Global Economics Vocabulary

  • Created by: TessAni
  • Created on: 13-04-13 17:20
Real GDP Growth
A measure of the total output, expenditure or income of an economy after adjusting for changes in the price level. The growth of real GDP is the percentage change in output during a particular time period, often measured over a year
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the sustained increase in the general level of prices, measured in the UK by changes in the cost of a basket of goods and services bought by a typical household (CPI), weighted according to the expenditure on each item in the basket
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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 balance of payments)
includes money flows due to trade (the trade balance - broken down to trade in goods and trades in services), transfers of interest, profit and dividends (the investment income balance) and transfers of money by govts/organisations, transfers balance
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Arises when someone is out of work and actively seeking employment. Measured as total number of percentage of workforce either with labour force survey or claimant count (Job Seeker's Allowance)
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Standard of Living
a measure of the material well-being of a nation and its people
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Short-run economic growth
The actual annual percentage increase in an economy's output, sometimes referred 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 actual and potential output of an economy.
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Negative output gap
Where actual output is below potential output
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Positive output gap
where in the short term actual output exceeds the economy's potential output
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Spare capacity
exists when firms in the economy are capable of producing more output than they are actually producing
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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 the 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 are 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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Marginal Propensity to Save (MPS)
the proportion of additional national income is saved (change in savings/change in national income)
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Marginal propensity to tax (MPT)
the proportion of additional national income that is taxed (change in tax/change in national income)
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Marginal Propensity to Import (MPM)
the proportion of additional national income that is spent on imports (change in imports/change in national income)
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the theory of investment that states that the level of investment depends on the rate of change of national income
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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 (LRAS) curve
the relationship between 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 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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Labour force
all those people of working age who are in employment or actively seeking work
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Labour 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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Capital account of the balance of payments
the section of the balance of payments that records long-term flow of capital into and out of an economy. It records purchases and sales of assets and is split into two sections, long-term capital flows and short-term capital flows
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Long-term capital flows
flows of money used for investment in assets (direct investment in setting up production facilities/portfolio investment through buying shares in companies)
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Short-term capital flows
flows of money that occur to take advantage of differences in countries' interest rates and changes in exchange rates; sometimes referred to as hot money
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Public sector net cash requirement (PSNCR)
the difference between the spending of general government (central and local) and their revenue. If expenditure exceeds revenue there is a budget deficit. Other way round a surplus. A deficit requires government to borrow money.
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Automatic stabilisers
changes in government expenditure and taxation receipts that take place automatically in response to the economic cycle. For example, expenditure on unemployment benefits rises 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 ad not for current expenditure
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Credibility (principle of fiscal policy)
a credible fiscal policy framework is one where the government's 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 and/or 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 business and politicians
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Stability and Growth Pact (SGP)
an agreement by members of the EU about fiscal policy. It require countries adopting the euro to have a budget deficit of 3% of less; a 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 signalled to producers and consumers through changes in absolute and relative price levels
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Operational Independence
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
when deviations above and below the target are given equal weight in the inflation target
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Asymmetric Inflation Target
when deviations below the inflation target are seen to be less important than deviations above the target
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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 the 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
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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Comparative advantage
where one country produces a good or service at a lower relative opportunity cost that others
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Relative opportunity cost
the cost of production of one good or service in terms of the sacrificed output of another good or service in one country relative to another
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Terms of Trade
the price of a country's exports relative to the price of its imports.
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Terms of Trade Formula
Index of average export prices/index of average import prices x100
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Trading possibility curve (TPC)
a representation of all the combination of two products that a country can consume if it engages in international trade. The TPC lies outside the PPC showing the gains in consumption possible from international trade
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Factor endowments
the mix of land, labour and capital that a country possesses. Factor endowments can be determined by geography, historical legacy, economic and social development etc.
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Factor intensities
the balance between land, labour and capital required in the production of a good or service
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Labour-intensive production
any production process that involves a large amount of labour relative to other factors of production
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capital-intensive production
where the production of a good or service requires a large amount of capital relative to other factors of production
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Heckscher-Ohin Theory of International Trade
a theory that a country will export products produced using factors of production that 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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Profit Margin
the difference between a firm's revenue and cost expressed as a percentage of revenue
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Dynamic Efficiencies
efficiencies that occur over time. International trade can lead to changes in behaviour over 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 licensing and franchising
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Licensing arrangements
an agreement that ideas and technology 'owned' by one company can be used by another, often for a charge
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Regional Trading Bloc
countries in a region that have formed an 'economic club' based on abolishing tariffs and non-tariff barriers to trade e.g. NAFTA and ASEAN
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Primary commodities
goods produced in the primary sector of the economy, such as coffee and tin
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Prebisch-Singer hypothesis
the argument that countries exporting primary commodities will face declining terms of trade in the 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 imports of secondary sector
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Developed Economies
countries with a high income per capita and diversified industrial and tertiary sectors of the economy, Examples of developed economies would include the USA, the UK, Japan and South Korea
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Developing economies
countries with 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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reductions in the barriers to international trade in order to allow foreign firms to gain access to the market for goods and services that are trade 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, for example trade between the UK and Germany or the USA and Canada
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Inter-industry trade
trade involving the exchange of goods and services produced by different industries
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intra-industry trade
trade involving the exchange of goods and services produced by the same industry
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Freely floating exchange rate
a system whereby the price of one currency expressed in terms of another is determined by the focus 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 countries. This fixed rate is often set by 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
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Foreign Exchange (FOREX) market
a term used to describe the coming together of buyers and sellers of currencies
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Short-term capital flows
flows of money in and out of a country in the form of bank deposits. Short-term capital flows are highly volatile and exist to take advantage of changes in relative interest rates
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Long-term capital flows
flows of money related to buying and selling of assets, such as land or property or production facilities (direct investment) or shares in companies (portfolio investment)
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External Economic Shocks
unexpected events coming from outside the economy that cause unpredicted changes in AS/AD. Examples might include rapid rises in oil prices or a global showdown
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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 two different countries. PPP is an attempt to measure the true value of a currency in terms of the goods and services it will buy
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J-Curve Effect
shows the trend in a country's balance of trade following a depreciation of the exchange rate. This causes an initial worsening of the balance of trade as higher import prices raise the value of imports and lower export prices reduce their value....
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J-Curve Effect cont.
due to short-run price inelasticity of demand for imports/exports. Eventually the trade balance improves. An appreciation of the currency causes an inverted J-Curve effect
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Marshall-Lerner Condition
states that for a depreciation of the currency to improve the balance of trade the sum of the price of elasticities of demand (PEDs) for imports/exports must be greater than 1
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Business strategy that limits the risk that losses are made from changes in the price of currencies or commodities
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Futures Markets
market where people and businesses can buy and sell contracts to buy commodities or currencies at a fixed price at a fixed date in the future
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Foreign Currency Reserves
foreign currencies held by central banks in order to enable intervention in the FOREX markets to affect the country's exchange rate
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Bilateral exchange rate
the exchange of one currency against another
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Effective exchange rate
the exchange rate of one currency against a basket of currencies of other countries, often weighted according to the amount of trade done with each country
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Single Currency
a currency that is shared by more than one country - the Euro
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Euro Area/Eurozone
term to describe the combined economies of the countries using the euro
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Expenditure-switching policies
policies that increase the price of imports and/or reduce the price of exports in order to reduce the demand for imports and raise for exports to correct a current account deficit on the balance of payments
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Expenditure-reducing policies
polices that reduce the overall level of national income in order to reduce the demand for imports and correct a current account deficit on the balance of payments
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Economic Integration
refers to the process of blurring the boundaries that separate economic activity in one nation state from that in another
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Non-tariff barriers (NTBs)
things that restrict trade other than tariffs
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Trade Deflection
where one country in a free trade area imposes high tariffs on another to reduce imports but the imports come in 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 two or more 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 eliminating 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 same currency and have a common monetary policy as result
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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 Sovereignty
the ability of a country to pursue an independent monetary policy
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Trade Creation
where economic integration results in high-cost domestic production being replaced by imports from a more efficient source within the economically integrated area
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Trade Diversion
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 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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Stability and Growth Pact
limits agreed to public sector borrowing and the national debt for those EU countries that are part of the euro area
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Automatic Stabilisers
elements of fiscal policy that cushion the impact of the business cycle without any need for corrective action by the govt. e.g higher spending on unemployment benefits and welfare payments and lower tax receipts provide an automatic fiscal stimulus
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Fiscal Transfers
occur when taxation raised in one country is used to fund government expenditures in another country
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Economic Convergence
economic conditions in different countries become similar. Economists distinguish between monetary (inflation/interest) and real convergence (structure of economies). membership of the euro area only requires monetary convergence to have taken place.
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Optimal currency area
refers to conditions that need to be met to avoid the costs of monetary union. These conditions include: a high degree of labour flexibility, mechanisms for fiscal transfers, and absence of asymmetric shocks (different impact on different economies)
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when income is below the level that would allow someone to enjoy some agreed minimum standard of living. WB defines 'extreme poverty' as less than $1 a day PPP and 'moderate' as less than $2 per day PPP
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Economic development
the process of improving people's economic well-being and quality of life
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Low-Income Countries
countries with a GDP per capita of $905 or less
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Lower-middle income coutnries
countries with a GDP per capita of $906-$3,595
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Upper Middle-Income Countries
countries with a GDP per capita of £3,595 - $11,115
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High-income coutnries
countries with a GDP per capita of $11,116 or more
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High Human Development
where the HDI is 0.8 and above
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Medium Human Development
where the HDI is between 0.5 and 0.8
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Low human development
where the HDI is less than 0.5
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Human Development Index (HDI)
a measure that, recognising the limitations of GDP per capita as a measure, combines outcomes that might be valued in the development process: life expectancy at birth; adult literacy rate and % of the relevant pop enrolled in education + GDP pc PPP
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Index of Sustainable Economic Welfare (ISEW)
an index (1989) that adds to national expenditure things that raise the quality of life (or well-being) and deducts things that reduce well-being. Daly and Cobb added to/refined the measure to produce a Genuine Progress Indicator (GPI)
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the processes that have resulted in ever-closer links between the world's 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 country other than where its operations originate
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Multinational Companies (MNCs)
firms that produce goods and services in more than one country
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The International Monetary Fund (IMF)
a global organisation that aims to promote international monetary co-operation and international trade
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World Bank
a global organisation that provides development funding
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This is a set of 126 flash cards covering the whole economics specification up to unit 4. Definitions are accurate and they can be used for solo or joint revision.

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