Theme 4 Definitions

Flashcards of key economic terms and definitions related to global economics, based on PMT Education resources.

Absolute Advantage

When a country can produce a good more cheaply in absolute terms than another country.

Absolute Poverty

When people are unable to afford sufficient necessities to maintain life; those on less than $1.90 a day.

Aid

When a country voluntarily transfers resources to another or gives loans on a concessionary basis.

Appreciation

An increase in the value of the currency using floating exchange rates.

Asymmetric Information

When one party has more knowledge than another; this causes market failure in the financial sector.

Automatic Stabilisers

Mechanisms which reduce the impact of changes in the economy on national income.

Balance of Payments

A record of all financial dealings over a period of time between economic agents of one country and another.

Buffer Stock Systems

When a maximum and minimum price are imposed together in order to bring about price stability.

Capital Account

A part of the balance of payments; records debt forgiveness, inheritance taxes, transfers of financial assets and sales of assets.

Capital Expenditure

Government spending on investment goods such as new roads, schools and hospitals, which will be consumed in over a year.

Capital Flight

When large amounts of money are taken out of the country, rather than being left there for people to borrow and invest.

Central Banks

A financial institution that has direct responsibility to control the money supply and monetary policy, to manage gold reserves and foreign currency and to issue government debt.

Common Market

Members trade freely in all economic resources and impose a common external tariff.

Comparative Advantage

When a country is able to produce a good more cheaply relative to other goods produced; it has a lower opportunity cost.

Current Account

A part of the balance of payments; records payments for the purchase and sale of goods and services, as well as incomes and transfers.

Customs Union

The removal of all tariff barriers between members and the introduction of a common external tariff.

Current Expenditure

General government final consumption plus transfer payments plus interest payments.

Cyclical Deficit

The part of the deficit that occurs because government spending fluctuates around the trade cycle.

Depreciation

A fall in the value of the currency using floating exchange rates.

Devaluation

When the currency is decreased against another under a fixed system.

Developed Country

Countries with a high GDP per capita and a high standard of living.

Developing Country

Countries with a low GDP per capita and a low standard of living.

Discretionary Fiscal Policy

Deliberate manipulation of government expenditure and taxes to influence the economy; expansionary and deflationary fiscal policy.

Economic Development

Improvements in living standards.

Emerging Economies

A country that is growing quickly and has some characteristics of a developed country but is not fully there yet.

Exchange Rate

The purchasing power of a currency in terms of what it can buy of other currencies.

Financial Account

A part of the balance of payments; records FDI, portfolio investment and the transfer of gold and currency reserves.

Financial Markets

When buyers and sellers can buy and trade a range of services or assets that are fundamentally monetary in nature.

Fiscal Deficit

When the government spends more than it receives in a year.

Fixed Exchange Rate

The value of the currency is set against the value of another and that exchange rate does not change.

Foreign Currency Gap

When a country does not export enough to finance the purchase of goods from overseas.

Foreign Direct Investment

Investment by one private sector company in one country into another private sector company in another.

Free Trade

Trade with no barriers or restrictions.

Free Trade Agreements

When two or more countries in a region agree to reduce/eliminate trade barriers on all goods from member countries.

Free Floating Exchange Rate

Value of the currency is determined purely by market demand and supply of the currency.

General Government Final Consumption

Spending on goods and services which will be consumed within the next year.

Gini Coefficient

A measure of income inequality; the ratio of the area between the 45 degree line (the line of perfect equality) and the Lorenz curve and the whole area under the 45 degree line.

Globalisation

The growing interdependence of countries and the rapid rate of change it brings about; movement towards free trade of goods and services, free movement of labour and capital and free interchange of technology and intellectual capital.

Harrod-Domar Model

Savings provide the funds that are used for investment, and growth rates depend on the level of saving and the productivity of investment. Therefore, growth in developing countries is limited by the lack of investment.

Human Capital

The economic value of an individual’s skills, experience, training etc.

Human Development Index (HDI)

Measures an economy’s development based on income, health and education.

Infrastructure

Facilities required for an economy to function, such as roads.

International Competitiveness

The ability of a country to compete effectively and become attractive in international markets.

J-Curve

A current account will worsen before it improves following a depreciation of the currency.

Laffer Curve

Shows that a rise in tax rates does not necessarily lead to a rise in tax revenue, due to the impact on incentives and work.

Lewis 2 Model

A model which suggests that countries will develop through industrialisation as labour is moved from the unproductive agriculture sector to the more productive urban sector. This increases wages and leads to more saving and investment.

Lorenz Curve

The cumulative percentage of population plotted against the cumulative percentage of income that those people have.

Market Bubbles

When the price of an asset rises massively and greatly exceeds the value of the asset itself.

Market Rigging

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.

Microfinance Schemes

Schemes which aim to give poor and near-poor households permanent access to a range of financial services.

Managed Floating Exchange Rate

Value of the currency is determined by demand and supply but the Central Bank intervenes to prevent large changes.

Marshall-Lerner Condition

The sum of the price elasticities of imports and exports must be more than one if a currency depreciation is to have a positive impact on the trade balance.

Monetary Unions

Two or more countries with a single currency.

Moral Hazard

When individuals act in their own best interests knowing there are potential risks- another cause of financial market failure.

National Debt

The sum of government debts built up over many years.

Primary Product Dependency

When a country relies heavily on primary products, such as agricultural goods or mining.

Progressive Taxation

Where those on higher incomes pay a higher marginal rate of tax; those on higher incomes pay a higher percentage of their income on tax.

Proportional Taxation

The proportion of income paid on the tax remains the same whilst the income of the taxpayer changes; everyone pays the same percentage of their income on tax.

Protectionism

When government enact policies to restrict the free entry of imports into their country, such as tariffs and quotas.

Quota

Limits placed on the level of imports allowed into a country.

Regressive Taxation

Where the proportion of income paid in tax falls whilst the income of the taxpayer increases; those on lower incomes pay a higher percentage of their income on tax.

Relative Poverty

When income falls below an average income threshold. In the UK, this is those on less than 60% of median household income.

Revaluation

When the currency is increased against the value of another under a fixed system.

Speculation

Trading financial assets in hope of significant returns.

Structural Deficit

The deficit which occurs when the cyclical deficit is 0.

Tariffs

Taxes placed on imported goods in an attempt to prevent people from buying them.

Terms of Trade

The ratio of an index of a country's export prices to an index of its import prices. average export price index x100/ average import price index

Theory of Comparative Advantage

Countries will find specialisation mutually advantageous if the opportunity costs of production are different.

Trade Creation

When a country moves from buying goods from a high cost to a lower cost producer.

Trade Diversion

When a country moves from buying goods from a low cost producer to a higher cost one.

Trade Liberalisation

Reduction or removal of protectionist policies.

Trading Bloc

A group of countries that reduce or remove trade barriers between them.

Transfer Payments

Government spending for which there is no corresponding output, where money is taken from one group and given to another.

Transfer Pricing

Where firms manipulate the price of their good so that profit is increased in areas of low tax.

Unit Labour Costs

The cost of employing workers for each unit of a good. total wages/ real output