1
Q
Balance of payments
A
A record of all financial transactions between an economy and the rest of the world.
2
Q
Current account
A
Measures the difference between money and credit going in and out of an economy (through
exports, imports and income paid on assets both home and abroad).
3
Q
Economic cycle
A
Variations in the annual rate of growth of real national output (GDP) over time.
4
Q
Economic
development
A
Long run improvements in broad measures of income per capita, education and health outcomes
and reductions in extreme poverty, hardship and inequality.
5
Q
Economic growth
A
An increase in the real value of goods and services produced as measured by the annual %
change in real GDP. Also, a long-run increase in a country’s productive capacity.
6
Q
shocks
A
Unexpected events that can affect both aggregate demand and supply e.g. unexpected changes in
world oil prices, currency volatility and the effects of political instability.
7
Q
Economic stability
A
When growth, prices and unemployment do not change much from one year to another.
8
Q
Price stability
A
Occurs when there is a low positive inflation rate of between 1-3% and price changes that do occur
have little impact on day-to-day decisions of people and businesses.
9
Q
Trade-off
A
A trade-off implies that choices have to be made between different objectives of policy for example
a trade-off between economic growth and inflation.
10
Q
Unemployment rate
A
The unemployment rate is the proportion of the economically active population who are
unemployed.
11
Q
Claimant Count
A
The number of people claiming unemployment-related benefits like the number of people claiming Job Seeker’s Allowance
(JSA) is counted.
To receive JSA, a person must:
* Be over 18 years old and not in full-time education
* Be available to work and actively seeking work
* Have less than £16 000 in household savings
* Not be working more than 16 hours per week or have a partner who is working more than
24 hours.
12
Q
Constant prices
A
Constant prices tell us that the data has been inflation adjusted.
13
Q
Consumer price index
(CPI)
A
The CPI is the UK government’s preferred measure of inflation, it measures changes in the
average cost of living for a representative household and is a weighted price index.
14
Q
Emerging markets
A
Term commonly used to describe the financial markets of developing countries.
15
Q
Full capacity output
A
Level of GDP where all available factor inputs are fully employed.
16
Q
Globalisation
A
A process in which countries have become increasingly integrated and inter-dependent.
17
Q
GNI
A
Income generated from resources owned by inhabitants and businesses of a country.
18
Q
Gross Domestic
Product (GDP)
A
Total monetary value of output, spending and factor incomes generated within the geographical
boundaries of a country in a given time period
19
Q
Gross Domestic
Product per capita
A
National income per head of population, used as a baseline measure of living standards,
measured by total GDP/resident population.
20
Q
Infrastructure
A
The transport links, communications networks, sewage systems, energy plants and other facilities
essential for the efficient functioning of a country and its economy.
21
Q
Labour Force Survey
A
A survey of employment in the UK, using the International Labour Organisation’s definition of
unemployment (someone who is out of work but is willing and able to work, and able to start a job
within the next 2 weeks). This survey is carried out quarterly, and 44 000 households are surveyed
every quarter. All countries in the EU must carry out an annual Labour Force Survey.
22
Q
Lagging indicators
A
Indicators which tend to follow economic cycles e.g. unemployment.
23
Q
Leading indicators
A
Indicators which predict future economic trends e.g. consumer confidence.
24
Q
Living standards
A
The baseline measure for the standard of living is real national income per capita measured at
constant prices and adjusted for purchasing power parity i.e. real GNI per capita ($) at PPP.
25
Macroeconomic
performance
The overall performance measured by changes in output, investment, prices, jobs, trade and living
standards and also the distribution of income and wealth.
26
Manufacturing
Manufacturing is one of the production industries, which also include mining, electricity, water &
waste management and oil & gas extraction. In 2015, the UK manufacturing sector accounted for
10% of total UK GDP and it accounted for 8% of jobs.
27
Nominal GDP
Monetary value of all goods and services produced expressed at current prices (i.e. unadjusted for
the effects of inflation).
28
Nominal income
The level of income in a given time period (e.g. a year) which is unadjusted for the effects of
inflation, also known as money income.
29
Productivity
How much output is produced for a given input (such as an hour of work).
A measure of efficiency = output per unit of input or output per person employed.
30
Purchasing power
The buying power of a unit of currency. It is inversely related to the rate of inflation.
31
Purchasing power
parity
PPP is an economic theory that compares different countries' currencies through a "basket of
goods" approach. According to this concept, two currencies are in equilibrium—known as the
currencies being at par—when a basket of goods is priced the same in both countries, taking into
account the exchange rates.
32
Real disposable
income
Income after taxes and welfare benefits, adjusted for the effects of inflation.
33
Real GDP
Nominal GDP adjusted for price changes, expressed at constant prices.
34
Real income per
capita
Real value of household income per head of population = real GDP divided by the resident
population.
34
Real income
Nominal income adjusted for price changes, expressed at constant prices.
35
Retail price index
(RPI)
A measure of the change in the cost of a representative sample of retail goods and services. It
does not meet international statistics standards and so has not be used as a national statistic since
2013.
36
Service industries
The service industries include the retail sector, the financial sector, the public sector, business
administration and cultural activities. In 2015, the service industries accounted for 80% of total UK
GDP and accounted for 83% of jobs.
37
Base year
The base year is chosen when calculating an index number. The value of the chosen indicator in
the base year is given an index number of 100.
38
Weights
Weights are used when calculating a weighted consumer price index. In the UK for example, the
weights used are taken from the spending patterns revealed by data from the Family Expenditure
Survey. Heavily weighted items such as transport costs, fuel bills and prices of foodstuffs have a
bigger impact on the overall measure of CPI inflation.
39
Income
Income represents a flow of earnings from using factors of production to generate an output of
goods and services. For example, wages and salaries are a factor reward to labour and interest is
the flow of income for the ownership of capital.
40
wealth
The value of a stock of assets such as housing, personal pensions, savings and many different
forms of marketable (sellable) assets such as antiques.
41
Circular flow of
income
An economic model that shows flows of goods and services and factors of production between
firms and households. The circular flow shows how national income or Gross Domestic Product is
calculated.
42
Injections
Injections are variables in an economy that add to the circular flow of income and include
investment (I), government spending (G) and exports (X).
43
National income
The total income earned by all factors of production in an economy in a given time frame.
44
Withdrawals
Withdrawals are variables in an economy that remove money flows from the circular flow of
income and include saving (S), government taxation (T) and imports (M).
45
Actual growth
A rise in real GDP in a given time period. It is also known as short run growth and is depicted by the aggregate demand curve shifting to the right.
46
Aggregate demand
Total amount of goods and services demanded in the economy at a given time and price level. It is
the sum of consumption expenditure, investment expenditure, government expenditure and net
exports.
47
Aggregate supply
Total planned output of goods and services in an economy at a given time and price level.
48
Short run economic
growth
Short run growth is cyclical; the growth of real GDP is determined by aggregate demand
(C+I+G+X-M) and also factors affecting short run aggregate supply (SRAS).
49
Underlying rate of
economic growth
Also known as the trend rate of growth or long run growth; it occurs when a country successful
raises their productive capacity allowing for a higher level of real national output to be sustained
50
Exogenous shock
An unexpected event beyond the control of the country’s officials that has a large negative impact
on its economy. Also known as external shocks.
51
Access to credit
The willingness and ability of financial institutions to lend funds to producers and consumers.
52
Accelerator process
Where planned capital investment is linked positively to the past and expected growth of consumer
53
Animal spirits
The state of confidence or pessimism held by consumers and businesses.
54
Business confidence
Expectations about the future of the economy – vital in influencing business decisions about how
much to spend on new capital goods and employment intentions.
55
Consumer confidence
Expectations about the future including interest rates, incomes and jobs.
56
Consumer durables
Products such as washing machines or computer screens that are not used up immediately when
consumed and which provide a flow of services over time.
57
Consumer spending
Household spending on goods and services. In the UK, household consumption is the largest
element of aggregate demand (GDP), accounting for 62% of the total in 2015
58
Exchange rate
Exchange rates are the price of one country’s’ currency in relation to another.
59
Fiscal policy
A government's policy regarding taxation and public spending. It can be loose (with the emphasis
on increased spending and lower tax revenue to boost economic activity, with the acceptance of a
wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue,
resulting in a slower-growing economy.
60
Government
borrowing
The amount the government must borrow each year to finance their spending.
61
Government debt
The total stock of unpaid debt issued by a government. A government will normally borrow money by issuing bonds or other securities.
62
Government spending
Spending by government on education, health care and defence & other public services.
63
Gross investment
Total investment calculated by adding new investment to replacement investment.
64
Household income
The financial resources available to households to spend or save:
* Original income: Income from jobs, private pensions, interest from savings
* Gross income = original income + cash benefits
* Disposable income = gross income minus direct taxes
* Post-tax income = disposable income minus indirect taxes
65
Household wealth
The monetary value of assets – including property, shares, savings, pension fund assets.
66
Interest rate
An interest rate is the cost or price of borrowing, or the gain from lending, normally expressed as
an annual percentage amount
67
Investment
The purchase of capital goods or spending on human capital by firms.
68
Investment income
Interest, profits and dividends from assets owned and located overseas.
69
Negative equity
When the value of an asset falls below the debt left to pay on that asset. Term is most commonly
used in connection with property prices after a slump in house prices.
70
Net investment
Total investment minus replacement investment.
71
Net primary income
Part of the current account of the balance of payments, it measures the net flow of profits, interest and dividends from investments in other countries and net remittance flows from migrant workers.
72
Net secondary income
Part of the current account of the balance of payments, it includes overseas aid / debt relief, military grants and (for the UK) net payments to the European Union.
73
Net trade
The balance between the monetary value of exports and imports.
74
Pension Fund
Fund that pools employees' pension benefits and holds them so that they can be paid at retirement.
The money is invested in stocks, bonds and other assets to boost returns and ensure that there are
sufficient funds to be paid out.
75
Personal allowance
The amount of income you can earn before you start paying income tax. This allowance for 2019 to 2020 is £12500.
76
Precautionary saving
Saving because of fears of a loss of real income or rising unemployment.
77
Protectionism
Restricting trade through tariffs and other forms of import controls such as quotas.
78
Replacement
investment
The purchase of capital goods by firms to replace existing, worn out capital. It does not add to the
total capital stock of an economy.
79
Saving
Saving is retaining part or all of an income by workers and households, putting it aside for future
use. Savings are normally kept in a deposit account or Individual Savings Account.
80
Saving ratio
The percentage of household disposable income that is saved rather than spent.
81
Trade cycle
A trade cycle refers to fluctuations in economic activities specially in employment, output and
income, prices, profits etc.
82
Unsecured credit
Credit not secured by another asset – i.e. money borrowed on credit cards.
83
Wealth effect
The supposed link between changes in wealth and household spending.
84
Marginal propensity to
consume (MPC)
The proportion of any change in income that is spent rather than saved.
85
Marginal propensity to
import (MPM)
The change in total spending on imported products following a change in income. The higher is the
marginal propensity to import, the greater is the outflow of extra income in the circular flow model.
A high MPM reduces the size of the multiplier effect.
86
Marginal propensity to
save (MPS)
The change in total savings arising from a small change in household disposable income. If income
rises by £100 and £30 is saved, then the marginal propensity to save = 0.3 (i.e. the change in
saving/change in income)
87
Marginal propensity to
tax (MPT)
The change in taxation following a change in income.
88
Marginal propensity to
withdraw (MPW)
The sum of the marginal propensity to save + marginal propensity to tax + the marginal propensity to import.
89
Multiplier
A calculation of the degree to which injections into the circular flow of income cause changes in final national income. Multiplier (k) = change in real GDP (Y)/change in injections (J).
90
Multiplier process
A description of the multiplier effect which comes about because injections of new demand for
goods and services into the circular flow of income stimulate further rounds of spending – in other
words “one person’s spending is another’s income”. This can lead to a bigger eventual final effect
on output and employment.
91
Multiplier ratio
The formula used to calculate the size of any change in final national income that results from an
increase in injections. The formula is 1/1-mpc.
92
Costs of production
Factor prices, including rent, wages and interest.
93
Business taxation
The level of tax on businesses, including corporation tax and capital gains tax.
94
Money wage rates
The going wage rate in an economy that businesses must pay to attract workers.
95
Classical LRAS
The Classical view is that LRAS is inelastic. This has important implications. The classical view
suggests that real GDP is determined by supply-side factors – the level of investment, the level of
capital and the productivity of labour etc. Classical economists suggest that in the long-term, an
increase in aggregate demand (faster than growth in LRAS), will just cause inflation and will not
increase real GDP
95
Price level
The general level of prices in an economy at a given point in time.
96
Factor mobility
Factor mobility measures the extent to which factor inputs such as land, labour and capital can easily switch between alternative uses with no loss of efficiency. There are two main types of factor immobility both of which are causes of market failure:
* Occupational immobility - barriers to moving easily between jobs.
* Geographical immobility – barriers to changing location to get a new job.
97
Incentives
Incentives matter enormously in any study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to price signals in the market.
98
Institutional structure
The structure of the institutes in an economy that uphold business law, provide funds through banking systems and protect workers.
99
Keynesian LRAS
The Keynesian LRAS assumes wages and prices are fixed until near full employment is reached.
Whilst the economy has spare capacity, the LRAS is perfectly elastic, and only when near full
employment is reached, does the price level start to rise. At full employment, the Keynesian LRAS
becomes vertical as no further output can be produced.
100
Keynesian
unemployment
Unemployment caused by a lack of aggregate demand in the economy – a deficiency of private
sector spending causes both output and employment to contract.
101
Long run aggregate
supply (LRAS)
Long run aggregate supply is determined by the state of technology, productivity, factor mobility and incentives. The LRAS curve is assumed to be vertical (i.e. independent of prices) and represents the normal capacity level of output for the economy.
102
boom
A period of rapid economic expansion resulting in higher GDP, lower unemployment, rising inflation
rates and rising asset prices.
103
Depression
Used to describe a severe recession which may become a prolonged downturn and where a nation’s real GDP falls by at least 10 per cent.
104
Double dip recession
When an economy goes into recession twice without a full recovery in between.
105
Forecast
A prediction made about the likely future performance of an economy
106
Hysteresis
When a sustained period of low aggregate demand can lead to permanent damage to the supply
side of the economy, for example because of high long-term unemployment.
107
Long run growth
The trend growth rate – mainly determined by changes in the stock of available factor inputs and
also improvements in productivity. Trend growth is represented by a rightward shift in the LRAS (or
PPF boundary).
108
Negative output gap
A negative output gap means that an economy has a large amount of spare productive capacity.
109
Net inward migration
When the number of migrants coming into a country is higher than those leaving in a given time
period – usually a year.
110
Output gap
Difference between actual and potential national output. A negative output gap means that an
economy has a large amount of spare productive capacity.
111
Peak
The high point of the economic cycle beyond which a recession starts.
112
Positive output gap
A positive output gap means that an economy is working beyond its normal productive capacity,
perhaps by workers working overtime and machines running long hours.
113
Potential growth
This is a rise in the productive potential or the capacity of the economy. It is not yet actual growth until AD rises to use up that extra capacity.
114
Production
Value of output of goods and services e.g. measured by GDP or an index of production in specific
industry.
115
Productive potential
Productive capacity of the economy – boosted by high quality capital investment.
116
Recession
A period of at least six months when real GDP decline. Or defined as a broadly-based contraction in output, employment, investment and confidence.
117
Recovery
A phase of the economic cycle, after a recession/depression, during which real GDP starts to increase and unemployment begins to fall.
118
Sustainable growth
Growth that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable growth can continue without damage to the environment, or the exhaustion of non-renewable resources.
119
Slowdown
A fall in the rate of growth of an economy but not a full-scale recession.
120
Slump
A sustained decrease in real GDP and a persistent rise in unemployment.
121
Trend growth
The long run average growth rate – mainly determined by changes in the stock of available factor
inputs and also improvements in productivity. Trend growth is represented by a rightward shift in
the LRAS (or PPF boundary).
122
Trough
The low point of the economic cycle beyond which a recovery starts.
123
Cyclical (Demand deficient) unemployment
Unemployment caused by a persistent lack of aggregate demand for goods and services, where national output < potential output leading to a negative output gap.
124
Discouraged workers
People often out of work for a long time who give up on job search and who become economically inactive in the labour market. A cause of hidden unemployment. (individuals without jobs who are not counted in official unemployment statistics because they are not actively seeking work)
125
Economically inactive
Those who are of working age but are neither in work nor actively seeking work.
126
Frictional
unemployment
Those moving between jobs. Typically lasts for up to six months.
127
Full employment
When there enough job vacancies for all the unemployed to take work.
128
Inactivity
The state of not producing an economic output.
129
Involuntary
unemployment
A situation where a worker is willing to work at the going wage but cannot find a job.
130
International Labour
Organisation (ILO)
The ILO is a United Nations agency whose mandate is to advance social justice and promote decent work by setting international labour standards.
131
Labour shortages
When businesses find it difficult to recruit the skilled workers they need.
132
Labour supply
The number of people able, available and willing to work at prevailing wage rates.
133
Migration
The movement of people from one geographical location to another with the intention of settling in
the new region.
134
Natural rate of
unemployment
The equilibrium rate of unemployment = frictional + structural unemployment.
135
Real wage
unemployment
Unemployment that occurs when labour market imperfections result in a higher real wage than the equilibrium real wage. These imperfections may include a minimum wage.
136
Redundancy
Making someone redundant is to end their paid employment.
137
Seasonal unemployment
This occurs when people are unemployed at particular times of the year when demand for labour is lower than usual.
138
Structural unemployment
Unemployment that results from the decline in an industry which leaves people unemployed because they do not have the skills needed by industries that are growing.
139
Under-employment
Workers are underemployed when they are willing to supply more hours of work than their employers are prepared to offer.
140
Unemployment rate
The unemployment rate is the proportion of the economically active population who are
unemployed.
141
Economically active
people aged 16 and over who are either currently employed (as employees or self-employed) or unemployed but actively seeking work and available to start a job, making them part of the labor force
142
Unemployment trap
When the prospect of the loss of unemployment benefits dissuades those without work from taking
a new job – creates a disincentives problem.
143
Unit wage costs
Labour costs per unit of output.
144
Voluntary
unemployment
People of working age choosing not to work at the going wage rate.
145
Zero Hours Contract
An employment contract under which the employee is not guaranteed work and is paid only for
work carried out.
146
Cost push inflation
Inflation caused by rising costs of production either domestically or from importing raw materials at
higher prices due to exchange rate depreciation.
147
Creeping inflation
Small rises in the general price level over a long period, low positive rate of inflation.
148
Deflation
A persistent fall in the general price level of goods and services shown by a negative rate of inflation
149
Demand pull inflation
Caused by an excess of AD over AS. “Too much money chasing too few goods”.
150
Disinflation
A fall in the rate of inflation but not sufficient to bring about deflation. Prices are still rising but at a slower rate, for example a drop in the annual inflation rate from 6% to 2%.
151
Expectations
How we expect the future to unfold – necessarily affected by the degree of uncertainty.
152
Fisher equation
The Fisher Equation lies at the heart of the Quantity Theory of Money. MV=PT, where M = Money Supply, V= Velocity of circulation, P= Price Level and T = Transactions. T is difficult to measure so it is often substituted for Y = National Income (Nominal GDP). Therefore MV = PY where Y=national output.
153
Inflation
A sustained increase in the general price level for goods and services.
154
Inflation expectations
The rate of increase of consumer prices expected by consumers. Expectations can then influence spending and saving decisions and also wage bargaining.
155
Inflation target
The Bank of England has a CPI inflation target, which is currently 2 per cent.
156
Inflationary pressures
Demand and supply-side pressures that can cause a rise in the general price level. Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices and an increase in the prices of raw materials, fuel and components used in production.
157
Money supply
The entire quantity of a country's commercial bills, coins, loans and credit.
158
Price stability
Occurs when there is a low positive inflation rate of between 1-3% and price changes that do occur have little impact on day-to-day decisions of people and businesses.
159
Quantity theory of
money
The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold
160
Relative deflation
An economy with an inflation rate which is lower than comparable economies. Over time, a low relative rate of inflation can lead to improved price competitiveness.
161
Stagflation
A combination of slow growth and rising inflation. The most notable recent period of stagflation occurred during the 1970s, when world oil prices rose dramatically, and UK inflation rose at one point to nearly 30 per cent
162
Wage price spiral
Where workers bid for higher wages because they have seen their real income eroded by rising prices. This can lead to a further burst of cost-push inflation.
163
Long run Phillips Curve
The long-run Phillips Curve is assumed to be a vertical line at the natural rate of unemployment, where the rate of inflation has no effect on the rate of unemployment.
164
Short run Phillips curve
The original Phillips curve suggested an inverse relationship between the rate of unemployment
and the percentage change in wages, implying a short-run trade-off.
165
Phillips Curve
The Phillips Curve shows a trade-off between inflation and unemployment. A demand-side policy to
reduce unemployment could conflict with price stability.
166
Bond market
The market for interest-bearing securities (with either a fixed or a floating rate) and with a maturity of at least one year) that companies and governments issue to raise capital.
167
Bond yield
The yield is effectively the interest rate on a bond. The yield will vary inversely with the market price of a bond. When bond prices are rising, the yield will fall. When bond prices are falling, the yield will
rise
168
Broad Money
A measure of the money supply. Broad money is a measure of the total amount of money held by households and companies in the economy. Broad money is made up mainly of commercial bank deposits — which are essentially IOUs from commercial banks to households and companies —and currency — mostly IOUs from the central bank.
169
Capital market
Market for medium-longer term loan finance. Capital markets are the markets where securities such as shares, and bonds are issued to raise medium to long-term financing. Includes raising of finance by the government through the issue/sale of medium-term and long-term government bonds for example 10 year and 20-year bonds (loans).
170
Characteristics of Money
needs to be durable, portable, divisible, uniform, acceptable and in limited supply.
money
171
Debt finance
Debt finance means borrowing money from an outside source with the promise of paying back the borrowed amount, plus the agreed-upon interest, at a later date.
172
Equity finance
Equity financing means raising capital by selling shares of a business to investors.
173
Foreign exchange market
A market where currencies (foreign exchange) are traded. There is no single currency market – it is made up of the thousands of trading floors. Gains or losses are made from the movement of exchange rates – speculative activity in the currency market is high.
174
Medium of exchange
Money acts as a medium of exchange. This allows goods and services to be traded without the need for a barter system. Barter systems rely on there being a double coincidence of wants between the two people involved in an exchange.
175
Method of deferred payment
A function of money that allows a system of making payments at a later date.
176
Money key functions
medium of exchange, a unit of account, a store of value and a standard of
deferred payment
177
Money market
This is the market for short term loan finance for businesses and households. Money is borrowed and lent normally for up to 12 months. Includes inter-bank lending i.e. the commercial banks providing liquidity for each other. The money market also includes short term government borrowing e.g. 3-12 month Treasury Bills – to help fund the government’s budget (fiscal) deficit.
178
Narrow money
A measure of the money supply. The narrow money definition of the money supply is a measure of the value coins and notes in circulation and other money equivalents that are easily convertible into cash such as short-term deposits in the banking system.
179
Store of value
Store of value can refer to any asset whose “value” can be used now or in the future i.e. its value can be retrieved at a later date. This means that people can save now to fund spending at a later date.
180
Unit of account
A function of money, a nominal unit of measure or currency used to value/cost products, assets (e.g. houses), debts, incomes and spending.
181
Balance sheet
A statement of the assets, liabilities and capital of a business at one single moment in time.
182
Building societies
Building societies are owned by their members (i.e. customers) and not shareholders. Historically, they tended to focus on offering mortgages and savings products. Since 1986 many now offer a broad range of retail banking products. There are over 40 building societies in the UK, many of them with regional customer bases. The five largest building societies are Nationwide Building Society, Yorkshire Building Society, Coventry Building Society, Skipton Building Society and Leeds Building Society.
183
Co-operative Bank
A bank that lends money, collected from its members, at low rates of interest.
184
Commercial banks
Commercial banks have a licence to take the deposits of savers and make loans. They provide services to corporate and individual customers. Commercial banks make their profits by taking small, short-term, relatively liquid deposits from retail savers and transforming these into larger, longer maturity loans e.g. in the form of business loans and mortgages. Other services of commercial banks include providing debit and credit cards, private banking, money custody and guarantees, cash management and settlement e.g. through cheque accounts, as well as trade finance.
185
Credit card
A card indicating that the holder has been granted a line of credit. It enables the holder to make purchases and/or withdraw cash up to a prearranged ceiling.
186
Credit creation
The process by which banks use existing deposits to lend to new borrowers, thus expanding the amount of money in an economy.
187
Credit risk
This is the risk to the commercial bank of lending to borrowers who turn out to be unable to repay their loans. Credit risk can be controlled by proper safeguards / research into the creditworthiness of borrowers. Credit risk also controlled through prudential regulation i.e. the size of reserves banks must hold back in case of bad debts.
188
Credit unions
Credit unions are small and local non-profit lending institutions. They are owned by their members and typically serving those customers who are unable to access standard retail bank products through the banks or building societies. Examples of credit unions include London Mutual, Bristol Credit Union and Glasgow Credit Union.
189
Crowdfunding
Crowdfunding is a form of equity finance that has grown rapidly in the USA and the UK.
Crowdfunding involves the collective effort of a large number of individuals who network and pool
small amounts of their capital to finance a new or existing business venture. Social causes remain
the most active source of crowdfunding activity.
190
Debt default
Failure to meet a debt obligation payment, either principal or interest.
191
Debt equity ratio
The debt-equity ratio is the total liabilities of a firm divided by total shareholder equity.
192
Investment banks
An investment bank provides a wide range of specialised services for companies and large investors. These include: Underwriting and advising on securities issues and other forms of capital raising; Advice on mergers and acquisitions and also corporate restructuring; Trading on capital
markets; Research and private equity investments.
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Leverage
Leverage is the use of borrowed funds to increase profitability. One measure of leverage is the
amount of long-term debt relative to equity.
194
Leverage ratio
The leverage ratio is a simple indicator of the ability of a bank or building society to absorb losses.
Leverage ratio = Capital / Exposures. The leverage ratio refers to the share of the total value of a
firm’s assets and its other commitments (referred to as ‘exposures’) that is funded with high-quality
capital capable of absorbing losses while a firm is a ‘going concern’. The lower the leverage ratio,
the more than a commercial bank or building society relies on debt to fund their activities.
195
Liquidity
Liquidity means the ease and cost with which assets can be turned into cash and used immediately
as a means of exchange.
196
Liquidity ratio
A liquidity ratio is the ratio of liquid assets held by a bank on their balance sheet to their overall
assets. Banks need to hold enough to cover expected demands from depositors. In the wake of the
Global Financial Crisis (GFC) the Basel Agreement require commercial banks to keep enough
liquid assets, such as cash and government bonds, to get through a 30-day market crisis.
197
Liquidity risk
Banks tend to attract short term deposits and they often lend for longer periods of time. As a result,
a commercial bank may not be able to repay all of those deposits if savers decide to withdraw their
funds. This is called liquidity risk. To reduce liquidity risk banks will try to attract longer term
deposits and also hold some liquid assets as capital reserves.
198
Liquidity trap
A liquidity trap occurs when low interest rates and a high amount of cash balances in the economy
fail to stimulate aggregate demand partly through a lack of confidence.
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Peer to peer lending
Peer-to-peer lending happens when individual savers are able to lend directly to borrowers, often
through online peer-to-peer lending platforms. Market participants include Zopa (launched 2005),
Crowdcube (launched 2009), Funding Circle (launched 2010), Rate Setter (also launched 2010)
and Thincats (launched 2011). Both the investor and the borrower benefits as the lender achieves
higher interest rates and the borrower lower interest rates than would be on offer if either had gone
through a commercial bank
200
Reserve assets ratio
A reserve assets ratio for a bank which sets the minimum liquid reserves that a bank must maintain
in the event of a sudden increase in withdrawals. A high reserve assets ratio may limit the lending
that a bank is able to do – it must maintain higher amounts of cash. Reserve ratios are mandatory central bank requirements for holding cash against deposits, while liquidity ratios (e.g., current, quick) measure a firm's general ability to meet short-term obligations.
201
Wholesale money
market
Borrowing and lending between institutional banks. This type of lending occurs on the interbank
market and often involves extremely large sums of money.
202
Base money
Currency (banknotes and coins) in circulation plus minimum reserves credit institutions are required/choose to hold with a country’s central bank.
203
Base interest rate
The rate of interest set by the Monetary Policy Committee of the Bank of England, being in effect the lowest rate that commercial lenders will charge interest at.
204
Basis point
One hundred basis points make up a percentage point, so an interest rate cut of 25 basis points might take the base rate from 0.5% to 0.25%.
205
Central bank
The monetary authority and major regulatory bank in a country. Its functions include issuing and managing the country's currency and a lender of last resort to the banks.
206
Central bank intervention
When a central bank enters the foreign exchange market to buy or sell currency in order to influence exchange rates.
207
Exchange rate
Exchange rates are the price of one country’s’ currency in relation to another.
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Exchange rate index
The trade-weighted external value of a currency.
209
European Central Bank (ECB)
The central bank for Europe's single currency, the euro. Its main task is to maintain the euro's purchasing power and thus price stability for member nations who use the Euro as their currency.
210
Forward guidance
A promise from the MPC about future interest rates to help generate greater certainty and encourage business and consumer confidence.
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Funding for Lending
A Bank of England and government scheme launched in 2012 to encourage banks and building societies to expand their lending by providing funds at lower rates than the prevailing market rate.
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Inflation target
The Bank of England has a CPI inflation target, which is currently 2 per cent.
213
Lender of Last Resort
A lender of last resort is a lender, typically a central bank, which provides financial institutions with funds when they cannot borrow from the market.
214
Monetary policy
The manipulation of the supply of money (QE), interest rates and exchange rates in order to influence output, prices and employment in the economy.
215
Monetary Policy Committee (MPC)
Bank of England committee of nine people (including the Governor) that meets every month to review the economy and set monetary policy interest rates for the UK.
216
Monetary stimulus
Changes in monetary policy designed to increase aggregate demand including lower policy interest rates and measures to increase the supply of credit.
217
Money supply
The money supply is the total amount of money in circulation in a country or group of countries in a monetary union. A distinction is made between narrow & broad money.
218
Quantitative easing (QE)
The introduction of new money into the national supply by a central bank. In the UK the Bank of England creates new money to buy financial assets from financial institutions. Total planned QE in January 2017 totalled £445 billion.
219
Transmission mechanism
How a change in interest rates affects the behaviour of economic agents and ultimately leads to changes in aggregate demand, employment and inflationary pressures.
220
Asset bubble
A sustained rise in the prices of assets such as housing and equities which takes their values well above long run sustainable levels.
221
Asymmetric information
This type of market failure exists when one individual or party has more information than another individual or party and uses that advantage to exploit the other party. Finance is a market in information – often a potential borrower (such as a small business) has better information on the likelihood that they will be able to repay a loan than the lender.
222
Capital ratio
A commercial bank's capital ratio measures the funds it has in reserve against the riskier assets it holds that could be vulnerable in the event of a crisis. The European Union runs regular “stress tests” to check whether banks have enough of a capital buffer to weather difficult economic/financial conditions (known as disaster scenarios). Banks must maintain sufficient capital which includes money raised from selling new shares to investors and also their retained earnings (profits).
223
Externalities
Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid.
224
Financial Conduct Authority (FCA)
The Financial Conduct Authority (FCA) is funded entirely by the firms it regulates. The FCA has three main objectives: (i) Secure an appropriate degree of protection for consumers; (ii) Protect and enhance the integrity of the UK financial system; (iii) Promote effective competition in the interests of consumers.
225
Financial Policy Committee (FPC)
The FPC’s main role in the UK is to identify, monitor, and take action to remove or reduce risks that threaten the resilience of the UK financial system as a whole. The FPC publishes a Financial Stability Report identifying key threats to the stability of the UK financial system. The FPC has the power to instruct commercial banks to change their capital reserves (buffers).
226
Financial crisis
A disturbance to financial markets, associated typically with falling asset prices and insolvency amongst debtors and intermediaries, which ramifies through the financial system, disrupting the market’s capacity to allocate capital.
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Illiquidity crisis
An agent is solvent but illiquid when its debt is not unsustainable, but it has large amounts of this debt coming to maturity (i.e. short-term debt) and it is not able to roll it over (this creates liquidity crisis, rollover/run crisis). Illiquidity can lead to insolvency as illiquidity can trigger default. In a liquidity crisis, international institutions may step in to provide emergency funds as a “lender of last resort”.
228
Insolvency crisis
An agent (such as business, individual or a bank) is insolvent when its debt relative to its income is so high that it will not be able to pay back its debt and the interest on it (i.e. there is an unsustainable debt). An insolvency crisis may require some form of debt restructuring / debt relief to lower default risk.
229
Liquidity ratio
A liquidity ratio is the ratio of liquid assets held by a bank on their balance sheet to their overall assets. Banks need to hold enough to cover expected demands from depositors. In the wake of the Global Financial Crisis (GFC) the Basel Agreement require commercial banks to keep enough liquid assets, such as cash and government bonds, to get through a 30-day market crisis.
230
Liquidity risk
Banks tend to attract short term deposits and they often lend for longer periods of time. As a result, a commercial bank may not be able to repay all of those deposits if savers decide to withdraw their funds. This is called liquidity risk. To reduce liquidity risk banks will try to attract longer term deposits and also hold some liquid assets as capital reserves.
231
Liquidity trap
A liquidity trap occurs when low interest rates and a high amount of cash balances in the economy fail to stimulate aggregate demand partly through a lack of confidence.
232
Market rigging
Illegally and unfairly controlling the price or the interest rate in order to increase their joint profits or exploit consumers.
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Moral hazard
Moral hazard exists in a market where an individual or organisation takes many more risks than they should do because they know that they are either covered by insurance, or that the government will protect them from any damage incurred as a result of those risks.
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Prudential Regulation Authority (PRA)
The PRA is part of the Bank of England and is responsible for the prudential regulation and supervision of around 1,700 banks, building societies, credit unions, insurers and major investment firms. The PRA focuses on the solvency of specific financial markets such as: Insurance providers, Buy-to-let mortgage lenders, Credit unions and other specialist lenders.
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Speculation
Speculation is the activity of buying a good or service in anticipation of a change in the price/market value e.g. currency or stock-market speculation.
236
Sub-prime lending
Sub-prime lending is lending money, usually to buy a house, to people who are risky to lend to. To compensate for this risk, commercial banks charge higher interest rates.
237
Systemic risk
The possibility that an event at the micro level of an individual bank / insurance company could then trigger instability or the collapse an entire industry or economy.
238
Austerity
Economic policy aimed at reducing a government's deficit (or borrowing). Austerity can be achieved through increases in government revenues - primarily via tax rises - and/or a reduction in government spending or future spending commitments.
239
Automatic stabilisers
Automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow in a recession.
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Budget balance
The annual balance between government spending and tax revenues. When G>T, there is a budget deficit and when G
241
Budget deficit
Occurs when government spending is greater than tax revenues. Reducing the deficit can be achieved by tax increases or cuts in government spending or a period of GDP growth which brings about a rise in direct and indirect tax revenues.
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Budget surplus
Occurs when tax revenues exceed government spending. A surplus can be used to repay some of the national debt.
243
Corporation Tax
A tax on the profits made by companies, in the UK the main rate of corporation tax is 19% and is expected to fall to 17% by 2020.
244
Cyclical budget (fiscal) deficit
The size of the deficit is influenced by the state of the economy: in a boom, tax receipts are relatively high and spending on unemployment benefit is low.
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Discretionary fiscal policy
Deliberate attempts to affect the level and growth of aggregate demand using changes in government spending, direct and indirect taxation and borrowing.
246
Direct taxation
Taxes levied on streams of income and profits such as income tax and corporation tax.
247
Equitable taxes
The principle that taxes should be fair and impartial.
248
Excise duties
Indirect taxes levied on specific goods, typically alcoholic beverages, tobacco and fuels.
249
Fine-tuning
Changes in monetary policy or fiscal policy designed to gradually manage the level of aggregate demand and prices e.g. small changes in policy interest rates / taxation.
250
Fiscal austerity or fiscal tightening
Fiscal austerity refers to decisions by a government to reduce the amount of borrowing (i.e. cut the size of a fiscal deficit) over time.
251
Fiscal deficit
When government expenditure is higher than the revenue from taxes in a given year.
252
Fiscal policy
A government's policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue, resulting in a slower-growing economy.
253
Fiscal stability
Many governments seek to maintain a degree of balance between tax revenues and public sector spending. A balanced budget is one in which spending equal revenue.
254
Fiscal stimulus
Government measures, normally involving increased public spending and lower direct and/or indirect taxation, aimed at giving a positive jolt to economic activity.
255
Government spending
Spending by government on education, health care and defence & other public services.
256
Household benefits cap
Welfare reform introduced by the UK government in 2013 – which limits total benefits at £500 per week for a family and £350 per week for a single person with no children.
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Import Tariff
A tax on imports that may be ad valorem (%) or a specific tax (a set amount per unit imported).
258
Indirect taxes
Taxes on spending. Examples include excise duties on fuel, cigarettes and alcohol and Value Added Tax (VAT) on many different goods and services. Producers may be able to pass on an indirect tax – depending on price elasticity of demand and supply.
259
Marginal rate of tax (MRT)
The rate of tax on the next unit (£1) of income earned. In the UK for example, the basic rate of income tax is 20% on earned income up to the higher tax rate income limit.
260
Multiplier effect
If there is an initial injection (e.g. a rise in exports), then the final increase in aggregate demand and real GDP will be greater. The size of the multiplier coefficient is affected by the marginal rate of withdrawal / leakage from the circular flow of income.
261
National debt
A government's total outstanding debt - effectively what the government still owes from the budget deficits accumulated over time.
262
Office of Budget Responsibility
The OBR is a non-departmental public body funded by the Treasury, that the UK government established to provide independent economic forecasts and independent analysis of the public finances.
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Patent box
A reduced rate of Corporation Tax applied to profits from patents – designed to stimulate research and innovation and improve the supply-side of the economy.
264
Personal allowance
The amount of income you can earn before you start paying income tax. It is currently £11,000 for 2016-17 and will rise to £11,500 in 2017-18.
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Progressive tax
With a progressive tax, the marginal rate of tax rises as income rises. I.e. as people earn more income, the rate of tax on each extra pound goes up. This causes a rise in the average rate of tax.
266
Proportional tax
When the marginal rate of tax is constant leading to a constant average rate of tax.
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Redistribution
Measures taken by government to transfer income from some individuals to others.
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Regressive tax
With a regressive tax, the rate of tax paid falls as incomes rise – I.e. the average rate of tax is lower for people on higher incomes. Examples: Duties on tobacco and alcohol.
269
Stimulus
Monetary policy and/or fiscal policy aimed at encouraging higher growth and/or inflation. This can include interest rate cuts, quantitative easing (QE), direct and indirect tax cuts and government spending increases such as higher infrastructure investment.
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Structural budget deficit
The structural deficit is that part of the deficit which is not related to the state of the economy. This part of the fiscal deficit will not disappear when the economy recovers.
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Subsidy
Payments by the government to suppliers that reduce their costs. The effect of a subsidy is to increase supply and therefore reduce the market equilibrium price.
272
Taxation
The imposition of taxes on streams of income, commercial activities and wealth by the government.
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Tax burden
The tax burden measures total tax revenues as a % of GDP.
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Tax competition
Tax competition happens when a national government uses reforms to the tax system as a supplyside strategy to attract investment and jobs into their economy.
275
Time lags
The time it takes for one change e.g. a change in interest rates to affect other variables e.g. consumer confidence and spending
276
Unit tax
A specific tax per unit sold e.g. the duty on a litre of fuel might be 80 pence.
277
Welfare cap
The welfare cap is a limit on the amount that UK government can spend on certain social security benefits and tax credits - It excludes pensions and Jobseekers’ Allowance.
278
Competition policy
Government policy directed at encouraging competition in the private sector: e.g. the investigation of takeovers or restrictive practices, regulation of monopoly power.
279
Competitive market
Where no single firm has a dominant position and where the consumer has plenty of choice when buying goods or services. There are few barriers to the entry of new firms.
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Deregulation
Reducing barriers to entry to make the supply-side of a market more competitive.
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Ease of entry
The ease with which a business can enter a market in search of a profit. When barriers to entry are low, a market can grow, increasing competition between firms and creating new jobs.
282
Geographical immobility
Barriers to people moving from one area to another to find work.
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Immobility of labour
Barriers to the movement of people between areas and between jobs.
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Incentives
Incentives can be used to make goods and services markets, as well as labour markets, work more efficiently and therefore creating greater productive capacity.
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Infrastructure
The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy.
286
Minimum wage
A wage that is set above the equilibrium wage rate. In theory, the outcome would be an excess supply of labour, or unemployment, known as the National Living Wage in the UK since 2016.
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National Living Wage
The formal name for the minimum wage in the UK since 2016.
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Natural rate of unemployment
The equilibrium rate of unemployment = frictional + structural unemployment.
289
Occupational immobility
Workers having the wrong skills for available job vacancies. This can be overcome by giving labour transferable skills.
290
Poverty trap
The poverty trap affects people on low incomes. It creates a disincentive to look for work or work longer hours because of the effects of the tax and benefits system.
291
Privatisation
Selling off a state-run industry to the private sector.
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Productive potential
Productive capacity of the economy – boosted by high quality capital investment.
293
Productivity
How much output is produced for a given input (such as an hour of work).
294
Pro-market supplyside policies
These policies focus on reducing the size of the state and extending the role of market forces in allocating scarce resources. For example: Cutting government spending (including welfare) and borrowing, lower business taxes to stimulate capital investment spending, reducing income tax rates to improve work incentives.
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Relative poverty
Relative poverty measures the extent to which a household's financial resources falls below an average income threshold for the economy.
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Spare capacity
When a business is not making full use of its available capacity – there are spare factors of production including land, labour and capital. When an economy has plenty of spare capacity, short run aggregate supply is elastic, and the output gap is negative.
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State-driven supplyside policies
When a government believes that active intervention in markets can help achieve increased productive capacity and competitiveness. Examples include: State investment in public services and critical infrastructure, a commitment to a minimum wage and/or living wage to improve work incentives & productivity in the labour market, higher taxes on the wealthy to fund public and merit goods.
298
Supply side improvements
Supply side changes that originate in the private sector, for example productivity improvements resulting from innovation and investment.
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Supply side policies
Any government policy designed to increase long run aggregate supply. In terms of labour markets, this could include increasing labour flexibility, skills / training of workers and so on.
300
Sustainable growth
Growth that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainable growth can continue without damage to the environment, or the exhaustion of non-renewable resources.
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Trend rate of growth
Also known as the long run rate of growth; it occurs when a country successful raises their productive capacity allowing for a higher level of real national output to be sustained.
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Containerisation
A system of freight transport for use in sea shipping that has reduced the transport costs of shipping many thousands of different goods across the globe.
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Closed economy
An economy operating without imports and exports, ie closed to global trade.
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Deglobalisation
The process of diminishing interdependence and integration between economies around the globe.
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Foreign direct investment
FDI is the acquisition of a controlling interest in productive operations abroad by businesses resident in the home economy. May involve the creation of new productive capacity such as a new factory or building of infrastructure.
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Globalisation
The deepening of relationships between countries of the world reflected in an increasing level of cross-border trade and investment and migration.
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Mercantilism
The notion that the wealth of a nation was based on how much it could export in excess of its imports, and thereby accumulate precious metals. Applied in the modern context to countries accumulating huge trade surpluses and focusing on export-led growth.
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Multinational companies
An MNC has facilities and other assets in at least one country other than its home country.
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Open economy
An economy with low tariff and non-tariff barriers which is deeply integrated into the regional and global economy.
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Transnational companies
TNCs base their manufacturing, assembly, research and retail operations in a number of countries.
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Absolute advantage
Occurs when a county can produce a product using fewer resources than another nation. If a country using the same factors of production can produce more of a product, then it has an absolute advantage.
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Ad valorem tariff
An import tariff rate charged as percentage of the price.
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Anti-dumping tariffs
Anti-dumping import tariffs are allowed under World Trade Organisation rules when cases of dumping have been established.
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Beggar my Neighbour
A policy that seeks to promote a country's economy at the expense of another country. An obvious example is the use of tariff barriers. A country may place a tariff on imports to help promote local domestic industry. This may help reduce local unemployment, but, be at the expense of the other country's export sectors.
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Bilateral trade agreement
An agreement to lower import tariffs and other trade barriers between two countries – for example between South Korea and Australia.
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Common External Tariff (CET)
A CET is an import tariff applied equally by each country participating in a customs union, e.g. the EU might impose a common tariff on imported whisky from Japan.
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Common market
A single market providing for participating countries free trade in goods and services and free movement of labour and capital. The European Union is a single market.
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Comparative advantage
Refers to the relative advantage that one country or producer has over another. A country can benefit from specializing in and exporting the product(s) for which it has the lowest opportunity cost of supply.
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Competitiveness
External competitiveness is the sustained ability to sell goods and services profitably at competitive prices in a foreign country. The core measure of competitiveness is a nation’s relative unit labour costs expressed in a common currency.
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Countervailing tariffs
An additional import tariff (tax) imposed on imported goods to offset subsidies provided to producers or exporters by the government of the exporting country.
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Creeping protectionism
A period of time where import tariff rates rise and where countries introduce quotas and barriers to the mobility of labour and capital.
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Customs union
A group of countries that abolish tariffs and quotas between member nations to encourage free movement of goods and services. Adopt a common external tariff on imports from non-members countries. The European Union is a customs union.
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Dumping
When a producer in one country exports a product to another country at a price which is below the price it charges in its home market or is below average costs of production.
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Dynamic gains from trade
Dynamic gains from trade make a domestic economy more productive. Examples of gains from trade liberalisation that fall into this category are: Diffusion of knowledge and technology, economies of scale and increased competition and innovation.
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European Free Trade Agreement (EFTA)
European Free Trade Association consists of Norway, Iceland, Switzerland and Liechtenstein.
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European Union (EU)
As of January 2017, there are twenty-eight member nations of the EU – collectively known as EU28. The UK voted to leave the EU in June 2016.
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Eurozone
The consists of those member states of the EU that use the Euro as their currency.
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Exchange rate
The external value of a currency.
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Export quota
A restriction on the volume of exports that can be sold overseas – this acts as a supply constraint in international markets and can lead to higher prices in global markets.
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Fairtrade
Trade between companies in developed countries and producers in developing countries in which fair prices are paid to the producers.
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Free trade
When trade in goods and services between nations is allowed to occur without any form of import restriction.
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Free trade area (FTA)
A free trade area (FTA) is one where there are no tariffs or taxes or quotas on goods and/or services from one country entering another.
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Infant industry
New / fledgling industry that may require government protection from overseas competition (for instance through the setting of import tariffs) in order to develop.
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Intra-regional trade
Intra-regional trade is the exchange of virtually identical products between countries within the same region.
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Market liberalisation
Removing state controls that impede the normal functioning of a market economy- for example, lifting price and wage controls and import quotas or lowering import tariffs.
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Monetary union
An intergovernmental agreement that involves two or more states sharing the same currency.
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Non-tariff barrier
Trade barriers such as import quotas, embargoes and export subsidies.
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Protectionism
Tariff and non-tariff restrictions on imports to protect domestic producers.
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Quota
A quota is a trade barrier that imposes a physical limit on the quantity of a good that can be imported into a country in a given period of time.
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Regional trade agreement
An agreement to lower import tariffs and other trade barriers between countries in a certain region.
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Relative export prices
A country’s export prices relative to those of a competing economy.
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Schengen Area
26 country passport-free area inside Europe.
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Single European Market (SEM)
The Single European Market represents a deeper form of economic integration than a customs union between its members. It involves the free movement of goods and services, capital and labour.
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Specialisation
When individuals, regions or countries concentrate on making one product to create a surplus to trade.
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Subsidy
Payments by the government to domestic suppliers that reduce their costs and thus make domestic output cheaper than imported goods and services.
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Trade creation
Trade creation occurs when a country enters a free trade area / agreement or becomes involved in a customs union in which there is free trade between members but also a common external tariff. Trade creation is the movement from a higher cost source of output to a lower cost source of supply as a result of joining a trade agreement.
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Trade diversion
Trade diversion is a feature of a country deciding to join a customs union i.e. an area where there is free trade within the customs union but also a common external tariff. Trade diversion is a switch from a lower-cost foreign source/supplier outside of a customs union towards a higher-cost supplier located inside the customs union.
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Trade barriers
Ways in which trade is controlled for example an import tariff, quota or embargo.
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Trade liberalisation
Reductions in import tariffs and non-tariff barriers to enhance trade between one or more countries.
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Trading bloc
A group of countries co-operating to liberalise trade between each other.
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Transition economies
Former countries of the Eastern Bloc that have been engaged in a transition from being largely command economies to market systems with a greater role for private enterprise and resource allocation via the price mechanism.
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World Trade Organisation (WTO)
The WTO polices free trade agreements and decides on trade disputes between countries. It arranges trade negotiations to liberalise trade for member countries by mutually agreed reductions in tariffs & quotas and opening domestic markets up to foreign competition.
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Advanced economies
According to the IMF, 35 economies are ‘advanced economies’. 24 in Europe + USA, Canada, Australia, New Zealand, Israel, Japan and South Korea.
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Aid
Overseas development assistance from one country to another. Might take the form of humanitarian assistance, technical expertise and project aid etc.
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Bilateral aid
Aid (development assistance) that flows from one country to another.
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Brain drain
The movement of highly skilled or professional people from their own country to another country where they can earn more money.
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BRICS economies
The BRICS grouping – Brazil, Russia, India, China and South Africa – has become short-hand for the rise of emerging markets in the global economy.
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BRICS development bank
BRICS New Development Bank (NDB) was launched in 2015. The NDB will lend money to developing countries to help finance infrastructure projects. The NDB is an alternative to the World Bank and also the International Monetary Fund (IMF).
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Capital flows
Movements of capital between countries. Outward capital flows are movements of domestically-owned capital abroad; inward capital flows are movement of foreign-owned capital to the domestic economy.
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Capital flight
The rapid movement of large sums of money out of a country. There could be several possible reasons - lack of confidence in a country's economy and/or its currency and political turmoil. Capital flight occurs when owners of liquid assets move them to other countries perceived as safe havens or as offering better returns. It can be legal or illegal.
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Corruption
The abuse of entrusted power for private gain, a key cause of government failure.
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Corruption Perceptions Index
Ranks countries/territories based on how corrupt their public sector is perceived to be. It is a composite index, a combination of polls, drawing on corruption-related data collected by a variety of reputable institutions.
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Development traps
Built on the research of Professor Paul Collier. 4 development traps are: conflict, reliance on natural resources, being landlocked with bad neighbours and bad governance/institutions.
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Economic development
Progress in expanding economic freedoms, a sustained improvement in economic and social opportunities and growth in personal and national capabilities.
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Economic structure:
The balance of output, incomes and employment drawn from different sectors – ranging from primary (farming, fishing, mining) to secondary (manufacturing and construction industries) to tertiary and quaternary sectors (tourism, banking, software industries).
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Emerging economy
Typically, a lower to middle income country that is progressing toward becoming more advanced, usually by means of rapid growth, urbanisation and industrialisation.
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Exogenous shock
An unexpected event beyond the control of the country’s officials that has a large negative impact on its economy.
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External debt
External debt is owed by governments, households and businesses in a country to external (overseas) creditors. Examples include government bonds sold to foreign investors and private sector credit from foreign banks. The scale of external debt is measured as a % of a country’s GNI.
369
Fertility rate
Average number of children a woman will have in her lifetime, by country or region.
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Genuine Progress Indicator (GPI)
An attempt to measure whether a country's growth, increased production of goods, and expanding services have actually resulted in the improvement of the welfare (or well-being) of the people in the country.
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Gross Domestic Product per capita
National income per head of population = total GDP / total population.
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Gross Domestic Product
The total value of an economy's domestic output of goods and services.
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Gross National Income (GNI):
This is broadly the same as GDP except that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home. GNI is affected for example by profits from businesses owned overseas and also remittances sent home by migrant workers.
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Hard infrastructure
Examples include power, transport, and telecommunications systems.
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Heavily Indebted Poor Countries Initiative
A global initiative to provide external debt relief to heavily indebted low-income countries.
376
Human Development Index
The HDI has become the most widely used measure for communicating a country’s development status. HDI is a broad measure of development, since it captures not only the level of per capita income but also incorporates measures of health (life expectancy) and education (school enrolment and literacy rate).
377
Humanitarian Aid
Emergency disaster relief, food aid, refugee relief and disaster preparedness.
378
Inclusive Wealth Index
Assesses changes in a country’s productive base, including produced, human, and natural capital over time.
379
Income distribution
Income distribution is how income is divided up among all the citizens in a country. The most common measure of income distribution is the Gini Coefficient.
380
Inequality-adjusted HDI
The IHDI takes into account not the average achievements of a country on health, education and income, and how those achievements are distributed among its citizens by “discounting” each dimension’s average value according to its level of inequality. The average world loss in HDI due to inequality is about 23%—ranging from 5% (Czech Republic) to 43.5% (Namibia).
381
Informal sector
The sector of the economy, normally comprising of small businesses, which is unregistered with the tax authorities.
382
Infrastructure
The transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy.
383
Intellectual Property (IP)
Private property rights over ideas and inventions including copyrights, patents, trademarks and industrial designs.
384
Least Developed Countries (LDCs)
A group of countries that have been classified by the United Nations as least developed in terms of their low gross domestic product (GDP) per capita, weak human assets and high degree of economic vulnerability.
385
Living standards
The baseline measure for the standard of living is real national income per capita measured at constant prices and adjusted for purchasing power parity i.e. real GNI per capita ($) at PPP.
386
Natural capital
The stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future. Natural capital may also provide services like recycling wastes or water catchment and erosion control.
387
Overseas assets
Assets such as businesses, shares, property which are owned in overseas countries and which might generate a flow of investment income which is a credit item on the primary income account of the balance of payments.
388
Primary product dependency
Heavy dependence measured as a share of GDP, total exports or employment from the extraction / cultivation of primary commodities such as copper and oil.
389
Primary sector
An industry involved in the production of raw materials including agriculture.
390
Property rights
Rights to ownership of an asset such as land or ideas (intellectual property rights).
391
Protectionism
Tariff and non-tariff restrictions on imports to protect domestic producers.
392
Resource efficiency
Achieving more with less, i.e. producing more goods and services but with a lower environmental footprint.
393
Savings gap
Savings are needed to finance capital investment. In many smaller low-income countries, high levels of extreme poverty make it difficult to generate sufficient savings to provide the funds needed to fund investment projects. This increases reliance on aid or borrowing from overseas. This problem is known as the savings gap.
394
Soft infrastructure
The financial system and regulation, education system, the legal framework, social networks, values and other intangible structures in an economy.
395
Subsistence farming
Farming where output is produced for consumption of the farmer and its family members and not for cash sale.
396
Sustainable development
To leave future generations the option or capacity to be as well off as we are.
397
Sustainable growth
Growth which meets the needs of the present without compromising the ability of future generations to meet their own changing needs and wants. Each generation should bequeath to its successor at least as large a productive base as it inherited.
398
Trend growth
Trend growth is the long term non-inflationary increase in output (GDP) caused by an increase in a country’s productive capacity i.e. LRAS.
399
Trickle down
The process whereby the economic gains from economic growth pass down throughout the entire society eventually giving rise to inclusive development.
Economics
flashcards
Decks in class (18)
# Cards
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topic 1: economic methodology and the economic problem21
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topic 2 : individual economic decision making32
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topic 3 : price determination in a competitive market44
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topic 4 production costs and revenue64
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topic 5: perfect competition, imperfectly competitive markets and monopoly110
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topic 6 : the labour market70
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topic 7: distribution of income and wealth, poverty and inequality23
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topic8: market mechanism, market failure and government intervention in markets68
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macro topic1 : measurement of macroeconomic performance30
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macro topic 2: how the macroeconomy works, circular flow of incomr, AD - AS analysis54
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macro topic 3 economic performance67
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macro topic 4 financial markets and monetary policy56
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macro topic 5 : fiscal and supply side policies61
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macro topic 6: the international economy135
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macro key terms401
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micro key terms386
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micro economics equations63
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macro economics equations31
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