F585 Key Terms

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Real GDP Growth
a measure of the total output, expenditure or income of an economy after adjusting for the changes in the price level. The groeth of real GDP is the percentage change in output during a particular time period, often measured over one year.
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Inflation
The sustained increase in the general level of prices, measured in the UK by changes in th cost of a basket of goods and services bought by a typical household (CPI), weighted according to the expenditure on each item in teh basket
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Unemployment
arises when someone is out of work and actively seeking employment. Measured as the total number of people unemployed (the level of U/S) or as a % of the workforce (rate of U/E). International comparisons by the labour force survey, UK by JSA
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Balance of payments
records money flows into and out of a country over a period of time
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Current Account in BOP
includes money flows due to trade (trade balance broken down into trade in G&s), transfers of interest, profit and dividends ( investment income balance) and transfers of money by governments and international organisations (transfers balance)
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Standard of living
a measure often material well-being of a nation and its people
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Short Run Economic Growth
the actual annual percentage increase in a countries output, sometimes refered to as actual economic growth
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Long Run Economic Growth
the rate at which the economy's potential output COULD grow as a result of changes in the economy's capacity to produce goods and services, sometimes referred to as potential economic growth
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Output Gap
The difference between the actual and potential output of an economy. Negative output gap: where actual output is below potential output. Positive output gap: where actual output exceeds potential output
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Spare capacity
exists in an economy when firms are producing less output than the are capable of producing; when there are unemployed resources.
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Trend rate of growth
the average rate of economic growth measured over a period of time, normally over the course of an economic cycle (peak to peak or trough to trough)
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Short Run Aggregate Supply
shows the level of production for the economy at a given price level, assuming labour costs and other factor input costs remain unchanged
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Economic Cycle
Fluctuations in the level of economic activity as measured by GDP. Typically there are four stages in the cycle: recession recovery, boom and slowdown.
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Human capital
The knowledge and skills of the labour force
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Accelerator
the theory of investment that states that the level of investment depends on the rate of change in national income
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Stocks
the amount of finished goods that firms hold in order to be able to satisfy increases in demand
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Long Run Aggregate Supply (curve)
the relationship between the total supply and the price level in the long run. The LRAS curve represents the maximum possible output for the whole economy- its potential output
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Classical Economists
economists who believe that markets will 'clear', that prices and quantities will adjust to changes in the forces of supply and demand so that the economy produces its potential output in the long run
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Keynesian Economists
economists who believe that market failures will result in price and quantity rigidities such that the economy's equilibrium output in the long run may be less than its potential output
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Labor Force
all those people of working age who are in employment or activley seeking work
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Labor Force participation rate
a measure of the proportion of the population able to work who are in employment or who are actively seeking work
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Capital Output Ratio
The amount of capital needed to generate each unit of output
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The Harrod- Domar Model
the theory say that in order to increase economic growth in the long run, there must be either more savings to funs the higher levels of investment or technological advance to increase the productivity of investment and lower the capital output ratio
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Capital Account of the Balance of payments
the section of teh BOP that records long- term flow of capital into and out of an economy. It records purchases and sales of assests and is split into 2 sections: 1) LT CF: money used for investment in assets. 2) ST CF: take +ve ER &IR,hot money
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Public sector net cash requirement (PSNCR)
the difference between the spending of general government and their revenue. Deficit if exceeds (need to borrow difference). Surplus if spending is below revenue
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Automatic Stabilisers
changes in government expenditure and taxation receipts that take place automatically in response to the economic cycle e.g. welfare benefits rise during the recession phase of the business cycle
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Economic Stability
the avoidance of volatility in economic growth rates, inflation, employment and unemployment and exchange rates, in order to reduce uncertainty and promote business and consumer confidence and investment
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Crowding Out
when government borrowing reduces the funds available for private sector investment or raises the cost of investment by raising market interest rates
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Cyclical deficit
a budget deficit that arises because of the operation of automatic stabilisers.
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Golden Rule
a commitment by the UK government that, over the economic cycle, it will borrow only to invest and not for current expenditure
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Credibility (principle of fiscal policy)
a credible fiscal policy is one where the governments commitment to economic stability is trusted by the public, business and financial markets
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Flexibility (principle of fiscal policy)
a flexible fiscal policy framework is one that has the flexibility to deal with macroeconomic shocks, such as sudden and unexpected changes in AD/AS
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Legitimacy (principle of fiscal policy)
a legitimate fiscal policy framework is one that has widespread support and about which there is general agreement among the public, businesses and politicians
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Stability and Growth Pact (SGP)
an agreement by memebrs of the EU about the way in which fiscal policy should be conducted to support Europe's single currency. It requires the eurozone states to have a budget deficit of 3% or less & government debt of 60% of GDP or less.
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Monetary Transmission Mechanism
the way in which monetary policy affects the inflation rate through the impact it has on other macroeconomic variables.
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Price Stability
when the general price level does not change or, if it does change, the rate of change is low enough not to significantly affect the decisions of firms and households
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Purchasing Power of Money
what a unit of currency will buy in terms of goods and services.
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Signalling Function
changes in demand and supply of goods and services are signaled to producers and consumers through changes in absolute and relative price levels
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Operational Independance
when a central bank is given responsibility for the conduct of monetary policy independent of political interference. The target for inflation however, is normally set by governments.
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Symmetric inflation target
where deviations above and below the target are given equal weight in the inflation target
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Asymmetric inflation target
where deviations below the inflation target are seen to be less important than deviations above.
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International Competitiveness
the ability of an economy's firms to compete in international markets and, thereby, sustain increases in national output and income .
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Unit Labour Costs
the cost of labour per unit of output (including the social costs of employing labour as well as wage costs)
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Relative Unit labour Costs
the cost of labour per unit of output of one country relative to its major trading partners.
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World Trade Organisation (WTO)
an international body responsible for negotiating trade agreements and 'policing; the rules of trade to which its members sign up. Trade disputes between members are settled by the WTO.
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Absolute Advantage (Adam Smith)
where one country is able to produce more of a good or service with the same amount of resources, such that the unit cost of production is lower.
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Reciprocal absolute advantage
where in a theoretical world of two countries and two products, each country has an absolute advantage in one of the two products
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Comparitive Advantage
where one country produces a good or service at a lower relative opportunity cost tha others
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Relatve opportunity cost
the cost of production of one G/S in one country relative to another
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Terms of trade
the price of a country's exports relative to the orice a a country's imports: Formula = Index of average export prices / Index of average import prices X 100
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Trading possibility curve
a representation of all the combinations of 2 products that a country can consumer if it engages in international trade. The TPC curve lies outside the PPC curve
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Factor Endowments
The mix of land labour and capital that country possesses: determined by geography, historical legacy and economic and social development
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Factor intensities
the balance between and, labour and cpital required in the production of a good or servcie.
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Heckscher- Ohlin theory of international trade
a theory that a country will export products produced using FOP taht are abundant and import products whose production requires the use of scarce factors..
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Infant Industries
industries in an economy that are relatively new and lack the economies of scale that would allow them to compete in international markets against more established competitors in other countries.
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Dynamic efficiencies
efficiencies that occur over time. International trade can lead to changes in behavior over a period of time that can increase productive and allocative efficiency.
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Knowledge and technology transfer
the process by which knowledge and technology developed in one country is transferred to another, often through licencing (an agreement that the techno owner by one company can be used by another, often for a fee) and franchising.
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Prebisch- Singer Hypothersis
the arguement that countries exporting primary commodities will face declining terms of trade in teh long run, which will trap them in a low level of development as more and more exports will need to be sold to 'pay for' same volume of capital
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Developed economies
countries with a high income per capita and diversified industrial and tertiary sectors of the economy e.g. USA, Japan & South Korea
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Developing economies
countries with a relatively low income per capita, an economy in which the industrial sector is small or undeveloped and where primary sector production is a relatively large part of total GDP
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Liberalisation
reductions in the barriers to international trade, in order to allow foreign firms to gain access to the market goods and services that are traded internationally.
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Transition economies
economies in the process of changing from central planning to the free market.
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Intra-regional trade
trade between countries in the same geographical area e.g. trade between the UK & Germany and Canada and the USA.
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Freely Floating Exchange rate
a system whereby the price of one currency is expressed in terms of another is determined by the forces of demand and supply
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Fixed exchange rate
an exchange rate system in which the value of one currency has a fixed value against other currencies. This fixed rate is often set by the government
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Semi Fixed/ Semi Floating exchange rate
an exchange rate system that allows a currency's value to fluctuate within a permitted band of fluctuation. For example the SEM II allows a band of 15% above or below the decided rate.
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External economic shocks
unexpected events coming from outside the economy that cause unpredicted changes in AD or AS e.g. rapid oil price rises or global slowdown
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Purchasing Power Parity (PPP)
the exchange rate that equalises the price of a basket of identical traded goods and services in 2 different countries. PPP is an attempt to measure the true value of a currency in terms of the G&S that it will buy
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J- Curve Effect
shows the trend in a countries balance of trade following a depreciation of the exchange rate. Initial worsening due to £export fall and £import rise as price inelastic demand of I & E in short run.Eventually this improves.
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Hedging
business strategy that limits the risk that losses are made from changes in the price of commodities or currencies. The buy currencies and commodities in FUTURES MARKETS where the price will be fixed at a fixed date in the future
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Marshall- Lerner condition
states that for a depreciation of a currency to improve the balance of trade, the sum of the PED for imports and exports must be greater than one.
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Expenditure Switching Policies
plicies that increase the price of imports and/ or reduce the price of exports in order to reduce the demand for imports and raise the demand for exports to correct a current account deficit on the BOP.
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Expenditure reducing policies
Policies that reduce the overall level of national income in order to reduce the demand for imports and correct a current account deficit on the BOP.
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Economic Integration
refers to the process of blurring the boundaries that separate the economic activity in one nation state from that of another
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Non- Tariff Barriers to Trade (NTBs)
things that restrict trade other than tariffs
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Trade defection
where one country in a free trade areas imposes high tariffs on another to reduce imports come from elsewhere in the free trade area.
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Free Trade Area
an agreement between two or more countries to abolish tariffs on trade between them.
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Customs Union
An agreement between 2+ countries to abolish tariffs on trade between them and to place a common external tariff on trade with non members
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Single Market
Deepens economic integration from a customs union by elimitating non-tariff barriers to trade, promoting the free movement of labour and capital and agreeing common policies in a number of areas.
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Monetary Union
the deepest form of integration in which countries share the smae currency and have a common monetary policy as a result
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Economic Union
deepens integration in a single market, centralising economic policy at the macroeconomic area.
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Single European Market (SEM)
a process adopted in the EU that promoted the free movement of goods, services and capital by harmonising product standards and removing remaining non tariff barriers to trade.
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Monetary Policy Sovereighnty
the ability of a country to persure an independent monetary policy
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Trade Creation
Where economic integration results in trade switching from a low-cost supplier outside the economically integrated area to a less efficient source within the area.
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Transaction costs
the costs of trading, which includes the costs of changing currencies.
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Price Transparency
the ability to compare prices of goods and services in different countries
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Fiscal Transfers
Occurs where taxation raised in one country is used to fund government expenditure in another country.
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Economic Convergence
the process by which economic conditions in different countries become similar. MONETARY CONVERGENCE: similarities in inflation and interest rates. REAL CONVERGENCE: similarities in the structure of economies.
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Optimal Currency Area
Refers to conditions taht need to be met to avoid teh costs of a monetary union including; a high degree of labour market flexibility, mechanisms for fiscal transfers and the absence of external shocks that impact differently on different countries.
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Poverty
When income is below the level that would allow someone to enjoy some agreed minimum standard of living. The world bank defines 'extreme poverty' as living on less than $1 per day (at PPP) and moderate poverty as living on ,$2 per day (PPP)
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Categorizing the income of countries
Low income Countries: GDP/Capita $905 or less. Lower middle income countries: $906-$3,595. Upper Middle Income Countries:$3,596-$11,115. High Income Countries; $11,116+
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Categorizing the Human Development of countries
High: HDI 0.8+. Medium: HDI 0.5-0.8. Low HDI
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Human Development Index (HDI)
a measure that, recognising teh limitations of GDP, combines outcomes that might be valued in teh development process: life expectancy at birth; adult literacy rate & % relevant pop enrolled in primary, secondary and tertiary education; and GDP/ capi
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Index of Sustainable Economic Welfare
an index, fist constructed in 1989 by Herman E. Daly and John B. Cobb, that adds to national expenditure things that raise the quality of life and deducts the things that reduce well being
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Globalisation
the processes that have resulted in ever closer links between the worlds economies.
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Foreign Direct Investment (FDI)
the establishment of branches and productive processes abroad, or the purchase of foreign firms; investment made by a multinational corporation in a county other than where its operations originate
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The International Monetary Fund (IMF)
a global organisation (185 member countries) that aims to promote international monetary co-operation and international trade
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World Bank
a global organisation that provides development funding, lans and advice to middle or poor income countries
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Sustainable development
the capability of an economic or social system to meet its current needs without impairing the ability of future generations to meet their own needs.
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Teh European Bank for Reconstruction and Development (ERBD)
a bank created after the end of the Cold War to help CEE nations in their transition to capitalism
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Flat Rate Income Tax
Everyone has the same rate of income tax irrespective of their earnings.
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Sustainable Development Stragtergie (EU)
policy aimed at achieving continious improvement in the quality of life of citizens through sustainable communities that use resources efficiently, tap the ecological & social innovation country ensuring prosperity,enviro protection &social cohesian
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Social Inclusion
A socially inclusive society is defined as one where all people feel valued, their differences are respected, and their basic needs are met so they can live in dignity.
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Other cards in this set

Card 2

Front

The sustained increase in the general level of prices, measured in the UK by changes in th cost of a basket of goods and services bought by a typical household (CPI), weighted according to the expenditure on each item in teh basket

Back

Inflation

Card 3

Front

arises when someone is out of work and actively seeking employment. Measured as the total number of people unemployed (the level of U/S) or as a % of the workforce (rate of U/E). International comparisons by the labour force survey, UK by JSA

Back

Preview of the back of card 3

Card 4

Front

records money flows into and out of a country over a period of time

Back

Preview of the back of card 4

Card 5

Front

includes money flows due to trade (trade balance broken down into trade in G&s), transfers of interest, profit and dividends ( investment income balance) and transfers of money by governments and international organisations (transfers balance)

Back

Preview of the back of card 5
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