AS Macroeconomics definitions

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Absolute advantage
A country's ability to produce a good using less resources than another country
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Comparative advantage
A country's ability to produce a good relatively more efficiently (i.e. at a lower opportunity cost) than another country
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Trading Possibilities Curve (TPC)
Shows the consumption possibilities under conditions of free trade
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Law of comparative advantage/The theory of trade
A theory arguing that there may be gains from trade arising when countries specialize in the production of goods or services in which they have a comparative advantage
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Free trade
international trade left to its natural course without tariffs, quotas, or other restrictions
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Protectionism
Deliberate measures, imposed by the government to protect domestic industry from foreign competition
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Tariffs
Taxes on imported products
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Quotas
A limit on the supply of a good
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Subsidy
A grant given by the government to producers to encourage he production of goods and services
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VER (voluntary export restraint)
a trade restriction on the quantity of a good that an exporting country is allowed to export to another country
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Red-tape
an idiom that refers to excessive regulation or rigid conformity to formal rules that is considered redundant or bureaucratic and hinders or prevents action or decision-making (an example of a NTB - non tariff barrier)
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Terms of trade
The relative prices at which exchange takes place; the ratio of exports prices to import pricesA process byhw
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World Trade Organisation (WTO)
A multilateral body now responsible for overseeing the conduct of international trade
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Embargo
government order that restricts commerce or exchange with a specified country or the exchange of specific goods, usually created as a result of unfavorable political or economic circumstances between nations
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Globalization
A process by which the world's economies are becoming more closely integrated
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MNC (multi-national corporation)
a corporation that has its facilities and other assets in at least one country other than its home country
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GATT (general agreement on tariffs and trade)
The precursor of the WTO, which organised a series of 'rounds' of tariff reductions
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Commodity
A raw material or primary agricultural product that can be bought or sold
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Foreign direct investment (FDI)
an investment in a business by an investor from another country for which the foreign investor has control over the company purchased
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Infant industry
a new industry, which in its early stages experiences relative difficulty or is absolutely incapable in competing with established competitors abroad
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Sun-rise industry
A new and growing industry, especially in electronics or telecommunications
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Strategic industry
An industry that a country considers very important for its economic development
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Dumping
A kind of predatory pricing, occurs when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production
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Economy of scale
a proportionate saving in costs gained by an increased level of production
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Mergers (M)
Unite two existing companies into one newly named company
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Aquisitions (A)
A corporate action in which a company buys most, if not all, of the target company's ownership stakes in order to assume control of the target firm, often made as part of a company's growth strategy
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Joint ventures (JV)
A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task, the venture is its own entity, separate from individual firms other business interets
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External shocks
An unexpected change in an economic variable which takes place outside the economy
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Credit crunch
An economic condition in which investment capital is difficult to obtain, banks and lenders become wary of lendingfunds to corporations, which drives up the price of debt products for borrowers
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Financial crisis
A situation in which the supply of money is outpaced by the demand for money meaningthat liquidity is quickly evaporated because available money is withdrawn from banks, forcing banks either to sell other investments to make up for the shortfall
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Liquidity
Term used to describe how easy it is to convert assets to cash
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Human Development Index (HDI)
A measure of economic development which includes incomes per capita, life span and education
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Economic development
An increase in the standards of living including incomes per capita, life span and education
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GDP (gross domestic product)
The total value of goods and services produced in an economy over a period of time
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GDP per capita
The average level of GDP per head of the population
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Economic growth
A percentage change in the total output of the economy over a period of time
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Labour market flexibility
Refers to the willingness and ability of labour to respond to changes in market conditions, including changes in the demand for labour and the wage rate
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Privatization
Transfer of ownership, property or business from the government to the private sector
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Nationalization
Transfer (a major branch of industry or commerce) from private to state ownership or control
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Interventionist strategies
policies and measures in which government plays an active role in manipulating markets and allocating resources
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Market-led strategies
policies that maximize the operation of market forces and at the same time minimizes the role of government in the economy
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Balance of Payments
A set of accounts showing the transactions conducted between residents of a country and the rest of the world
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Current account
Account identifying transactions in goods and services between the residents of a country and the rest of the world
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Capital account
Account identifying transactions in (physical) capital between the residents of a country and the rest of the world
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Financial account
Account identifying transactions in financial assets between residents of a country and the rest of the world
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Visible trade
Trade in goods
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Invisible trade
Trade in services
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Credit
When money comes in (to the economy)
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Debit
When money goes out (of the economy)
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Balance
The sum of all credits and debits on the account
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Quantitative easing
A process by which the central bank purchases assets such as government and corporate bonds in order tot release additional money into the financial system
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Bank reserves
currency deposits which are not lent out to the bank's clients, a small fraction of the total deposits is held internally by the bank or deposited with the central bank
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Current account deficit/trade deficit
An economic measure of a negative balance of trade in which a country's imports exceeds its exports; represents an outflow of domestic currency to foreign markets
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Nominal Value
Value of an economic variable based on current prices, taking no account of prices changing through time
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Real Value
Value of an economic variable, taking account of prices changing over time
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Exchange rate
The price of one currency in terms of another
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Real exchange rate
The nominal exchange rate adjusted for differences in relative inflation rates between countries
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Effective exchange rates
The exchange rate for a country relative to a weighted average of currencies of its trading partners
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Foreign exchange reserves
Stocks of foreign currency and gold owned by the central bank of a country to enable it to meet any mismatch between the demand and supply of the country's currency
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Devaluation
Process whereby a government reduces the prices of its currency relative to an agreed rate in terms of foreign currency
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Revaluation
Process whereby a government raises the price of domestic currency in terms of foreign currency
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J-curve effect
when a country's trade balance initially worsens following a devaluation or depreciation of its currency
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Marshall-Lerner condition
states that a currency devaluation will only lead to an improvement in the balance of payments if the sum of demand elasticity for imports and exports is greater than one
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Exchange rate mechanism (ERM)
A system that was set up by a group of European countries in 1979 with the objective of keeping member countries' relatively stable against each other
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Purchasing power parity (PPP) theory of exchange rates
Theory stating that in the long run exchange rates (in a floating rate system) are determined by relative inflation rates in different countries
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Hot money
Stocks of funds which are moved around the world form country to country in search of the best return
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Floating exchange rate
A system in which the exchange rate is permitted to find its own level in the market
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Fixed exchange rate
A system in which the government of a country agrees to fix the value of its currency in terms of that of another country
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Appreciation
A rise in the exchange rate within a floating exchange rate system
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Depreciation
A fall in the exchange rate within a floating exchange rate system; a fall in value of physical capital equipment over time as it is subject to wear and tear
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Net investment
Gross investment minus depreciation
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Monetarism
the theory or practice of controlling the supply of money as the chief method of stabilizing the economy
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Keynesian school (employment)
A group of economists who believed that the macroeconomy could settle at an equilibrium that was below full employment
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Monetarist school (employment)
A group of economists who believed that the macroeconomy always adjusts rapidly tot he full employment level of output
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Natural rate of output
The long-run equilibrium level of output to which monetarists believe the macroeconomy will always tend; corresponds to full employment
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Natural rate of unemployment (NRU)
The percentage of the labor force that can normally be expected to be unemployed for reasons other than cyclical fluctuations in real GDP; (frictional + structural unemployment) / labor force
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Aggregate Supply curve
Describes the relationship between price levels and the quantity of output that firms are willing to provide
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Short-run aggregate supply curve
A curve showing how much output firms would be prepared to supply in the short-run at any given price level
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Long-run aggregate supply curve
The long run level of real output which is sustainable given a quantity and quality of the economy's scarce resources
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Aggregate demand Curve
The relationship between the level of aggregate demand and the overall price level; it shows planned expenditure at any given possible overall price level
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Long run economic growth
The expansion of the productive capacity of an economy
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Short run economic growth
An increase in actual GDP
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Circular flow of income
A neoclassical economic model depicting how money flows through the economy
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Propensity
an inclination or natural tendency to behave in a particular way
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Marginal propensity to consumer (MPC)
The proportion of additional income devoted to consumer expenditure
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Marginal Propensity to tax (MPT)
The proportion of additional income that is taxed
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Marginal propensity to import (MPM)
The proportion of additional income that is spent on imports of goods and services
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Marginal propensity to save (MPS)
The proportion of additional income that is saved by households
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Marginal propensity to withdraw (MPW)
The proportion of additional income that is withdrawn from the circular flow - the sum of the marginal propensities to save, import and tax
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Multiplier (k)
The ratio of a change in equilibrium real income to the autonomous change that brought it about; it is defined as 1 divided by the marginal propensity to withdraw
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Stagflation
persistent high inflation combined with high unemployment and stagnant demand in a country's economy
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Velocity of circulation
the amount of units of money circulated in the economy during a given period of time; measured by diving GDP by money supply - high velocity indicated high inflation
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Average propensity to consume
The proportion of income that households devote to consumer expenditure
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Average propensity to save (savings ratio)
the proportion of income which is saved, usually expressed for household savings as a fraction of total household disposable income
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Accelerator effect
when an increase in national income (GDP) results in a proportionately larger rise in capital investment spending
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Macroeconomics
The study of the interrelationships between economic variables at an aggregate level
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Economic agents
a person, company, or organization that has an influence on the economy by producing, buying, selling or taxation
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Factors of production
Resources used in the production process; inputs into production, including labour, land, capital and entrepreneurship
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Payments to the factors of production
Rent (land), wages (labour), interest (capital), profit (entrepreneurship)
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Leakages
Outflow from a circular flow of income model; withdrawals from possible spending (tax, savings, spending on imports)
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Injections
Additions of extra spending into the circular flow of income (investment, exports, government spending)
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Consumption function
The relationship between consumer expenditure and disposable income; its position depends upon the other factors that affect how much households spend on consumer expenditure
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Investment
Expenditure undertaken by firms to add to the capital stock
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Primary sector
The sector of an economy making direct use of natural resources
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Secondary sector
Portion of an economy that includes light and heavy industrial manufacturers of finished goods and products from raw materials
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Tertiary sector
Industry which does not produce raw materials or manufacture products but offers a service
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Rostow's 5 stages of the economic growth
traditional society, pre-conditions for take-off, take-off, drive to maturity, age of mass consumption
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Traditional society
An agricultural economy of mainly subsistence farming, little of which is trade, the size of the capital stock is limited and of low quality resulting in very low labour productivity and little surplus output left to sell in domestic/overseas market
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Pre-conditions for take-off
Agriculture becomes more mechanised and more output is traded, savings and investment grow although they are still a small percentage of national income (GDP), some external funding is required (i.e. overseas aid/remittances from migrant workers)
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Take-off
Manufacturing industry assumes greater importance, although the number of industries remains small, savings and investment grow, (~15% of GDP), agriculture assumes lesser importance in relative terms although the majority of people may remain farming
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Dual economy
existence of two distinct types of economic segments within an economy, a capitalist based manufacturing sector (geared towards global markets) labour intensive agricultural sector (low productivity, geared towards subsistence farming or local market
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Drive to maturity
Industry becomes more diverse, growth should spread to different parts of the country as the state of technology improves - the economy is less dependent on factor inputs for growth and makes better use of innovation to increases real incomes per cap
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Age of mass consumption
Output levels grow, enabling increased consumer expenditure, there is a shift towards tertiary sector activity and the growth is sustained by the expansion of a middle class of consumers
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Recession
Occurs when GDP falls for two or more consecutive quarters
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Tend rate of economic growth/ Trend rate
the average sustainable rate of economic growth over a period of time, i.e. in the UK, the trend rate has tended to be about 2.5%
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Productivity
Measure of the efficiency of a factor of production
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Labour productivity
Measure of output per worker, or output per hour worked
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Capital productivity
Measure of output per unit of capital
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Total factor productivity
The average productivity of all factor, measured as the total output divided by the total amount of inputs used
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Real GDP
The value of economic output adjusted for price changes
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Nominal GDP
Gross domestic product (GDP) evaluated at current market prices
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Valuation approach
the methodology used to determine the fair market value of a business
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Fair market value (FMV)
An estimate of the market value of a property, based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market
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Income approach (for measuring GDP)
GDP based on the income approach is calculated by adding up the factor incomes to the factors of production in the society
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Output approach (for measuring GDP)
Summing the value of sales of goods and adjusting (subtracting) for the purchase of intermediate goods to produce the goods sold
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Expenditures approach (for measuring GDP)
The total spending on all final goods and services (Consumption goods and services (C) + Gross Investments (I) + Government Purchases (G) + (Exports (X) - Imports (M)), GDP = C + I + G + (X-M)
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Economic growth rate
the rate at which a nation's Gross Domestic product (GDP) changes/grows from one year to another
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Sustainable economic growth
a rate of growth which can be maintained without creating other significant economic problems, especially for future generations
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Sustainable development
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs
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Unemployed
People who are economically active but not in employment
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Employment
the state of having paid work
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Full employment
A situation where people who are economically active in the workforce and are willing and able to work (at going wage rates) are able to find employment
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Claimant count of unemployment
The number of people claiming the Jobseeker's allowance each month
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Workforce
People who are economically active - either in employment or unemployed
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ILO unemployment rate
measure of the percentage of the workforce who are without jobs, but are available for work, willing to work and looking for work
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In employment
People who are either working for firms or other organisations, or are self employed
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Economically inactive
Those people who are of working age who are not looking jobs, for a variety of reasons
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Discouraged workers
People who have been unable to find employment and who are no longer looking for work
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Labour Force Survey
A continuous household survey to provide information about the labour market, including employment, unemployment and economic activity rates
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Unemployment rate
A measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force
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Cyclical (disequilibrium) unemployment
Unemployment that arises during the downturn of the economic cycle, such as a recession
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Structural unemployment
Unemployment arising because of changes in the pattern of economic activity within an economy
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Seasonal unemployment
Unemployment that arises in season of the year when demand is relatively low
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Frictional unemployment
Unemployment associated with job search; that is, people who are between jobs
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Demand-deficient unemployment
Unemployment that arises because of a deficiency in aggregate demand in the economy, so that the equilibrium level of output is below full employment
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Voluntary unemployment
Situation arising when an individual chooses not to accept a job at the going wage rate
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Involuntary unemployment
Situation arising when an individual who would like to accept a job at the going wage rate in unable to find employment
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Hysteresis
refers to the possibility that periods of high unemployment tend to increase the rate-of-unemployment-below-which-inflation-begins-to-accelerate (NAIRU)
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Inflation
a sustained rise in the general level of prices for goods and services; if incomes stay the same, purchasing power will fall
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Deflation
A situation in which the average price level is falling - this is negative inflation
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Disinflation
A fall in the inflation rate
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Hyperinflation
inflation is extremely high and increasing at a rapid pace; prices rise more than 50% a month
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Index number
A device for comparing the value of one variable in one period of location with a base observation (e.g. the RPI measures the average price level of prices relative to a base period)
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Consumer price index (CPI)
A geometric, mean based index which includes all UK households and foreign visitors
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Retail price index (RPI)
An arithmetic, mean based index which differs form CPI as it includes more (i.e. housing costs/mortgages) and excludes top earners/state dependent pensioners
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Inflation rate
The rate if change of the average price level; for example, the percentage annual rate of change of the CPI
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Cost-push inflation
Inflation initiated by an increase in the costs faced by firms, arising on the supply side of the economy
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Demand-pull inflation
Inflation initiated by an increase in aggregate demand
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Money stock
the quantity of money in the economy
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Inflation targeting
An approach to macroeconomic policy whereby the central bank is charged with meeting a target for inflation
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Symmetric inflation targeting
A requirement placed on a central bank to respond when inflation is too low as well as when inflation is too high (i.e. Bank of England)
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Asymmetric inflation targetng
A requirement on a central bank to respond when inflation moves above the target level (i.e. European Central Bank)
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Equity
Concept or idea of fairness in economics, particularly in regard to taxation or welfare economics
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Equality
Aims to ensure that everyone gets the same things
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Income/wealth/pay inequality
The extend to which income/wealth/pay is distributed unevenly within a group of people
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Income
Money received, especially on a regular basis, for work or through investments
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Wealth
An abundance of valuable possessions or money
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Absolute poverty
a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information
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Relative poverty
refers to a standard which is defined in terms of the society in which an individual lives and which therefore differs between countries and over time
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Average price level
the average of current prices across the entire spectrum of goods and services produced in the economy
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Aggregate supply
The total supply of goods and services produced within an economy at a given overall price level in a given time period
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Aggregate demand
The total demand for final goods and services in an economy at a given time: AD = C + I + G + (X-M)
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Consumption
The use of goods and services by households
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Investment
Expenditure undertaken by firms to add tot he capital stock
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Government spending
The total amount of money that the government spends in a particular period
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Net exports
The value of a country's total exports minus the value of its total imports
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Supply-side policies
Range of measures intended to have a direct impact on aggregate supply - and specifically on the potential capacity output of the economy
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Demand-side policies
Range of measures intended to have a direct impact on aggregate demand
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Neo-classical economics
An approach to economics that relates supply and demand to an individual's rationality and his or her ability to maximize utility or profit
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Keynesian
An economic theory of total spending in the economy and its effects on output and inflation; it is considered to be a “demand-side” theory that focuses on changes in the economy over the short run
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Austrian School
Belief that the workings of the broad economy are the sum of smaller individual decisions and actions
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Monetarist school
The economy's performance is determined almost entirely by changes in the money supply
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Fiscal Policy
Decisions made by the government on its expenditure, taxation and borrowing
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Government budget
forecast by a government of its expenditures and revenues for a specific period of time
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Budget deficit
A status of financial health in which expenditures exceed revenue
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Budget surplus
A status of fincancial health in which revenue exceeds expenditures
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Balanced budget
Revenues are equal to expenditures
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Government revenue
Money received by a government
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Government expenditure
The total amount of money that the government spends in a particular period
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Current expenditure
Expenditure on goods and services consumed within the current year
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Capital expenditure
Funds used by a company to acquire or upgrade physical assets
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The golden rule
Stipulates that a government will borrow to invest, not to finance existing spending
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Income tax
Tax levied directly on personal income
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Capital gains tax (CGT)
Tax levied on capital gains (a profit from the sale of property or an investment) incurred by individuals and corporations
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Value added tax (VAT)
A type of consumption tax that is placed on a product whenever value is added at a stage of production and at final sale
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Inheritance tax
Tax paid by a person who inherits money or property or a levy on the estate (money and property) of a person who has died
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Automatic stabilizers
Effects by which government expenditure adjusts to offset the effects of recession and boom without the need for active intervention
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Regressive tax
A tax that takes a larger percentage from low-income people than from high-income people; it is generally a tax that is applied uniformly
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Progressive tax
A tax in which the tax rate increases as the taxable amount increases; takes a larger percentage from the income of high-income earners than it does from low-income individuals
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Flat rate tax system/proportionate tax
A system of income tax in which each taxpayer pays the same rate of tax on income
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Direct tax
Tax levied on the income or profits of the person who pays it, rather than on goods or services
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Indirect tax
Tax levied on goods and services rather than on income or profits
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'good' tax
Equity, certainty, convenience & economy
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Canons of taxation
Four maxims devised by Adam Smith, setting out the characteristics of a good tax
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Average tax rate
Tax rate you pay on income when you add up all sources of taxable income and divide that number into the amount of taxes you owe
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Marginal tax rate
The percentage of tax applied to your income for each tax bracket in which you qualify
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Debt
A sum of money that is owed or due
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National/government debt
Total outstanding borrowings of a central government comprising internal (owing to national creditors) and external (owing to foreign creditors) debt incurred in financing its expenditure
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Crowding in
An economic principle in which private investment increases as debt-financed government spending increases
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Crowding out
an economic theory stipulating that rises in public sector spending drive down or even eliminate private sector spending
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National/government debt
Total outstanding borrowings of a central government comprising internal (owing to national creditors) and external (owing to foreign creditors) debt incurred in financing its expenditure
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Crowding in
An economic principle in which private investment increases as debt-financed government spending increases
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Crowding out
an economic theory stipulating that rises in public sector spending drive down or even eliminate private sector spending
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Monetary policy
The decisions made by government regarding monetary variables such as the money supply and interest rates
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Monetary policy committee (MPC)
Body within the Bank of England responsible for the conduct of monetary policy
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Bank rate
The interest rate that is set by the monetary policy committee of the Bank of England in order to influence inflation
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Interest rates
The cost of borrowing and the return on savings
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Money supply/stock
The quantity of money in the economy
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Reserve requirements/cash reserve ratio
A central bank regulation employed by most, but not all, of the world's central banks, that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves (rather than lend out)
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Narrow money
Money in forms that can be used as a medium of exchange, generally notes, coins, and certain balances held by banks
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Broad money
Money in any form including bank or other deposits as well as notes and coins
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Open market operations (OMO)
A monetary policy tool used by central banks to increase or decrease money supply by buying and selling government bonds in the open market
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Monetary transmission mechanism
How policy-induced changes in the nominal money stock or the short-term nominal interest rate impact on real variables such as aggregate output and employment
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Central bank
A national bank that provides financial and banking services for its country's government and commercial banking system, as well as implementing the government's monetary policy and issuing currency
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Monetary/price stability
Stability of the value of money (i.e. low and steady interest rate - government target)
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Financial stability
Ability to facilitate and enhance economic processes, manage risks, and absorb shocks
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Lender of last resort
An institution, usually a country's central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse
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Market-oriented policy
Using the power of the free market, or allowing the forces of supply and demand to 'solve' equilibria imbalances
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Interventionist policy
Regulatory actions taken by a government in order to achieve some goal
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Incentives
A benefit, reward, or cost that motivates an economic action
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Subsidies
A sum of money granted by the state or a public body to help an industry or business keep the price of a commodity or service low
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Research and deveopment
Investigative activities that a business chooses to conduct with the intention of making a discovery that can either lead to the development of new products or procedures, or to improvement of existing products or procedures
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Infrastructure
The basic physical systems of a business or nation
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National Minimum wage (NMW)
Minimum hourly wage rate that is allowable by law
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Living wage
The amount an individual needs to earn to cover the basic costs of living
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Immigration
The action of coming to live permanently in a foreign country
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Privatization
The transfer of ownership, property or business from the government to the private sector
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price stickiness
The resistance of a price (or set of prices) to change, despite changes in the broad economy that suggest a different price is optimal
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Sticky wages
Pay of employed workers tends to have a slow response to the changes in the performance of a company or of the broader economy
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Flexible wages
Respond to changes in supply and demand and lead to the market clearing wage being set
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Inflationary expectations
Rate of inflation that workers, businesses and investors think will prevail in the future, and that they will therefore factor into their decision-making
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Card 2

Front

A country's ability to produce a good relatively more efficiently (i.e. at a lower opportunity cost) than another country

Back

Comparative advantage

Card 3

Front

Shows the consumption possibilities under conditions of free trade

Back

Preview of the back of card 3

Card 4

Front

A theory arguing that there may be gains from trade arising when countries specialize in the production of goods or services in which they have a comparative advantage

Back

Preview of the back of card 4

Card 5

Front

international trade left to its natural course without tariffs, quotas, or other restrictions

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Preview of the back of card 5
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