World Economy Definitions

Main definitions I need to know!

  • Created by: Manvir
  • Created on: 22-03-12 16:42


Process through which the world economy is becoming increasingly interconnected.

19th Century - Globalisation increased.

20th Century - Globalisation decreased.

After WW2 - Globalisation increased.

1980s/1990s - Globalisation increased.

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Trading Blocs

Trade Bloc is used to reduce trade barriers between countries who have a agreement.

Free Trade

Customs Union

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International Assest Flows

Foreign Direct Investment (FDI) - investment in REAL PROPERTY such as land, factories or office buildings.

Portfolio Investment - investment in FINANCIAL assests such as equities and bonds.

1) Equities are paper assests reflecting part ownership of a company, assests and a claim to future profit streams.

2) Bonds are an "I owe you!"

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Global Institutions set up to co ordinate international economic policies:

World Bank

International Monetary Firms

World Trade Organisation

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Gross Domestic Product (GDP)

Measures total value of output produced in an economy without any adjustment for the depreciation of capital. Equals the sum of the income earned domestically by both a domestic and foreign citizen.

GDP per capita = GDP/Population Size

GDP per worker = Total GDP/Labour Force Size -> productivity of work force.

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Gross National Product (GNP)

Measures total value of output produced by domestic citizens both home and abroad. 

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Gross National Income (GNI/GNY)

Measures total income of all residents of a nation wherever they produce or earn this income including from income abroad paid to national citizens.

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Nominal GDP

Output measured in current prices i.e. multiplying output of each good by price of good in each year.


Nominal GDP might change even if output remains the same i.e. effected by inflation.

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Real GDP

Output measured in constant prices i.e. multiplying output of each good by the price of a good in the base year.


Only changes if quantity changes.

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GDP Deflator

GDP Deflator = Nominal GDP/Real GDP

Measures how prices change between years.

Percentage change in this index form from year to year is a measure of inflation.

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Exchange Rate

Price at which one national currency can be exchanged for another on the foreign exchange market.

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Purchasing Power Parity (PPP)

This is the theory that exchange rates will move so the price of good are the same in all countries i.e. a given amount of money will buy the same amount of goods in a different country.

Big Mac Index

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Human Development Indicator

Alternative measure of welfare (living standards) that takes into account education, health and income.

Positive correlation between HDI and GDP per capita.

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Lorenz Curve

Graphical representation of income distribution.

Used to measure inequality.

The greater the gap between the line of equality and the lorenz curve the greater the inequality in the country.


GINI Coefficient gives a numerical value of inequality; 0 corresponds to perfect equality and 1 corresponds to perfect inequality.

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GDP per capita

Measured by HOURLY PRODUCTIVITY i.e. how much GDP produced from every hour worked X NUMBER OF HOURS WORKED.

Number od hours worked is limited so in order to increase GDP per capita you must focus on increasing hourly productivity through increasing;

1. Capital Stock a worker has to interact with.

2. Education and skills of employee.

3. Level of technolog in the firm.


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Marginal Product of Capital (MPK)

The increase in output that results from adding one unit of capital (keeping layout and TFP constant)

Calculated by differentiating with respect to K i.e. dY/dK

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Marginal Product of Labour (MPL)

The increase in output that results from adding one more unit of labour (keeping capital and TFP constant)

Calculated by differentiating with respect to L i.e. dY/dL.

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