Theme 4 key terms

Absolute Advantage

When a country can produce a good more efficiently (using fewer resources) than another country.

Aid

Financial or resource assistance given by one country to another to support economic development or humanitarian relief.

Balance of Payments

A financial record of a country’s transactions with the rest of the world, including trade, investment, and financial transfers.

Bilateral Aid

Aid given directly from one country to another.

Capital Account

A section of the balance of payments recording cross-border investments and financial asset transactions.

Comparative Advantage

When a country produces a good at a lower opportunity cost than another country, making specialization and trade beneficial.

Consumer Surplus

The difference between what consumers are willing to pay and what they actually pay for a good.

Current Account

A component of the balance of payments that records trade in goods and services, net income, and current transfers.

Debt Relief

The partial or total cancellation of a country’s external debts, often granted to promote economic stability and growth.

Devaluation

A government-led reduction in the value of a country’s currency in a fixed exchange rate system to boost exports.

Developing Economy

A nation with lower industrialization, income, and human development indicators compared to advanced economies.

Dumping

When a country or firm exports goods at a price lower than their production cost, often to gain market share.

Economic Development

The process of improving economic well-being and quality of life through economic growth, infrastructure, and social improvements.

Economic Growth

The increase in a country’s output of goods and services over time, measured by GDP growth.

Emerging Economy

A country transitioning from low-income to middle-income status, showing rapid industrialization and growth.

Exchange Rate

The price of one currency in terms of another, determining international trade costs.

Export-Led Growth

An economic strategy focused on increasing exports to drive GDP growth.

Foreign Exchange Market (Forex)

A global marketplace where currencies are traded, determining exchange rates.

Free Trade

International trade without restrictions like tariffs and quotas, allowing efficient resource allocation.

Globalisation

The increasing economic, political, and cultural integration among countries.

Human Capital

The economic value of a population’s education, skills, and abilities, crucial for productivity.

Import Substitution

A policy encouraging domestic production to replace imported goods and reduce dependency on foreign products.

International Monetary Fund (IMF)

A global financial institution that provides financial support and economic advice to countries facing economic instability.

Monetary Union

A group of countries adopting a shared currency and monetary policy, like the Eurozone.

Multilateral Aid

Aid distributed by international organizations like the World Bank or United Nations rather than directly between countries.

Non-Tariff Barriers (NTBs)

Trade restrictions that aren’t tariffs, such as quotas, regulations, and subsidies, affecting international trade.

Poverty Trap

A self-reinforcing situation where low income leads to low investment in education and health, perpetuating poverty.

Protectionism

Government policies like tariffs and quotas that restrict imports to protect domestic industries.

Real Exchange Rate

The nominal exchange rate adjusted for inflation differences between countries, determining trade competitiveness.

Remittances

Money sent by workers abroad to their home country, often a vital income source for developing economies.

Tariff

A tax on imports, making foreign goods more expensive and protecting domestic industries.

Terms of Trade

The ratio of export prices to import prices, indicating a country’s trade competitiveness.

Trade Creation

When joining a trade agreement leads to more efficient production and lower prices due to increased trade.

Trade Diversion

When trade shifts from a low-cost producer outside a trade bloc to a higher-cost producer within the bloc due to trade agreements.

Trade Liberalisation

Reducing barriers to trade, such as tariffs and quotas, to encourage international commerce.

Trading Bloc

A group of countries that reduce trade barriers among members, such as the EU or NAFTA.

Voluntary Export Restraint (VER)

A self-imposed limit by an exporting country on the quantity of goods it exports to another country.

World Trade Organization (WTO)

An international body that regulates global trade and resolves trade disputes between countries.

Financial Conduct Authority (FCA)

Regulator overseeing financial firms in the UK, ensuring consumer protection and market integrity.

Financial Intermediaries

Institutions like banks and building societies that facilitate funds flow between savers and borrowers.

Financial Policy Committee (FPC)

A Bank of England body responsible for macroprudential regulation, focusing on financial stability.

Financial Stability

A state where the financial system operates smoothly without excessive liquidity or credit issues.

Budget Deficit

When government spending exceeds tax revenue.

Fixed Exchange Rate

A currency system where a government or central bank sets and maintains the currency’s value against another.

Floating Exchange Rate

A system where market forces (supply and demand) determine currency value.

Foreign Direct Investment (FDI)

Investment made by firms in one country into businesses in another country.

Foreign Currency Gap

A situation where a country lacks sufficient foreign currency to pay for necessary imports.

Foreign Exchange Reserves

A country’s stock of foreign currency and gold, used to manage the exchange rate and economic stability.

Free Trade Area

A group of countries that remove trade barriers among themselves but maintain individual external tariffs.

Forward Market for Foreign Exchange

A market where contracts set future exchange rates to manage currency risks.

General Agreement on Tariffs and Trade (GATT)

The predecessor of the World Trade Organization (WTO), aimed at reducing trade barriers.

Gini Coefficient

A statistical measure of income inequality within a country (0 = perfect equality, 1 = extreme inequality).

Golden Rule of Fiscal Policy

The principle that government borrowing should only be for investment, not day-to-day expenses.

Government Budget Deficit (Surplus)

The difference between government spending and revenue (deficit if spending exceeds revenue, surplus if revenue exceeds spending).

Government Capital Expenditure

Government spending on infrastructure, such as roads, hospitals, and schools.

Government Consumption Expenditure

Government spending on goods and services consumed within a fiscal period.

Harmonised Competitiveness Index

A measure comparing a country’s competitiveness using price and cost indicators.

Highly Indebted Poor Countries (HIPC) Initiative

A program by the IMF and World Bank to help reduce the debt burdens of the world’s poorest countries.

Human Development Index (HDI)

A composite index measuring development based on life expectancy, education, and income.

Indirect Tax

A tax on expenditure, such as VAT (Value Added Tax).

Industrialisation

The process of transforming an economy from primarily agricultural to industrial production.

Infrastructure

Basic physical and organizational structures (e.g., roads, bridges, utilities) needed for economic activity.

Interbank Lending Market

A market where banks lend to each other, ensuring liquidity within the banking system.

Interventionist Strategy

A development approach where governments play a significant role in economic planning and investment.

Invisible Trade

Trade in services rather than goods, such as banking, insurance, and tourism.

Keynesian School of Thought

An economic theory advocating government intervention to manage demand and economic stability.

Labour Productivity

Output per worker, measuring efficiency in production.

Law of Comparative Advantage

The economic principle stating that countries should specialize in producing goods where they have the lowest opportunity cost.

Lender of Last Resort

A role of central banks to provide emergency funding to banks facing financial crises.

Lewis Model

A development model arguing that economic growth occurs as surplus agricultural labor moves to the industrial sector.

LIBOR (London Interbank Offered Rate)

A benchmark interest rate used in global financial markets, now replaced by other rates in many regions.

Lorenz Curve

A graphical representation of income inequality within a population.

Liquidity

The ease with which an asset can be converted into cash without affecting its price.

Liquidity Ratio

A measure of a financial institution’s ability to meet short-term obligations.

Market Failure

A situation where markets do not allocate resources efficiently, often requiring government intervention.

Market-Friendly Growth

An economic strategy that promotes free markets while allowing targeted government intervention when needed.

Marginal Tax Rate

The additional tax paid on an extra unit of income.