Economics Definitions

Absolute advantage

When a country produces a good or service more efficiently than the rest of the world

Adverse selection

A situation in which one participant has more information before the transaction occurs

Allocative efficiency

When resources are put to their best possible use in producing goods and services in optimal combinations for society

Balance of trade

A measure between the difference in exports and imports over a period of time

Comparative advantage

A theory that states that two countries will gain from trade if they each choose to specialise in the production of the good with the lowest opportunity cost

Consumer Price Index

A weighted basket of typical goods and services that are bought in the economy by the typical family

Used to measure changes in inflation

Consumer surplus

The difference between the price that consumers pay and the price that they are willing to pay

Contractionary

Policies that decrease aggregate demand

Contractionary fiscal policies

Increase tax rate (income, corporate), decrease government spending

Households have less disposable income for consumption

Firms have less money for investment

Contractionary monetary policy

Increase interest rates

Slows down investment and consumption

Customs union

Free trade among member countries, but same external policies towards non-members

Cyclical unemployment

Also known as demand-deficient unemployment

Due to business cycle

Always refer to recession

Use demand-side policies

Debit

When money leaves a country

Credit

When money enters a country

Demand-side policies

Target AD

Fiscal policy

• Increasing government expenditure

• Decreasing taxes

Monetary policy

• Lowering interest rate

Demerit goods

Goods that have negative effects when consumed

Cause negative externalities of consumption

Disinflation

When the rate of inflation decreases

Disposable income

The income remaining after deduction of taxes and social security charges

Available to be spent or saved as one wishes

Downstream industries

Uses inputs to production that are intermediate goods.

For example, furniture is a downstream industry from the timber industry.

Dumping

When firms export their goods at a price below production cost

A type of predatory pricing behaviour

An importer may sell or ‘dump’ goods abroad in order to gain a foothold in a new market.

LEDCs

• Highly dependent of primary sector

  • Subject to climate and ecological conditions

• Often has limited access to infrastructure, education, healthcare etc

  • Low level of human capital (skills)

  • Barriers to education and access to healthcare/obtain good health

• Often high inequality, gender and economic

• Limited access to international market

• Often has a large informal economy

• Weak institutional framework

  • Less tax revenue

  • Little to no property rights

  • Corruption

Exchange rate

The value of one currency in terms of another

Excise taxes

Taxes that aim to discourage the consumption of particular goods, such as tobacco, petrol and alcohol

Fungibility

Goods that have full fungibility are perfectly interchangeable with each other. It doesn’t matter who produces them. Some goods can have partial fungibility, such as milk.

Green GDP

GDP that has been corrected for loss of biodiversity as a result of economic activity, and the monetary costs of pollution and climate change

Hyperinflation

Price level rises that are more than 50% a month

Expenditure switching policies

Switches consumption out of imports and into domestic goods

• Tariffs

• Import quotas

• Providing subsidies to domestic exporters

• Depreciation or devaluation

  • Makes exports more expensive when priced in the domestic currency

Expenditure reducing policies

Slows domestic spending in the economy

• Higher taxes

• Cuts in government spending

• Increase in interest rates

Interdependence

The relationship between two economic actors where each of them is dependent over the other for the supply of necessary goods and services

Interest rate

The cost of borrowing money

International Monetary Fund (IMF)

An international organisation that aims to promote global economic growth and financial stability, encourage international trade and reduce poverty

Interventionist policies

Policies where the government takes an activist role in encouraging economic growth and/or development

Interventionist supply-side policies

• Provision of education

• Provision of healthcare

• Investment in infrastructure

Price Elasticity of Demand (PED)

When PED<1 (inelastic), as price decreases, revenue may decrease

Assumptions of the theory of comparative advantage

Perfect information about availability and price

Identical products

No trade protectionism

No transaction costs (transport, storage)

Debt service

The repayment of the principal and interest on borrowed funds

Reserve requirement (RR)

Lower reserve requirement means the bank has more money to lend out, which will increase money supply

Higher reserve requirement means the bank has less money to lend out, which will decrease money supply

Foreign Direct Investment (FDI)

Investment made by foreign companies to build factories and purchase physical capital

Micro-credit

The provision of financial credit to small entrepreneurs in LDCs to promote small business

Usually repaid back in short term

Pros:

• Increases access to credit, so they can set up small businesses, increases income, poverty cycle

• Creates job opportunities, increases income

• Better living standards

Cons:

• May be corrupt

  • May give larger amount than able to be repaid

  • Collateral needs to be paid (houses, other assets)

• Businesses may not be successful

• Micro-credit may not be used to set up businesses

  • Used for consumption instead

  • Collateral needs to be paid

Economically Least Developed Countries (ELDCs)

Low-income countries facing severe structural challenges to sustainable development

Marshall-Lerner Condition

Describes the circumstance that depreciation of a nation’s currency may not always help correct the current account deficit

Only when PEDx + PEDm > 1, depreciation will correct the current account deficit

Common market

An area of economic integration that allows nations to trade freely with each other

They set a common external policy

Allow free movement of factors of production between member states.

Crowding out

When increased public sector borrowing and spending leads to a decrease in loanable funds and an increase in interest rates

Can lead to lower private investment in the economy

Collective self-governance

When users of resources manage the resource by themselves

Users realise it is in their best interest to limit the use of the resource / not focus on their own best interest

Leads to sustainable use

Demand

The amount of a good or service that individuals are willing and able to buy at a given price in a time period (ceteris paribus)

Circular economy

An economy that promotes environmental sustainability and considers the environmental impacts when making economic decisions

Humanitarian aid

Aid given to regions experiencing situations where people are unable to fulfill their basic needs. It alleviates short-term suffering in the form of provision of basic necessities (food, water etc.)

Absolute poverty

When a person or household does not have the minimum income needed to meet living requirements, currently USD 1.90 per day

Relative poverty

Is a comparative measure based on the living standards of the country.

When a person is poor relative to the others in the country.

The relative poverty line is usually household disposable income of less than 60% of median income.

Concentration ratio

The level of competition between firms in an industry

A high concentration ratio closer to 100% indicates the existence of a monopoly

Informal economy

All economic activity that is not officially monitored by the government or taxed