The Global Economy

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Real GDP Growth
a measure of the total output, expenditure or income of an economy after adjusting for changes in the price level
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the sustained increase in the general price level, measured in the UK by changes in the cost of a basket of g+s bougt by a typical household
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arises when someone is out of work and actively seeking employment. measured as the total number of people unemployed or as % of the workforce
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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
includes money flows due to trade, transfers of interest, profit and dividends and transfers of money by govt and international organisations
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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 % increase in an economys output, sometimes referred to as acutal economic growth
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Long-Run Economic Growth
the rate at which the economys potential output could grow as a result of changes in the economys capacity to produce goods and services - potential economic growth
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Output Gap
the difference between the actual and potential output of an economy
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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 av rate of economic growth measured over a period of time, normally over the course of the economic cycle
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Short-Run AS
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. 4 stages: recession, slump, boom, recovery
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Human Capital
the knowledge and skills of the labour force
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proportion of additional national income that is saved
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the proportion of additional national income that is taxed
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the proportion of additional national income that is spent on imports
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the theory of investment that states 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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LRAS curve
the relationship between total supply and the price level in the long run. LRAS represents the maximum possible output for the whole economy- its potential output
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Classical Economics
economists who believe that markets will clear, that prices and quantities adjust to changes in the forces of s+d so that the economy produces its potential output in the LR
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Keynesian Economics
economists who believe that market failures will result in price and quantity rigidities such that the economys equilibrium output in the LR 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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Long-Term Capital Flows
flows of money used for investment in assests
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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 spending of general govt and their revenue. if exp exceeds rev, there is a budget deficit which requires govt to borrow money to make up shortfall of revenue
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Automatic Stabilisers
changes in govt expenditure and taxation receipts that take place automatically in response to the economic cycle. e.g expenditure on unemployment benefits rises during recession
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Economic Stability
the avoidance of volatility in economic growth rates, inflation, unemployment and exchange rates in order to reduce uncertainty and promote business and consumer confidence and investment
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Crowding Out
when govt borrowing reduces the fund available for provate 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 govt that, over the economic cycle, it will borrow only to invest and not for current expenditure
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a credible fiscal policy framework is one where the govt commitment to economic stability is trusted by the public, business and financial markets
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a flexible fiscal policy framework is one that has the flexbility to deal with macroeconomic shocks such as unexpected changes in AS/AD
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a legitimate fiscal policy framework is one that has widespread support and about which there is general agreement among the public, business and policians
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Stability and Growth Pact
an agreement by members of the EU about the way in which fiscal policy should be conducted to support europes single currency. requires those countries adopting EU single currency to abide by rules: 1. a budget deficit of 3% og GDP or less and 2. a f
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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, the rate of change is low enough to not 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 g+s
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Signalling Function
changes in d+s of g+s 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 independant of political interference. target for inflation normally set by govt
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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 Information
when deviations below the inflation target are seen to be less important than deviations above the target
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International Competiveness
the ability of an economys firms to compete in international markets and thereby sustain increases in national output and income
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Unit Labour Cost
the cost of labour per unit of output
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Relative Unit Labour Cost
the cost of labour per unit of output of one country relative to its major trading partners
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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 settles 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 counties 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 g/s at a lower relative opportunity cost than others
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Relative Opportunity Cost
the cost of production of one g/s in terms of the sacrificed output of another g/s in one country relative to another
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Terms Of Trade
the price of a countrys exports relative to the price of its imports. can be measured using formula: index av export prices/ index av import prices x100
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Trading Possibility Curve
a representation of all the combinations of two products that a country can consume if it engages in international trade. 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. determined by among other things, geography, historical legacy, economic and social development
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Factor Intensities
the balance between land, labour and capital required in the production of a g/s
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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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where the production of a g/s requires a large amount of capital relative to other factors of production
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Hecksher-Ohlin Theory
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 economies of scale that would allow them to compete in international markets against more established competitors in other countriesq
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Profit Margin
the difference between a firms revenue and costs expressed as a % of revenue
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Dynamic Efficiencies
efficiencies that occur over time. international trade can lead to changes in behaviour 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 techonology developed in one country is transferred to another, often through licensing and franchising
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Licensing Arrangements
an arrangements 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 tarrifs and non tarrif barriers to trade e.g EU NAFTA ASEAN
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Primary Commodities
goods produced in the sector of an economy such as coffee and copper
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Prebisch-Singer Hypothesis
the argument that countries exporting primary commods will face declining terms of trade in the LR which will trap them in a low level of development as more and more exports will need to be sold to 'pay for' the same volume of imports of secondary
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Developed Economies
countries with high income per capita and diversified industrial and tertiary sectors of the economy
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Developing Economies
countries with relatively low income per capita, an economy which the industrial sector is small or undeveloped and where primary sector production is large part of GDP
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reductions in barriers to international trade, in order to allow forgein firms to gain access to the market for g+s that are traded internationally
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Transition Economics
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 USA + Canada
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Inter-Industry Tade
trade involving the exchange of g+s produced by different industries
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Intra-Industry Trade
trade involving the exchange of g+s 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 forces of d+s
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Fixed Exchange Rate
an exchange rate system in which the value of one currency has a fixed value against another countries. often set by the govt
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Semi Fixed/ Semi-Floating Exchange Rate
an exchange rate system that allows a currencys value to fluctuate within a permitted band of fluctuation
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FOREX market (forgein exchange)
a term used to describe the coming together of buyers and suppliers of currency
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Short-term Capital Flows
flows of money in and out of a country in the form of bank deposits. STCF are highly volatile and exist to take adv of changes in relative interest rates
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Long-Term Capital Flows
flows of money relatied to the selling and buying of assets such as land/property/production facilities (direct investment)/shares in companies (portfolio investment)
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External Economic Shocks
unexpected events coming from outside the economy that cause unpredicted changed in AS/AD e.g rapid decrease in oil prices or global slowdown
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Purchasing Power Parity (PPP)
the exchange rate that equalises the price of a basket of identical traded g+s in two different countries. PPP is an attempt to measure the tre value of a currency in terms of the g+s it will buy
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J-Curve Effect
shows the trend in a countrys BoT following a depreciation in the exchange rate. fall in ER causes initial worsening of the BoT as higher imports raise the value of imports and lower export prices reduce value exports due to SR price inelasticity
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Marshall-Lerner Condition
stated that for a depreciation of the currency to improve the BoT the sum of the price elasticities of demadn for imports + exports must be greater than 1
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business strategy that limits the the risk that losses are made from changes in the price of currencies or commodities
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Futures Markets
markets 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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Forgein Currency Reserves
foreign currencies held by central banks in order to enable intervention in the FOREX markets to affect the countrys exchange rate
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Bilateral Exchange Rate
the exchange of one currency against another
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Effective Exchange Rate
the exchnage rate of one currency against a basket of currencies of other countries, often weighted according to the amount of trade done with each other
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Single Currency
a currency that is shared by more than one country. the Euro is shared by 15 countries in the EU
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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 raise demadn for exports to corrent current account deficit
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Expenditure-Reducing Policies
policies that reduce the overall revel 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 Intergration
refers to the process of blurring the boundaries that seperate economic activity in one nation state from that in another
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Non-Tarrif Barriers
things that restrict trade other than tarrrifs
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Trade Deflection
where one country in a free trade area imposes high tarrifs 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-tarriff barriers to trade, promoting the free movement of labour and capital and agreeing common policies in a number of areas
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Economic Union
deepens integration in a single market, centralising economic policy ay the macroeconomic level
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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 a result
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Single European Market
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 persue an independent monetary policy
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Trade Creation
where economic intergration 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 the costs of changing currencies
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Price Transparancy
the ability to compare prices of g+s in different countries
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Stability and Growth Pact
limits agreed 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 of unemployment benefits during recession
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Fiscal Transfers
occur where taxation raised in one country is used to fund govt expenditures in another country
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Economic Convergence
the pricess by which economic conditions in different countries become similar. economists distiguish between monetary convergence (similari in inflation and interest r) and rela convergence (strusture econ) euro area requires monetary convergence
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Optimal Currency Area
refers to the conditions that need to be met to avoid the costs of monetary union. include high degree labour market flexibility, mechanisms for fiscal transfers, absence of external shocks that impact differently on different economies
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when income is below level that would allow someone to enjoy agreed minimum standard of living. world bank extreme pov live on less than $1 a day and moderate pov live on less than $2 per day
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Economic Development
the process of improving peoples economic well-being and quality of life
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Low-Income Countries
countries with GDP per capita < $905
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Lower Middle-Income Countries
GDP per capita $905-$3595
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Upper Middle-Income Countries
GDP per capita $3596-$11115
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High-Income Countries
GDP per capita > $11116
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High Human Development
where HDI is 0.8 and above
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Medium Human Development
where HDI is between 0.5 and 0.8
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Low Human Development
where HDI is less than 0.5
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Human Development Index
a measure that recignising limitations of GDP per capita as a measure, combines outcomes that might be valued in the development process; life expectancy, adult literacy rate, % relevant ppl in education AND gdp per capita
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Index of Sustainable Welfare (ISEW)
an index that adds to national expenditure things that raise the quality of life and decucts things that reduce well being
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the processes that have resulted in ever-closer links between the worlds economies
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Foreign Direct Investment
the establishment of branches and productive processes abroad, OR purchase of forgein firms; investment made by a multinational corporation in a country other than the one in which it originates
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Multinational Companies
MNCs - firms that produce g+s in more than one country
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World Trade Organisation
a global organisation that regulates world trade
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Transition Economy
one that is changing from a centrally planned to a free market economy
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The International Monetary Fund
IMF- a global organisation that aims to promote international monetary co-orperation and international trade
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World Bank
a global organisation that provides development funding
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the sustained increase in the general price level, measured in the UK by changes in the cost of a basket of g+s bougt by a typical household

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Balance of Payments


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Current Account


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