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208 Cards in this Set
- Front
- Back
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Microeconomics
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the study of the behaviour of individual consumers, firms, and industries and the determination of market prices and quantities of good, services, and factors of production.
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Macroeconomics
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the study of aggregate economic activity. It investigates how the economy as a whole works.
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Ceteris paribus
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all other things being held equal.
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Positive economics
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matters of economics that can be proven to be right or wrong by looking at the facts.
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Normative economics
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matters of economics that are based upon opinion and so are incapable of being proved to be right or wrong.
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Scarcity
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the limited availability of economic resources relative to society's unlimited demand for goods and services.
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Land
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the physical factor of production. It consists of natural resources, some of which are renewable (e.g. wheat) and some of which are non-renewable (e.g. iron ore).
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Labour
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the human factor of production. It is the physical and mental contribution of the existing work force to production.
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Capital
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the factor of production that comes from investment in physical capital and human capital. Physical capital is the stock of manufactured resources (e.g. factories, roads, tools) and human capital is the value of the workforce (improved through education or better health care).
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Entrepreneurship
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the factor of production involving organising and risk-taking.
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Opportunity cost
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it is the next best alternative foregone when an economic decision is made.
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Free good
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goods or services which are unlimited in supply and have no opportunity cost are free goods. A free good has an unlimited supply at market price zero.
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Economic good
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a good or service which is relatively scarce and so has a price. An opportunity cost is involved if it is consumed.
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Utility
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the satisfaction or pleasure that an individual derives from the consumption of a good or service.
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Production possibilities curve*
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it shows the maximum combinations of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently and the state of technology is fixed.
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Actual output
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the actual production of goods and services in an economy in a given time period.
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Actual growth
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this occurs when previously unemployed factors of production are brought in to use. It is represented by a movement from a point within a PPC to a new point nearer to the PPC
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Potential output
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the possible production that would be possible in an economy if all available factors were being employed.
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Potential growth
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this occurs when the quantity and/or quality of factors of production within an economy is increased. It is represented by an outward shift of the PPC.
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Economic growth
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the growth of real output in an economy over time. Usually measured as growth in real GDP
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Economic development
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it is a broad concept involving improvement in standards of living, reduction in poverty, improved health and education. (May add increased freedom and economic choice.)
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Sustainable development
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development that meets the needs of the present
without compromising the ability of future generations to meet their own needs.
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Free market economy (market economy)
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an economy where the means of production are privately held by individuals and firms. Demand and supply determine how much to produce, how/how many to produce, and for whom to produce.
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Planned economy (command economy)
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an economy where the means of production are collectively owned (except labour). The state determines how much to produce, how/how many to produce, and for whom to produce.
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Transition economy
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an economy in the process of moving from a centrally
planned economic system towards a more market-oriented economic system.
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Demand *
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the willingness and ability to purchase a quantity of a good or service at a certain price over a given time period.
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Law of demand*
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as the price of a good falls, the quantity demanded will normally increase.
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Veblen goods (HL only)
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goods that are exceptions to the Law of Demand, where at high prices, as price rises, then so does demand. This is because the product achieves "snob value".
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Giffen goods (HL only)
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goods that are exceptions to the Law of Demand, where at very low prices, with consumers on low incomes and dependent upon the good for survival, as price rises, then so does demand (e.g. potatoes in Ireland in the 19th century).
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Supply *
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it is the willingness and ability of a producer to produce a quantity of a good or service at a given price (in a given time period).
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Law of supply
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as the price of a good rises, the quantity supplied will normally rise.
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Equilibrium price*
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it is the market-clearing price. It is set where D = S.
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Maximum price*
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a price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.
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Minimum price*
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a price imposed by an authority and set above the market price. Prices cannot fall below this price.
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Buffer stock scheme*
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a situation where a government intervenes in a market to stabilise prices by buying up surplus stock when prices would go too low or by supplying stock from a previously built up "buffer stock" when prices would go too high.
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Price elasticity of demand
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a measure of the responsiveness of the quantity demanded of a good or service when there is a change in its price.
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Elastic demand
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where a change in the price of a good or service leads to a greater than proportional change in the quantity demanded of the good or service. (PED would be greater than one.)
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Inelastic demand
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where a change in the price of a good or service leads to a less than proportional change in the quantity demanded of the good or service. (PED would be less than one.)
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Cross price elasticity
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it is a measure of the responsiveness of the demand for one good or service to a change in the price of another good or service.
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Income elasticity
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it is a measure of the responsiveness of the demand for a good or service to a change in income.
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Normal goods
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A good where the demand for it increases as income increases.
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Inferior goods
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A good where the demand for it decreases as in come increases and more superior goods are purchased.
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Price elasticity of supply
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a measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price.
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Elastic supply
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where a change in the price of a good or service leads to a greater than proportional change in the quantity supplied of the good or service. (PES would be greater than one.)
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Inelastic supply
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where a change in the price of a good or service leads to a less than proportional change in the quantity supplied of the good or service. (PES would be greater than one.)
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Indirect tax
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a tax on expenditure. It is added to the selling price of a good or service.
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Flat rate tax (specific tax)
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an indirect tax where a specific amount, e.g. $1, is added to the selling price of each unit.
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Ad valorem
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an indirect tax where a percentage, e.g. 20%, is added to the selling price of each unit.
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Subsidy
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an amount of money paid by the government to a firm, per unit of output.
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Fixed costs
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costs that do not change with the level of output. They will be the same for one or one thousand units. (The cost of producing nothing.)
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Variable costs
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costs that vary with the level of output.
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Total costs
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the total costs of producing a certain level of output - fixed costs plus variable costs.
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Average cost
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it is the average (total) cost of production per unit, calculated by dividing the total cost by the quantity produced. It is equal to the average variable cost plus the average fixed cost.
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Marginal cost
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it is the additional cost of producing one more unit of output.
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Economic cost
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is accounting cost plus opportunity cost.
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Short run
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the period of time in which at least one factor of production is fixed - the production stage.
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Law of diminishing average returns
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as extra units of a variable factor are applied to a fixed factor, the output per unit of the variable factor will eventually diminish.
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Law of diminishing marginal returns
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as extra units of a variable factor are applied to a fixed factor, the output from each extra unit of the variable factor will eventually diminish.
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Long run
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the period of time in which all factors of production are variable, but the state of technology is fixed - the planning stage.
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Economies of scale*
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they are a fall in long run unit (average) costs that come about as a result of a firm increasing its scale of production (output).
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Diseconomies of scale
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they are an increase in long run unit (average) costs
that come about as a result of a firm increasing its scale of production (output).
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Total revenue
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the aggregate revenue gained by a firm from the sale of a particular quantity of output (equal to price times quantity sold).
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Average revenue
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total revenue received divided by the number of units sold. Usually, price is equal to average revenue.
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Marginal revenue
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the extra revenue gained form selling one more unit of a good or service.
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Normal profits
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it is the amount of revenue needed to cover the total costs of production, including the opportunity costs.
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Abnormal profits
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a level of profit that is greater than that required to ensure that a firm will continue to supply its existing good or service. (An amount of revenue greater than the total costs of production, including opportunity costs.)
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Profit-maximising level of output*
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the level of output where marginal revenue is equal to marginal cost.
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Shut down price*
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the price where average revenue is equal to average variable cost. Below this price, the firm will shut down in the short run. Break even price* - the price where average revenue is equal to average total cost. Below this price, the firm will shut down in the long run.
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Allocative efficiency*
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the level of output where marginal cost is equal to average revenue. The firm sells the last unit it produces at the amount that it cost to make it.
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Productive efficiency*
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it exists when production is achieved at lowest cost per unit of output. This is achieved at the point where average total cost is at its lowest value.
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Perfect competition
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it is a market structure where there are a very large number of small firms, producing identical products, that are incapable of affecting the market supply curve. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.
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Monopolistic competition
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it is a market structure where there are many buyers and sellers, producing differentiated products, with no barriers to entry or exit.
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Product differentiation
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ways in which suppliers attempt to make their products different from those of their competitors, e.g. differences in quality, performance, design, styling, or packaging. It is a form of non-price competition.
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Oligopoly
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it is a market structure where there are a few large firms that dominate the market. There are many different theories of oligopoly.
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Collusive oligopoly
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where a few firms act together to avoid competition by resorting to agreements to fix prices or output in an oligopoly.
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Non-collusive oligopoly
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where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable.
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Cartel
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A group of firms in an industry that join together to fix prices. These are usually illegal in most countries,
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Monopoly
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a market form where there is only one firm in the industry, so the firm is the industry. Monopolies may, or may not, have barriers to entry.
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Barriers to entry
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obstacles in the way of potential newcomers to a market, such as economies of scale, product differentiation, and legal protection.
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Natural monopoly
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a situation where there are only enough economies of scale available in a market to support one firm.
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Contestable market
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a market where new entrants face costs similar to those of established firms and where, on leaving, firms are able to get back their capital costs, less depreciation.
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Price discrimination
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it occurs when a producer charges a different price to different customers for an identical good or service.
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Market failure
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the failure of markets to produce at the point where community surplus (consumer surplus + producer surplus) is maximised.
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Positive externalities*
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they are beneficial effects that are enjoyed by a third party when a good or service is produced or consumed.
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Negative externalities*
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they are the "bad" effects that are suffered by a third• party when a good or service is produced or consumed.
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Sustainable development
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it is the development needed to meet the needs of the present generation without compromising the ability of future generations to meet their own needs.
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Public goods
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goods or services which would not be provided at all by the market. They have the characteristics of non-rivalry and non-diminishability, e.g. flood barriers.
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Merit goods
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goods or services considered to be beneficial for people that would be under-provided by the market and so under-consumed.
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Demerit goods
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goods or services considered to be harmful to people that would be over-provided by the market and so over-consumed.
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Tradable permits
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they are permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable. Firms may trade these permits for money.
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Circular flow of income*
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a simplified model of the economy that shows the flow of money through the economy.
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Gross national product
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the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit).
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Net national product
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GNP [the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit)] minus depreciation (capital consumption).
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Nominal GDP
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the total money value of all final goods and services produced in an economy in one year, not adjusted for inflation.
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Real GDP
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the total money value of all final goods and services produced in an economy in one year, adjusted for inflation.
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Per capita GDP
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the total money value of all final goods and services produced in an economy in one year per head of the population.
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Economic growth
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the growth of real output in an economy over time. Usually measured as growth in real GDP per capita.
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Economic development
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it is a broad concept involving improvement in standards of living, reduction in poverty, improved health and education. (May add increased freedom and economic choice.)
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Human development index [HDI]
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a composite index that brings together measurements of health, education, and living standards in order to attempt to measure relative development. (Elements are life expectancy at birth, literacy rate, school enrolment rate, and GDP per capita [PPP US$])
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Aggregate demand*
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An explanation that aggregate demand is the total spending in an economy consisting of consumption, investment, government expenditure and net exports.
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Consumption
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An explanation that it is spending by households on consumer goods and services over a period of time.
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Investment
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An explanation that it is the addition of capital stock to the economy or expenditure by firms on capital.
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Inflationary gap
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the situation where total spending (aggregate demand) is less than the full employment level of output, thus causing inflation.
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Deflationary gap
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the situation where total spending (aggregate demand) is
greater than the full employment level of output, thus causing unemployment.
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Business cycle* (trade cycle)
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it shows fluctuations in the level of economic activity in an economy over time and suggests that the changes are cyclical. There are four stages, depression (slump), recovery, boom, and recession.
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Demand-side policy
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any government policy designed to influence the aggregate demand in the economy, thus affecting the average price level and real national output.
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Fiscal policy
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a demand-side policy using changes in government spending and/or direct taxation to achieve economic objectives relating to inflation and unemployment.
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Monetary policy
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a demand-side policy using changes in the money supply or interest rates to achieve economic objectives relating to inflation and unemployment.
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Aggregate supply*
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the total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.
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Short run aggregate supply (SRAS)
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aggregate supply that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production.
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Long run aggregate supply (LRAS)
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aggregate supply that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity and/or quality of factors of production.
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Supply-side policy
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government policies designed to shift the long run aggregate supply curve to the right, thus increasing potential output in the economy.
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Multiplier (HL only)
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the ratio of an induced change in the level of national income to an original change in one or more of the injections into the circular flow of income (i.e. investment, government spending, or export revenue).
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Accelerator (HL only)
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the relationship between the level of induced investment and the rate of change of national income.
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Crowding out (HL only)
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a situation where the government spends more (government expenditure) than it receives in revenue (mainly taxation), and needs to borrow money, forcing up interest rates and "crowding out" private investment and private consumption,
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Unemployment
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An explanation that it is the number of people without a job, who are actively seeking work.
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Full employment
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exists when the number of jobs available in an economy is equal to or greater than the number of people actively seeking work.
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Underemployment
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exists when workers are carrying out jobs for which they are over-qualified, i.e. they are not using their full skills and abilities or when workers are employed part-time, even though they are available for full time employment or when workers in a planned economy are undertaking jobs that would not exist in a free market.
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Unemployment rate
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the number of unemployed workers expressed as a percentage of the total workforce.
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Structural unemployment
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equilibrium unemployment that exists when in the long-term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labour. There is a mismatch between skills and the jobs available.
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Frictional unemployment
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equilibrium unemployment that exists when people have left a job and are in the process of searching for another job.
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Seasonal unemployment
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equilibrium unemployment that exists when people are out of work because their usual job is out of season, e.g. a ski instructor in the summer.
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Demand deficient / cyclical unemployment*
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disequilibrium unemployment that exists when there is insufficient demand in the economy and wages do not fall to compensate for this.
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Real wage unemployment*
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disequilibrium unemployment that exists when wages in the economy get pushed up above the equilibrium wage rate, either by the government or by trades unions.
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Inflation
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a sustained increase in the general or average) level of prices and a fall in the value of money.
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Demand-pull inflation*
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inflation that is caused by increasing aggregate demand in an economy, i.e. a shift of the AD curve to the right.
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Cost-push inflation*
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inflation that is caused by an increase in the costs of production in an economy, i.e. a shift of the SRAS curve to the left.
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Oetiation
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a persistent fall in the average level of prices in an economy.
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Phillips curve (HL only)*
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a curve showing the inverse relationship between the rate of unemployment and the rate of inflation, which suggests a trade-off between inflation and unemployment (short run Phillips curve). The long run Phillips curve shows the monetarist view that there is no trade off between inflation and unemployment in the long run and that there exists a natural rate of unemployment that can only be affected by supply-side policies.
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Natural rate of unemployment (HL only)*
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the rate of unemployment that is consistent with a stable rate of inflation. It is the rate where the long run Phillips curve touches the x-axis.
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Direct taxation
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taxation imposed on people's income or wealth, and on firms' profits. It is sometimes known as unavoidable tax.
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Indirect taxation
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a tax on expenditure. It is added to the selling price of a good or service. It is sometimes known as avoidable tax.
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Progressive taxation
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a system of direct taxation where tax is levied at an increasing rate for successive bands of income. The marginal tax rate is higher than the average tax rate.
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Regressive taxation
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a system of taxation in which tax is levied at a decreasing average rate as income rises. This form of taxation takes a greater proportion of tax from the low-income taxpayer than from the high-income taxpayer.
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Proportional taxation
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a system of taxation in which tax is levied at a constant rate as income rises, for example 10% of each increment of income as income rises.
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Transfer payments
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a payment received for which no good or service is exchanged, e.g. a student grant or a pension.
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Laffer Curve (HL only)*
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a curve showing the possible relationship between income tax rates and the total tax revenue received by the government.
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Lorenz Curve (HL only)*
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a curve showing what percentage of the population owns what percentage of the total income in the economy. It is calculated in cumulative terms. The further the curve is from the line of absolute equality (45 degree line), the more unequal is the distribution of income.
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Gini coefficient (HL only)
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a coefficient (index) that measures the ratio of the area between a Lorenz curve and the line of absolute equality to the total area under the line of equality. The higher the figure, the more unequal is the distribution.
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Factor endowment
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the factors of production that a country has available to produce goods and services.
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Specialisation
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where a country specialises in the production of goods and services where they have a comparative advantage in production. They will then trade to get the goods and services that they do not specialise in.
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Absolute advantage* (HL only)
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where a country is able to produce more output than other countries using the same input of factors of production.
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Comparative advantage* (HL only)
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where a country is able to produce a good at a lower opportunity cost of resources than another country.
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Free trade
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international trade that takes place without any barriers, such as tariffs, quotas, or subsidies.
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Tarifs
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a duty (tax) that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government.
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Quota*
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import barriers that set limits on the quantity or value of imports that may be imported into a country.
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Subsidy*
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an amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm an advantage over foreign competition.
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Voluntary export restraint (VER)
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a voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product (or products).
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Infant industry argument
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the argument that new industries should be protected from foreign competition until they are large enough to achieve economies of scale that will allow them to be competitive.
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Dumping
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it is the selling of a good in another country at a price below its unit cost of production.
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Free trade area (FTA)
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an agreement made between countries, where the countries agree to trade freely among themselves, but are able to trade with countries outside the free trade area in whatever way they wish.
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Customs union
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an agreement made between countries, where the countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the customs union.
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Common market
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a customs union with common policies on product regulation, and free movement of goods, services, capital, and labour.
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Trade creation (HL only)
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occurs when the entry of a country into a customs union leads to the production of a good moving from a high-cost producer to a low-cost producer.
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Trade diversion (HL only)
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occurs when the entry of a country into a customs union leads to the production of a good moving from a low-cost producer to a high-cost producer.
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World Trade Organisation
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is an international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.
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Balance of payments
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is a record of the value of all the transactions between the residents of a country with the residents of all other countries over a given time period.
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Balance of trade
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a measure of the revenue received from the exports of tangible goods minus the expenditure on the imports of tangible goods over a given period of time.
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Invisible balance
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a measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given period of time.
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Current account
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a measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest, and dividends) and net transfers of money (foreign aid, grants, and remittances).
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Capital account
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a measure of the buying and selling of assets between countries. The assets are often separated to show assets that represent ownership and assets that represent lending.
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Exchange rate
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the value of one currency expressed in term of another, e.g. €1 = US$1.5.
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Fixed exchange rate
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an exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, or to the average value of a selection of currencies, or to the value of some other commodity, such as gold.
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Floating exchange rate
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an exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and supply of, the currency on the foreign exchange market.
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Depreciation*
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a fall in the value of one currency in terms of another currency in a floating exchange rate system.
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Appreciation*
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an increase in the value of one currency in terms of another currency in a floating exchange rate system.
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Devaluation
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a decrease in the value of a currency in a fixed exchange rate system.
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Revaluation
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an increase in the value of a currency in a fixed exchange rate system.
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Purchasing power parity theory (HL only)
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states that under a floating exchange rate system, exchange rates adjust to offset differential rates of inflation between countries that are trade partners in order to restore balance of payments equilibrium.
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Current account surplus
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where the revenue from the export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows in a given year.
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Current account deficit
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where revenue from the exports of goods and services and income flows is less than the expenditure on the import of goods and services and income flows in a given year.
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Expenditure-switching policies
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policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services.
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Expenditure-reducing policies
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policies implemented by the government that attempt to reduce overall expenditure in the economy, including expenditure on imports.
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Marshall-Lerner condition (HL only)
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states that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance if the elasticity of demand for exports plus the elasticity of demand for imports is greater than one.
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J-Curve (HL only)*
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suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of the currency will lead to a worsening of the current account deficit, before things improve in the long term.
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Terms of trade
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an index that shows the value of a country's average export prices relative to their average import prices.
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Deteriorating terms of trade/adverse terms of trade
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where the average price of exports falls relative to the average price of imports.
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Elasticity of demand for exports
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a measure of the responsiveness of the quantity demanded of exports when there is a change in the price of exports.
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Elasticity of demand for imports
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a measure of the responsiveness of the quantity demanded of imports when there is a change in the price of imports.
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Poverty cycle*
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any circular chain of events starting and ending in poverty, such as low income means low savings means low investment means low growth means low incomes.
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Infrastructure
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the large scale public systems, services, and facilities of a country that are necessary for economic activity. They are accumulated through investment, usually by the government.
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Indebtedness
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relates to the high levels of debt that developing countries owe to developed countries. The repayments on this debt act as a significant barrier to growth for developing countries.
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Non-convertible currency
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the currency of a country that is not convertible on the international foreign exchange markets.
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Capital flight
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occurs when money and other assets flow out of a country to seek a "safe haven" in another country.
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Harrod-Domar growth model
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it states that the rate of growth of GDP is determined by the national savings ratio and the ratio of capital to output in the economy.
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Dual sector model
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explains how an underdeveloped economy moves from being a traditional agrarian economy to an economy with a larger manufacturing and service sector. The structural change comes about as surplus labour goes from agriculture to manufacturing, the key being reinvested profits in manufacturing that lead to a spiral of capital growth, increased demand, and increased profits.
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Bilateral aid
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aid that is given directly from one country to another.
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Multilateral aid
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aid that is given by rich countries to international aid agencies, such as the World Bank, and then distributed by the agencies.
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Soft loans
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loans given to developing countries that have a rate of interest significantly below the usual market rate.
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Grant aid
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short term aid provided as a gift that does not have to be repaid (food aid, medical aid, and emergency aid).
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Official aid
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aid that is provided to a country by another government or an official government agency. It may be multilateral or bilateral in nature.
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Unofficial aid
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aid that is organised by a non-government organisation, such as Oxfam.
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Tied aid
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grants or loans that are given to a country, but only on the condition that the funds are used to buy goods and services from the donor country.
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Export-led growth (outward-oriented strategies)
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strategies based on openness and increased international trade. Growth is achieved by
concentrating on increasing exports, and export revenue, as a leading factor in the AD of the economy. Growth in the international market should be translated into growth in the domestic market, over time.
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Import substitution (inward-oriented strategies / protectionism)
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strategies to encourage the domestic production of goods, rather than importing them. It should mean that industries producing the goods domestically should grow, as will the economy, and then should be competitive on world markets in the future. The strategies encourage protectionism.
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Sustainable development
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development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
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Fairtrade
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a scheme where products from producers in developing countries can be certified to display the registered Fairtrade mark encouraging consumers to buy them because they know that the producers of the products have been paid a fair price and the products have been produced under approved conditions.
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Micro-credit
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small loans usually given to enable poor people to start up very small-scale businesses in developing countries.
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Foreign Direct Investment (FDI)
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long term investment by multinational corporations in another country.
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The World Bank
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an organisation whose main aims are to provide aid and advice to developing countries, as well as reducing poverty levels and encouraging and safeguarding international investment.
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The International Monetary Fund (IMF)
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an organisation working to foster global monetary cooperation, secure financial stability, facilitate international trade, and reduce poverty.
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Multinational company/corporation (MNC)
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a company that has productive units in more than one country.
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Non-governmental organisations (NGOs)
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they are non-government organizations that exist to promote economic development and/or humanitarian ideals and/or sustainable development
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Commodity pricing agreements
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different countries working together to
operate a buffer stock scheme for a commodity, thus achieving stable prices.
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Non-Price Determinants of Demand |
Tastes Number of Buyers Price of other Goods Income Extectations |
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Non-Price Determinants of Supply |
Taxes / Subsidies Price of other goods Resources Expectations Number of Sellers Technology |
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Determinants of the Price Elasticity of Demand |
Definition (Food vs McNuggets) Luxury or Necessity (YED) Income (YED) Substitutes (XED) Time Period (More elastic as time goes by) |
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Determinants of the Price Elasticity of Supply |
Storage Possibilities Time Period Considered Rise in Price as Output rises Unused Capacity Mobility of the Factors |
