IB Economics Unit 4

Absolute advantage

This is where a country is able to produce more output than other countries using the same input of factors of production.

Absolute poverty

Absolute poverty is measured in terms of the basic need for survival. It is the amount of income a person needs to have in order to stay alive.

Appreciation

An increase in the value of one currency in terms of another currency in a floating exchange rate system.

Appropriate technology

Technology that caters to the particular economic, social, and environmental characteristics of its users.

Balance of payments

It is a record of the value of all the transactions between the residents of a country with the residents of all other countries over a given period of time.

Balance of trade in goods

A measure of the revenue received from the exports of tangible (physical) goods minus the expenditure on the imports of tangible goods over a given period of time.

Balance of trade in services

A measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given period of time.

Budget deficit

A situation that exists when planned government spending exceeds planned government revenue. A government may "run a budget deficit" in order to increase aggregate demand in the economy.

Capital account

A measure of the buying and selling of assets between countries. The assets are often separated to show assets that represent ownership and assets that represent lending.

Capital flight

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

Capital transfers

A measure of net monetary movements gained or lost through actions such as the transfer of goods and financial assets by migrants entering or leaving the country, transfers relating to the sale of fixed assets, gift taxes, inheritance taxes, and death duties.

Common market

A customs union with common policies on product regulation, and free movement of goods, services, capital, and labour.

Comparative advantage

This is where a country is able to produce a good at a lower opportunity cost of resources than another country.

Current account

A measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest, and dividends) and net transfers of money (foreign aid, grants, and remittances).

Current account deficit

This is where revenue from the exports of goods and services and income flows is less than the expenditure on the import of goods and services and income flows in a given year.

Current account surplus

This is where the revenue from the export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows in a given year.

Current transfers

These are recorded in the balance of payments whenever an economy receives goods, services, income, or financial items without something in return. All transfers not considered to be capital are current.

Customs union

An agreement made between countries, where the countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to export to the customs union.

Debt relief (cancellation)

The act of eliminating the debt owed by an economically least developed country in order to allow it to achieve development objectives.

Depreciation

A fall in the value of one currency in terms of another currency in a floating exchange rate system.

Devaluation

A decrease in the value of a currency in a fixed exchange rate system.

Development aid

Aid that consists of grants, concessional long-term loans, project aid, and programme aid.

Dumping

It is the selling of a good in another country at a price below its unit cost of production.

Economic development

A broad concept involving improvement in standards of living, reduction in poverty, improved health and education along with increased freedom and economic choice.

Economic well-being

A multi-dimensional concept relating to the level of prosperity and quality of living standards in a country.

Economically least developed countries (ELDC's)

Those countries classified by the UN as being "low-income countries confronting severe structural impediments to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets".

Elasticity of demand for exports

A measure of the responsiveness of the quantity demanded of exports when there is a change in the price of exports.

Elasticity of demand for imports

A measure of the responsiveness of the quantity demanded of imports when there is a change in the price of imports.

Exchange rate

The value of one currency expressed in terms of another, for example, €1 = US$1.5.

Expenditure reducing

Policies implemented by the government that attempt to reduce overall expenditure in the economy, including expenditure on imports.

Expenditure switching

Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services.

Export promotion

Strategies based on openness and increased international trade. Growth is achieved by concentrating on increasing exports, and export revenue, as a leading factor in the AD of the economy. Growth in the international market should be translated into growth in the domestic market, over time.

Export revenue

Value of exports earned by producers

Exports

Goods and services produced in one country and purchased by consumers in another country.

External balance

The value of exports of goods and services minus the value of imports of goods and services.

Fairtrade

A scheme where products from producers in economically least developed countries can be certified to display the registered Fairtrade mark encouraging consumers to buy them because they know that the producers of the products have been paid a fair price and the products have been produced under approved conditions.

Financial account

A measure of the net change in foreign ownership of domestic financial assets.

Fixed exchange rate

An exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, or to the average value of a selection of currencies, or to the value of some other commodity, such as gold.

Floating exchange rate

An exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and supply of, the currency on the foreign exchange market.

Foreign aid

The international transfer of capital, goods, or services from a country, or international organization, for the benefit of a recipient country and its population.

Foreign direct investment (FDI)

A long-term investment by a multinational corporation in a foreign country, (where the foreign investor owns more than 10% of the domestic company).

Free trade

International trade that takes place without any barriers, such as tariffs, quotas, or subsidies.

Free trade agreement

An agreement made between countries, where the countries agree to trade freely among themselves, but are able to trade with countries outside the free trade area in whatever way they wish.

Gini coefficient (index)

A coefficient (index) that measures the ratio of the area between a Lorenz curve and the line of absolute equality to the total area under the line of equality. The higher the figure, the more unequal is the distribution.

Happiness Index

An index which is used to measure the collective happiness and well-being of a population.

Happy Planet Index

An index that combines four elements to show how efficiently residents of different countries are using environmental resources to lead long, happy lives. The elements are well-being, life expectancy, inequality of outcomes, and ecological footprint.

Human Development Index (HDI)

A composite index that brings together three variables that reflect the three basic goals of development, a long and healthy life, improved education, and a decent standard of living. The variables measured are life expectancy at birth, mean years of schooling and expected years of schooling, and GNI per capita (PPP US$).

Human Opportunity Index (HOI)

This index measures how individual circumstances, such as place of residence, gender, and education of the household head, can affect a child's access to basic opportunities such as water, education, electricity and sanitation. It is created by the World Bank.

Humanitarian aid

Aid given to alleviate short-term suffering, consisting of food aid, medical aid, and emergency relief aid.

Import expenditure

Value of spending on imports.

Import substitution

Strategies to encourage the domestic production of goods, rather than importing them. It should mean that industries producing the goods domestically should grow, as will the economy, and then should be competitive on world markets in the future. The strategies encourage protectionism.

Imports

Goods and services purchased by consumers in one country that have been produced in another country

Infant industry

A new industry that should be protected from foreign competition until it is large enough to achieve economies of scale that will allow it to be internationally competitive.

International Monetary Fund (IMF)

An organization working to foster global monetary cooperation, secure financial stability, facilitate international trade, and reduce poverty.

International trade

Trade that involves the exchange of goods or services between two countries.

J-curve

The J-curve suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of the currency will lead to a worsening of the current account deficit, before things improve in the long term.

Lorenz curve

A curve showing what percentage of the population owns what percentage of the total income in the economy. It is calculated in cumulative terms. The further the curve is from the line of absolute equality (45-degree line), the more unequal is the distribution of income.

Managed exchange rate

An exchange rate that floats in the foreign exchange markets but is subject to intervention from time to time by domestic monetary authorities, in order to resist fluctuations that they consider to be undesirable. Also known as a "dirty float".

Marshall-Lerner condition

This condition states that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance if the sum of the elasticity of demand for exports plus the elasticity of demand for imports is greater than one.

Microfinance

The provision of small loans to poor entrepreneurs who lack access to traditional banking services.

Monetary union

This is where two or more countries share the same currency and have a common central bank.

Multidimensional Poverty Index (MPI)

An international measure of acute poverty covering over 100 economically least developed countries. It complements traditional income-based poverty measures by capturing the deprivations that each person faces at the same time with respect to education, health and living standards.

Net exports (X-M)

Export revenues minus import expenditure.

Non-government organization (NGO)

A non-government organization that exists to promote economic development and/or humanitarian ideals and/or sustainable development.

Non-produced, non-financial assets

A measure of the net international sales and purchases of non-produced assets, such as land, and intangible assets, such as patents and copyrights.

OECD Better Life Index

An index to compare well-being across countries, based on 11 topics that the OECD has identified as essential, in the areas of material living conditions and quality of life.

Official borrowing

International borrowing by a government to help to cover a current account deficit.

Official foreign aid

Aid that is provided to a country by another government or multilateral agency.

Portfolio investment

The purchase of financial investments such as shares and bonds in order to gain a financial return in the form of interest or dividends.

Positive discrimination

The practice of giving advantage to groups that have been treated unfairly in the past.

Poverty

The scarcity or the lack of a certain amount of material possessions or money.

Poverty trap/cycle

Any circular chain of events starting and ending in poverty, such as low income means low savings means low investment means low growth means low incomes.

Preferential trade agreement

This is where a country agrees to give preferential access (for example, reduced tariffs) to certain products from one or more trading partners.

Property rights

The exclusive, legal, authority to own and determine how a resource is used, whether that resource is owned by the government or by individuals.

Purchasing power parity (PPP)

A theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.

Quota

Import barriers that set limits on the quantity or value of imports that may be imported into a country.

Relative poverty

Relative poverty is a comparative measure of poverty. A person is said to be in relative poverty if they do not reach some specified level of income, for example, 50% of average earnings for the country.

Remittances

Remittances are the transfer of money by foreign workers to individuals, often family members, in their home country.

Reserve assets

Foreign currencies and precious metals held by governments (central banks) as a result of international trade. Reserves may be held so that the government may maintain a desired exchange rate for the country's currencies.

Revaluation

An increase in the value of a currency in a fixed exchange rate system.

Social safety net

A collection of social welfare services provided by the state, or other institutions, targeted to vulnerable, resource-deprived households, to prevent them from falling into poverty.

Subsidy (international)

An amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm an advantage over foreign competition.

Sustainable development

The level of development needed to meet the needs of the present generation without compromising the ability of future generations to meet their own needs.

Tariff

A duty (tax) that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government.

Trade liberalisation

The process of reducing barriers to international trade.

Trade protection

Trade protection is an economic policy aiming to limit imports and/or encourage exports by setting up trade barriers.

UN sustainable development goals (SDGs)

A collection of 17 global goals set by the United Nations to mobilize efforts to end all forms of poverty, fight inequalities and tackle climate change, while ensuring that no one is left behind.

Wealth

The total value of all assets owned by a person, firm, community, or country.

World Bank

An organization whose main aims are to provide aid and advice to economically least developed countries, as well as reducing poverty levels and encouraging and safeguarding international investment.

World Trade Organization (WTO)

An international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.