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).

Globalisation – The increasing economic, political, and cultural integration of economies worldwide.

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.