exchange Rates

is when the currency is broadly determined by market forces but the government takes action to influence the rate of exchange in the exchange rate

Currency Appreciation

The increase in the value of a currency relative to other foreign currencies.

Currency Depreciation

The fall in the value of a currency relative to other foreign countries.

Currency Revaluation

The active decision of a government to increase the value of its own currency in relation to other currencies

Currency Devaluation

The active decision of a government to decrease the value of its own currency in relation to other countries