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82 Cards in this Set

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Absolute poverty
A standard of living that fails to provide basic needs, often measured by the number falling below a threshold level of income such as a $1.25 a day.
Automatic fiscal stabilisers
Government spending and tax revenues that change with the level of economic activity, dampening the swings in the economic cycle.
Capital flight
The flow of capital out of a country following a sharp fall in the confidence investors have in the future prospects of that country. This precipitates a sharp depreciation of the currency.
Capital inflows
The purchase of assets by overseas residents: short-term flows such bond purchases and long-term flows such as foreign direct investment in physical capital.
Capital mobility
The ease of switching capital from one use to another. Mobile capital (see hot money) includes liquid assets such as bonds and equities. Immobile capital includes physical plant and machinery which is difficult to sell quickly or switch to an alternate use.
Catch-up and convergence
This occurs when countries that start off poor tend to grow more rapidly than countries that start off rich. This is because technology is an exogenous variable and it can be replicated and used to drive faster productivity growth. The result is some convergence in the standard of living as measured by per capita GDP.
Comparative advantage
The ability of one country to produce a good at a lower opportunity cost than another country; i.e. in terms of other goods foregone. If each country specialises in those goods and services where they have an advantage, then total output and economic welfare can be increased (under certain assumptions).
Corruption
Rent-seeking behaviour by public decision makers that leads to a misallocation of resources. For example, a decision taken on the basis of a bribe rather than the most efficient use of the scarce resources available.
Crowding Out
Government borrowing puts upward pressures on interest rates as the government has to increase the yield on bonds to attract buyers. This can put upward pressure on general interest rates and so cause lower private sector spending and investment.
Customs union
An agreement between a group of countries to set a common external trade policy and to allow free trade within the membership countries; for example, Mercosur.
Debt forgiveness
An agreement by the lender(s) to write off all or part of an outstanding debt.
Debt relief
An agreement by the lender(s) to defer or reduce interest payments on international loans. This is normally coupled by a debt rescheduling agreement which often lengthens the repayment period or reduces the interest rate.
Deregulation
The removal of legal restrictions on the activities of businesses. The objective is normally to increase competition or reduce business costs.
Direct taxes
Taxes levied on the incomes of individuals and firms.
Discretionary policy
Policy made by judgemental methods rather than following rigid rules.
UK: Following the abandonment of the golden rule by the Labour government, fiscal policy is once again discretionary. Monetary policy is based on an inflation target and is therefore partially rule-based.
Dumping
When a producer in one country exports a product to another country at a price which is either below the price it charges in its home market or is below its costs of production.
Dutch disease
This refers to the harmful effects on an economy’s competitiveness of real exchange rate appreciation resulting from a rapid, large inflow of funds, for example due to rising commodity export revenues.
ECB
The European Central Bank that sets interest rates for the Euro zone based on a CPI inflation target of below 2%.
Effective exchange rate
An index number of the value of a country’s currency relative to a weighted basket of other currencies.
EMU
The Economic and Monetary Union contains the member countries of the EU that adopted the Euro.
Euro
The single European currency that has been used for all currency transactions in the Euro zone since 2002. 17 of the EU’s 27 members use the euro, Estonia was the most recent to join at the start of 2011.
Exchange rate policy
The decision by government over how it wants the value of its currency to be determined: by the free market (floating exchange rate) or managed by intervening in the currency markets and restricting the flow of capital (fixed or pegged exchange rate).
Expenditure-reducing policy
This aim to shift aggregate demand to the left, by tightening fiscal or monetary policy, and thereby reducing consumption and thus import demand. This policy could be very effective in the UK which has a high marginal propensity to import.
Expenditure-switching policy
These policies aim to switch consumer demand from imported goods onto domestically-produced ones. This could be achieved a devaluation of the exchange rate or protectionism.
External (exogenous) shocks
Events that through aggregate demand or aggregate supply have a major effect on an economy: e.g. significant increase in the oil price or sudden contraction in availability of credit (credit crunch).
Fair trade
The purchase of imported goods at prices above the world price in order to give the producers a ‘fair’ and stable price. This policy hopes to improve incomes and living standards, reduce price volatility and so encourage investment, enforce better worker conditions and for social premiums to be invested into infrastructure.
FDI
Foreign Direct Investment is the purchase of foreign firms or the establishment of foreign subsidiaries.
Fiscal Drag
When tax allowances do not rise in line with prices and income then households and firms end up paying a larger percentage of their incomes in tax.
Fixed Exchange Rate
An exchange rate that is fixed against other major currencies through action by governments or central banks, usually within small margins of fluctuation around the central rate. This is likely to involve periodic intervention in the foreign exchange market by one or more central banks to buy or sell the currency or change interest rates.
Gini coefficient
A measurement of inequality in the distribution of income. The closer the coefficient is to one, the more unequal the income distribution in the country.
Globalisation
The process by which most economies have become more interdependent. This has been accompanied by rapid growth in global trade and capital and labour movements.
Good governance
Good governance is normally associated with the fair exercise of the rule of law, allowing for the enforceability of contracts, transparency, so institutions can be judged, and legitimate decision makers, normally elected through a democratic process.
Harrod-Domar model
A theory of economic growth that focuses on the savings rate and the capital output ratio. Growth is = s/k
Hot money
Short term, speculative flows of money between countries seeking the best return.
Human capital
Refers to the stock of knowledge and skills acquired by people through investment in their productive capacity.
IDA
The soft arm of the IBRD, the International Development Agency lends money at concessionary rates to the poorest countries.
IMF
The International Monetary Fund is an international lender of last resort, assisting countries that have acute balance of payments difficulties. Their loans come with conditions in order to achieve macroeconomic stability and structural adjustment, known as Structural Adjustment Programmes.
Indirect taxes
Taxes levied on expenditure and output, such as VAT.
Infant industry
A new industry that is emerging in a country that will take time to become internationally competitive. For example a lack of managerial experience, worker skills and economies of scale will mean the industry will be facing higher unit costs than established firms in other countries.
Inflation targeting
A form of monetary policy where monetary instruments (primarily interest rates) are manipulated by the central bank to keep inflation within a narrow range. An inflation target can be symmetrical such as in the UK (=2% ±1%) or asymmetrical such as in the Euro zone (<2%).
International competitiveness
The degree to which domestic producers can compete on international markets for customers; often measured using relative unit labour costs or real exchange rates.
Inward-looking trade strategy
A development strategy focussing on substituting imported goods and services with domestically produced goods, behind protective trade barriers. These policies hope industry will benefit from economies of scale, the current account will improve, and scarce foreign exchange will only be used for importing essential capital goods.
J Curve Effect
The effect of currency depreciation on the trade deficit depends on price elasticity of demand for exports and imports. The J-Curve effect says that in the short-run, export volumes will remain constant, and import spending will rise, hence worsening the current account; in other words the Marhsall-Lerner condition is not satisfied. Only in the long-run, will the current account start to improve.
Lewis two-sector model
A theory that focuses on the wage differential between the traditional agricultural sector and the modern manufacturing sector, driving the migration of surplus workers into the latter leading to the transformation of the economy.
Long-run Phillips curve
The relationship between unemployment and inflation in the long run – i.e. when markets are in equilibrium. Advocates of the vertical LRPC maintain that attempts by the government to reduce unemployment below its natural rate will simply lead to accelerating inflation through increasing inflationary expectations.
Lorenz curve
A graphical representation of inequality. The closer the curve is to the line of perfect equality, the more equal the society’s distribution of income.
Marshall-Lerner Condition
This states that a devaluation will only improve the current account if the combined elasticities of demand for exports and imports is greater than one. If they are less than one, a devaluation will worsen the current account balance.
Microfinance
Refers to the provision of financial services to low income households and small businesses in developing countries.
Moral hazard
When an insured party decides to take higher risks because they perceive their losses will be covered – for example the excessive risk-taking by banks knowing
that central banks might rescue them.
Natural rate of unemployment
The rate of unemployment that exists when labour markets are in equilibrium and hence the economy is producing at potential output. Attempts by government to reduce unemployment below the NRU will end in accelerating inflation.
NGOs
Non-Governmental Organisations are associated neither with governments nor with firms and yet play a major role in developing countries through the provision of aid and by influencing the development policy agenda. Examples include Oxfam, Christian Aid and MSF.
Non-tariff barriers
Protectionist measures including quotas, technical regulations on imported goods and domestic subsidies.
Outward-looking trade strategies
A development strategy focussing on increasing exports. It is often associated with a laissez-faire approach to imports and hopes industries will exploit their comparative advantage and improve efficiency due to greater competition.
Prebisch-Singer hypothesis
The hypothesis that the terms of trade for primary product dependent developing countries tends to deteriorate over time reducing their gains from trade.
Primary product dependence
A nation that relies on the export of one or two primary products for the majority of its FOREX earnings, leaving it vulnerable to fluctuating world prices.
Progressive tax
A tax that takes a larger percentage of household income the larger their income.
Protectionism
Any departure from free trade designed to give some protection to domestic industries from international competition.
Quantitative Easing
institutions and credits the seller’s bank account. So the seller has more money in their bank account which they may go and spend. Or they may buy other assets instead, such as shares or company bonds. That will push up the prices of those assets, making the people who own them, either directly or through their pension funds, better off. So they may go out and spend more. And higher asset prices mean lower yields, which brings down the cost of borrowing for businesses and households. That should provide a further boost to spending. In addition, banks will find themselves holding more reserves. That might lead them to boost their lending to consumers and businesses. So, once again, borrowing increases and so does spending.
Quotas
A trade barrier that places a limit on the quantity of a good that can be imported.
Real exchange rate
The nominal exchange rate adjusted for the different rates of inflation between the two currencies.
Real interest rate
The interest rate adjusted for inflation, revealing the opportunity cost of deferring consumption.
Regressive tax
A tax that takes a smaller percentage of household income the larger their income.
Relative inflation rates
A key determinant of competitiveness between two countries over the long term.
Relative interest rates
Changes in interest rates of one country relative to another may lead to flows of hot money and therefore movement in the exchange rate.
Relative poverty
A standard of living that falls significantly below the average experienced in the society concerned. In the UK, this is defined as those earning less than 60% of median income.
Ricardian Equivalence
The argument that government budget deficits have
no lasting effects on economic activity. Rational taxpayers are supposed to anticipate that tax cuts today will mean tax increases in future, and so save more when the government saves less.
Rostow model
Rostow's model suggests an economy passes through five stages of economic development: traditional society, transitional stage, take-off, drive to maturity and high mass consumption. The model suggests certain conditions need to met before the economy can move to the next stage.
Savings gap
The difference between the level of savings and the desired level of investment in a country.
Senile industry
An industry that is facing persistent declining demand.
Short-run Phillips curve
The relationship between unemployment and inflation in the short run – i.e. some markets may be in disequilibrium.
Sovereign Wealth Fund
A government or state run investment fund usually created by profits from natural resources such as oil, gas or minerals. Highly secretive, their assets grew dramatically when oil prices rose to record levels. Some of the largest SWFs are in the oil-rich Middle East and China.
Stability & Growth Pact (EU)
This was adopted in 1997 and forms part of the Maastricht convergence criteria for new members of the eurozone and to maintain discipline in the public finances of Euro Area member-states. The pact sets a limit for annual government budget deficit to GDP of 3% and the ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year.
Structural Adjustment Policies
A set of policies associated with the World Bank and IMF that aim to stabilise and structurally adjust a nation in order to improve economic development. Stabilisation policies include devaluation of the currency, fiscal and monetary tightening. Structural adjustment policies include reduced trade restrictions, privatisation and deregulation to encourage private enterprise. These are judged in Poverty Reduction Strategy Papers (PRSPs).
Tariff
Taxes levied on imports to increase their price domestically.
Terms of trade
The ratio of the average price of a country’s exports to the average price of its imports.
Trade barriers
Policies designed to protect domestic industries from international competition such as tariffs, quotas, subsidies and technical restrictions.
Trade creation
The increased amount of trade due to the reduction in trade barriers between countries. Often seen as an advantage of reducing trade barriers.
Trade diversion
The diversion of trade away from countries where trade barriers are faced to countries where trade barriers are lower. For example when a nation joins the EU it may start to buy more from within the EU than before, diverting its demand away from former sources.
Trading bloc
An agreement between a group of countries to allow free trade within the membership countries but to allow individual members to independently set their external trade policy beyond the trading bloc; e.g. NAFTA.
Unit labour costs
The cost of the labour needed to produce one more unit of output. Commonly used as an indicator of a nation's productivity and a critical factor in the choice of location for FDI.
World Bank (IBRD)
The International Bank of Reconstruction and Development (IBRD) lends money to developing nations at commercial rates in order to provide funds for development projects considered too risky by commercial banks. IBRD loans are often conditional on the recipient country adopting certain policies.
WTO
The World Trade Organisation oversees and regulates the international trading environment of its 153 members. Its primary objective is to reduce trade barriers.