Glossary

abnormal profi t Refers to positive time period (aggregate demand), measured average costs Costs per unit of output, economic profi t, arising when total on the horizontal axis, plotted against the or the cost of each unit of output on revenue is greater than total economic price level, measured on the vertical axis. average. They are calculated by dividing costs (implicit plus explicit costs); is total cost by the number of units of output also known as ‘supernormal profi t’. See aggregate supply The total quantity produced. economic profi t. of goods and services produced in an economy over a particular time period, at average fi xed costs Fixed cost per unit absolute advantage Refers to the ability different price levels, ceteris paribus. of output, or the fi xed cost of each unit of of a country to produce a good using fewer output on average. They are calculated by resources than another country, or, what aid See foreign aid. dividing fi xed cost by the number of units is the same thing, the ability of a certain allocation of resources See resource of output produced. amount of resources in a country to allocation. produce more than the same resources can average product The total quantity produce in another country. allocative effi ciency An allocation of of output of a fi rm per unit of variable input (such as labour); shows how much resources that results in producing the absolute poverty The inability of an output each unit of the variable input individual or a family to afford a basic combination and quantity of goods and (for example, each worker) produces on standard of goods and services, where services mostly preferred by consumers. It average. this standard is absolute and unchanging is achieved when the economy allocates over time. Absolute poverty is defi ned in its resources so that no one can become average revenue Revenue per unit of output sold, calculated by dividing total relation to a nationally or internationally better off in terms of increasing their revenue by the number of units of output determined ‘poverty line’, which benefi t from consumption without determines the minimum income that can produced. someone else becoming worse off. The sustain a family in terms of its basic needs. condition for allocative effi ciency is given average tax rate Tax paid divided by actual output The quantity of output by P = MC (price is equal to marginal cost). total income, expressed as a percentage actually produced by an economy. In the (i.e. tax paid divided by total income context of the production possibilities anti-dumping An argument that multiplied by 100). model, it may be contrasted with justifi es trade protection policies: if a average total costs Total cost per unit production possibilities: actual output country’s trading partner is suspected of of output, or the total cost of each unit of occurs somewhere inside an economy’s practising dumping, then the country output on average. They are calculated by production possibilities curve (PPC) should have the right to impose trade dividing total costs by the number of units because of the presence of unemployed protection measures (tariffs or quotas) to of output; they are also equal to the sum of resources and productive ineffi ciency. limit quantities of the dumped good; see average fi xed costs and average variable costs. In the context of the AD-AS model, it dumping. may be contrasted with potential output, appreciation (of a currency) Refers average variable costs Variable cost given by the position of an economy’s to an increase in the value of a currency per unit of output, or the variable cost of long-run aggregate supply (LRAS) curve: in the context of a fl oating (or fl exible) each unit of output on average. They are actual output may be higher or lower than exchange rate system or managed calculated by dividing variable cost by the potential output (if there is an infl ationary exchange rate system (compare with number of units of output. or defl ationary gap) or it may be equal revaluation, which refers to an increase in to potential output (if the economy is in balance of payments A record (usually currency value in the context of a fi xed long-run equilibrium). for a year) of all transactions between the exchange rate system). residents of a country and the residents of ad valorem taxes Taxes calculated as a appropriate technology Technologies all other countries, showing all payments fi xed percentage of the price of the good that are well-suited to a country’s received from other countries (credits), or service; the amount of tax increases as particular economic, geographical, and all payments made to other countries the price of the good or service increases. ecological and climate conditions. Often (debits). In the course of a year, the sum of all the credits must be equal to the sum of administrative barriers Trade used in connection with labour-abundant all the debits. protection measures taking the form of developing countries that require labour- intensive (as opposed to capita- intensive) administrative procedures that countries balance of trade in goods Part of the technologies. may use to prevent the free fl ow of balance of payments, it is the value of imports into a country; these may include asymmetric information A type of exports of goods minus the value of customs procedures involving inspections market failure where buyers and sellers imports of goods over a specifi c period of and valuation, controls on packaging, and do not have equal access to information, time (usually a year). others. Often considered to be a kind of usually resulting in an underallocation of ‘hidden’ trade protection as they don’t balance of trade in services Part of resources to the production of goods and involve obvious trade protection measures the balance of payments, it is the value services, as parties to a transaction with such as tariffs and quotas. of exports of services minus the value of less access to information try to protect imports of services over a specifi c period of themselves against the consequences of aggregate demand The total quantity time (usually a year) of goods and services that all buyers the information asymmetry. in an economy (consumers, fi rms, the balance on capital account The sum automatic stabilisers Factors that government and foreigners) want to buy of infl ows minus outfl ows of funds in automatically, without any action by over a particular time period, at different the capital account of the balance of government authorities, work toward possible price levels, ceteris paribus. payments. See capital account. stabilising the economy by reducing the aggregate demand curve The curve short term fl uctuations of the business balance on current account The sum that shows the relationship between total cycle. Two important automatic stabilisers of infl ows minus outfl ows of funds in quantity of goods and services that all buyers are progressive income taxes and the current account of the balance of in an economy want to buy over a particular unemployment benefi ts. payments. See current account. 540 Glossary balance on fi nancial account The sum capital One of the factors of production, circular fl ow of income model A of infl ows of funds minus outfl ows in which itself has been produced (it does model showing the fl ow of resources from the fi nancial account of the balance of not occur naturally), also known as consumers (households) to fi rms, and the payments. See fi nancial account. ‘physical capital’, including machinery, fl ow of products from fi rms to consumers, tools, equipment, buildings, etc. Physical as well as money fl ows consisting of balanced budget Referring usually to the capital is also referred to as a ‘capital consumers’ income arising from the sale government’s budget, it is the situation good’ or ‘investment good’. Other types of their resources and fi rms’ revenues where government tax revenues are equal of capital include ‘human capital’, or the arising from the sale of their products. It to government expenditures over a specifi c skills, abilities, knowledge and levels of illustrates the equivalence of expenditure period of time (usually a year). good health acquired by people; ‘natural fl ows, value of output fl ows, and income barriers to entry Anything that can capital’, or everything that traditionally fl ows. prevent a fi rm from entering an industry has been included in the factor of production ‘land’; and ‘fi nancial capital’, clean technology Technology that is not and beginning production, as a result polluting, associated with environmental limiting the degree of competition in the or purchases of fi nancial instruments such as stocks and bonds. sustainability; includes solar power, wind industry. power, hydropower, recycling, and many bilateral trade agreement Any trade capital account In the balance of more. payments, refers to the infl ows minus agreement (or agreement to lower closed economy An economy that has international trade barriers) involving outfl ows of funds for (i) capital transfers’ (including such things as debt forgiveness no international trade (no imports and two trading partners, usually two exports); usually appears in connection countries. It may also involve a trade and non-life insurance claims), and (ii) the purchase or use of non-produced natural with economic theories and models as agreement between one country and virtually no economy in the real world is another group of countries when this resources (such as mineral rights, forestry rights, fi shing rights and airspace); it is a a closed economy. To be contrasted with groups acts as a single unit (such as the open economy. European Union). May be contrasted with relatively unimportant part of the balance regional trade agreement and multilateral of payments. collusion An agreement among fi rms to trade agreement. capital account balance See balance on fi x prices, or divide the market between capital account. them, so as to limit competition and break-even point The point of maximise profi t; usually involves fi rms in production of a fi rm where its total capital expenditures With reference to oligopoly. revenue is exactly equal to its total costs government expenditures, these include (economic costs), and it is therefore public investments, or the production of collusive oligopoly Refers to the type earning normal profi t, or zero economic physical capital, such as building roads, of oligopoly where fi rms agree to restrict (supernormal) profi t airports, harbours, school buildings, output or fi x the price, in order to limit hospitals, etc. competition, increase monopoly power break-even price A price at which and increase profi ts. See also cartel. the fi rm breaks even, meaning that its capital liberalisation Refers to the total revenues are just equal to its total free movement of fi nancial capital in commercial bank A fi nancial institution costs (economic costs); at the break-even and out of a country, occurring through (which may be private or public) whose price the fi rm is earning zero economic the elimination by the government main functions are to hold deposits for (supernormal) profi t, but it is earning of exchange controls (government their customers (consumers and fi rms), to normal profi t. restrictions on the quantity of foreign make loans to their customers, to transfer exchange that can be bought by domestic funds by cheque (check) from one bank to budget defi cit Referring usually to the another, and to buy government bonds. government’s budget, it is the situation residents of a country). where government tax revenues are less capital transfers A part of the capital common access resources Resources than government expenditures over a account of the balance of payments, that are not owned by anyone, do not specifi c period of time (usually a year). they include infl ows minus outfl ows for have a price, and are available for anyone such things as debt forgiveness, non-life to use without payment (for example, budget surplus Referring usually to the lakes, rivers, fi sh in the open seas, open government’s budget, it is the situation insurance claims, and investment. See capital account. grazing land, the ozone layer and many where government tax revenues are greater more); their depletion or degradation leads than government expenditures over a carbon tax A tax per unit of carbon to environmental unsustainability. specifi c period of time (usually a year). emissions of fossil fuels, considered by common market A type of trading bloc business confi dence A measure of the many countries as a policy to deal with the problem of climate change. in which countries that have formed a degree of optimism among fi rms in an customs union proceed further to eliminate economy about the future performance cartel A formal agreement between fi rms any remaining tariffs in trade between of fi rms and the economy; it is measured in an industry to undertake concerted them; they continue to have a common on the basis of surveys of business actions to limit competition; is formed in external policy (as in a customs union), and managers. Is an important determinant of connection with collusive oligopoly. It may in addition agree to eliminate all restrictions the investment component of aggregate involve fi xing the quantity to be produced on movements of any factors of production demand. by each fi rm, or fi xing the price at which within them; factors affected are mainly business cycle Fluctuations in the output can be sold, and other actions. labour and capital, which are free to cross growth of real output, or real GDP, The objective is to increase the monopoly all borders and move, travel and fi nd consisting of alternating periods of power of the fi rms in the cartel. Cartels are employment freely within all member expansion (increasing real output) and illegal in many countries. countries. The best-known common market is the European Economic Community contraction (decreasing real output); also central bank A fi nancial institution known as trade cycles. (EEC, the precursor of the present European that is responsible for regulating Union). cap and trade scheme A scheme in the country’s fi nancial system and which a government authority (of a single commercial banks, and carrying out community surplus See social surplus. monetary policy. country or a group of countries) sets a comparative advantage Arises when limit or ‘cap’ on the amount of pollutants ceteris paribus A Latin expression that a country has a lower relative cost, or that can be legally emitted by a fi rm, means ‘other things being equal’. Another opportunity cost, in the production of set by an amount of pollution permits way of saying this is that all other things a good than another country. Forms the (known as tradable permits) distributed are assumed to be constant or unchanging. basis of the theory of comparative advantage. to fi rms; fi rms that want to pollute more It is used in economics theories and than their permits allow can buy more models to isolate changes in only those competitive market A market permits in a market, while fi rms that want variables that are being studied. composed of many buyers and sellers to pollute less can sell their excess permits. acting independently, none of whom has Glossary 541 any ability to infl uence the price of the consumer surplus Refers to the difference investment spending, thus reversing the product (i.e. no market power). between the highest prices consumers are impacts of the government’s expansionary willing to pay for a good and the price fi scal policy. competitive supply In the case of two actually paid. In a diagram, it is shown goods, refers to production of one or the by the area under the demand curve and current account In the balance of other by a fi rm; in other words the two above the price paid by consumers. payments, this includes the balance of goods compete with each other for the trade (recording exports minus imports same resources (for example, if a farmer consumption Spending by households of goods) plus the balance on services can produce wheat or corn, producing (consumers) on goods and services (recording exports of services minus imports more of one means producing less of the (excludes spending on housing). of services), plus infl ows minus outfl ows other). of income and current transfers. The most contractionary fi scal policy Refers to important part of the current account in competition Occurs when there fi scal policy usually pursued in an infl ation, most countries is the balance of trade. are many buyers and sellers acting involving a decrease in government independently, so that no one has the spending or an increase in taxes (or both). current account balance See balance on ability to infl uence the price at which the May be contrasted with expansionary fi scal current account. product is sold in the market. policy. See also fi scal policy. current account defi cit Occurs when complements (complementary contractionary monetary policy Refers the current account balance has a negative goods) Two or more goods that tend to monetary policy usually pursued in an value, meaning that debits are larger than to be used together. If two goods are infl ation, involving an increase in interest credits (there is an excess of debits). complements, an increase in the price of rates, intended to lower investment and one will lead to a decrease in the demand consumption spending; also known as current account surplus Occurs when of the other. ‘tight monetary policy’. May be contrasted the current account balance has a positive with expansionery monetary policy. See also value, meaning that credits are larger than composite indicator A summary monetary policy. debits (there is an excess of credits). measure of more than one indicator, often used to measure economic development; core rate of infl ation A rate of infl ation current expenditures In the government for example the Human Development Index based on a consumer price index that budget, refers to government spending (HDI), that measures income, education excludes goods with highly volatile on day-to-day items that are recurring and health indicators. (unstable) prices, notably food and energy (i.e. repeat themselves) and items that prices. are used up or ‘consumed’ as a good or concentration ratio A measure of service is provided. Include wages and how much an industry’s production corporate indebtedness The degree salaries (for all government employees); is concentrated among the industry’s to which corporations have debts (see spending for supplies and equipment for largest fi rms; it measures the percentage indebtedness). the day-to-day operation of government of output produced by the largest fi rms activities (for example, school supplies in an industry, and is used to provide an corporate social responsibility The and medical supplies for public schools indication of the degree of competition or practice of some corporations to avoid and public health care services); provision degree of monopoly power in an industry. socially undesirable activities, such as of subsidies; and interest payments on The higher the ratio, the greater the degree polluting activities, employing children, government loans. of monopoly power. or employing workers under unhealthy conditions; as well as undertaking socially current transfers An item in the current concessional loan Loans that are desirable activities, such as support for account of the balance of payments, refers offered as part of foreign aid, made on human rights and donations to charities. to infl ows and outfl ows of funds for items concessional terms, i.e. that they are including gifts, foreign aid, and pensions. offered at interest rates that are lower than cost-push infl ation A type of infl ation commercial rates, with longer repayment caused by a fall in aggregate supply, in customs union A type of trading bloc, periods. turn resulting from increases in costs of consisting of a group of countries that production (for example, wages or prices fulfi l the requirements of a free trade area conditional assistance Refers to of other inputs), shown in the AD-AS (elimination of trade barriers between development assistance provided by model as leftward shifts of the AS curve. members) and in addition adopt a bilateral or multilateral development common policy towards all non-member organisations, which is extended to costs of production The total countries; members of a customs union countries on condition that they satisfy opportunity costs incurred by fi rms in also act as a group in all trade negotiations certain requirements, usually requiring order to acquire resources for use in and agreements with non-members. It that they adopt particular policies. production; include explicit costs (for achieves a higher degree of economic purchased resources) and implicit costs integration than a free trade area, but constant returns to scale Refers to (for self-owned resources). lower than a common market. the situation where the output of a fi rm changes in the same proportion as all credit items In the balance of payments, cyclical unemployment A type of its inputs; given a percentage increase refer to payments received from other unemployment that occurs during the in all inputs, output increases by the countries, entering the balance of downturns of the business cycle, when same percentage. May be contrasted with payments accounts with a plus sign; they the economy is in a recessionary gap; the increasing returns to scale and decreasing represent an infl ow of foreign exchange downturn is seen as arising from declining returns to scale. into a country. or low aggregate demand, and therefore cross-price elasticity of demand (XED) is also known as ‘demand-defi cient’ consumer confi dence A measure of the unemployment. degree of optimism of consumers about A measure of the responsiveness of the their future income and the future of demand for one good to a change in the debit items In the balance of payments, the economy; it is measured on the basis price of another good; measured by the refer to payments made to other countries, of surveys consumers. Is an important percentage change in the quantity of one entering the balance of payments accounts determinant of the consumption good demanded divided by the percentage with a minus sign; they represent an component of aggregate demand. change in the price of another good. If outfl ow of foreign exchange from a XED > 0 the two goods are substitutes; if country. consumer price index A measure of the XED < 0, the two goods are complements. cost of living for the typical household; deciles Division of a population into it compares the value of a basket of crowding-out Refers to the possible ten equal groups with respect to the goods and services in one year with the impacts on real GDP of increased distribution of a variable, such as income; value of the same basket in a base year. government spending (expansionary fi scal for example, the lowest income decile Infl ation (and defl ation) are measured as policy) fi nanced by borrowing; if increased refers to 10% of the population with the a percentage change in the value of the government borrowing results in a higher lowest income. basket from one year to another. rate of interest, this could reduce private 542 Glossary decreasing returns to scale Refers to system (to be compared with devaluation, dual economy Arises when there the situation where the output of a fi rm which is a decrease in currency value in are two different and opposing sets of changes less than in proportion to a a fi xed exchange rate system). (Note that circumstances that exist simultaneously, change in all its inputs; given a percentage depreciation also refers to capital goods often found in economically less increase in all inputs, output increases by that become worn out and are discarded.) developed countries, such as for example, a smaller percentage. May be contrasted wealthy, highly educated groups co- with constant returns to scale and increasing deregulation Policies involving the existing with poor, illiterate groups, a returns to scale. elimination or reduction of government formal and informal urban sector, and a regulation of private sector activities, low-productivity agricultural sector and a defi cit In general, this is the defi ciency based on the argument that government high-productivity urban industrial sector. of something compared with something regulation stifl es competition and else. (i) In the balance of payments, a increases ineffi ciency. dumping The practice of selling a good ‘defi cit’ in an account occurs when the in international markets at a price that credits (infl ows of money from abroad) deterioration in the terms of trade A is below the cost of producing it (usually are smaller than the debits (outfl ows of decrease in the value of the terms of trade by providing export subsidies); while it money to other countries); for example, a index. See terms of trade. is illegal according to international trade defi cit in the balance of trade means that determinants of aggregate rules, many countries practise it anyway. the value of exports (credits) is smaller demand Factors that cause shifts of the Forms the basis of the anti-dumping than the value of imports (debits). (ii) aggregate demand curve; include factors argument in favour of trade protection. In the case of the government budget, a that infl uence consumption spending See also anti-dumping. ‘defi cit’ occurs when government revenues (C), investment spending (I), government are smaller than government expenditures. easy monetary policy See expansionary spending (G) and net exports (Xn). monetary policy. defl ation A continuing (or sustained) determinants of demand See non-price decrease in the general price level. economic costs The sum of explicit costs determinants of demand. and implicit costs, or the total opportunity defl ationary gap See recessionary gap. determinants of supply See non-price costs incurred by a fi rm for its use of determinants of supply. resources, whether purchased or self-owned. demand Indicates the various quantities When economists refer to ‘costs’ they are of a good that consumers (or a consumer) devaluation (of a currency) Refers to a actually referring to ‘economic costs’. are willing and able to buy at different decrease in the value of a currency in the possible prices during a particular time context of a fi xed exchange rate system (to economic development Broad-based rises period, ceteris paribus (all other things be compared with depreciation, which is a in the standard of living and well-being of being equal). decrease in currency value in the context a population, particularly in economically less developed countries. It involves demand-defi cient unemployment See of a fl oating (or fl exible) or managed exchange rate system). increasing income levels and reducing cyclical unemployment. poverty, reducing income inequalities and demand curve A curve showing the development aid Foreign aid intended unemployment, and increasing provision of relationship between the quantities of to help economically less development and access to basic goods and services such a good consumers (or a consumer) are countries; may involve project aid, as food and shelter, sanitation, education willing and able to buy during a particular programme aid, technical assistance or debt and health care services. relief. time period, and their respective prices, economic effi ciency A condition ceteris paribus (all other things being equal). direct investment In the balance of that arises when allocative effi ciency is demand management Policies that payments, refers to infl ows or outfl ows achieved. See allocative effi ciency. focus on the demand side of the economy, of funds for the purpose of foreign direct investment. See foreign direct investment. economic growth Increases in total real attempting to infl uence aggregate demand output produced by an economy (real to achieve the goals of price stability, full direct taxes Taxes paid directly to GDP) over time; may also refer to increases employment and economic growth. the government tax authorities by the in real output (real GDP) per capita (or per demand-pull infl ation A type of taxpayer, including personal income taxes, person). corporate income taxes and wealth taxes. infl ation caused by an increase in economic integration Refers to aggregate demand, shown in the AD-AS diseconomies of scale Increases in the economic interdependence between model as a rightward shift in the AD curve. average costs of production that occur as a countries, usually achieved by agreement demand-side policies Policies that fi rm increases its output by varying all its between countries to reduce or eliminate attempt to change aggregate demand inputs (i.e. in the long run). Diseconomies trade and other barriers between them. (shift the aggregate demand curve in the of scale are responsible for the upward- There are various degrees of integration, AD-AS model) in order to achieve the sloping part of the long-run average total depending on the type of agreement and goals of price stability, full employment cost curve: as a fi rm increases its size, costs the degree to which barriers between and economic growth, and minimise per unit of output increase. countries are removed; see trading bloc, free the severity of the business cycle. In the trade area, customs union, common market, disinfl ation Refers to a fall in the rate monetary union. event of an infl ationary or recessionary of infl ation; it involves a positive rate of (defl ationary) gap, they try to bring infl ation and should be contrasted with economic profi t Is a fi rm’s total revenue aggregate demand to the full employment defl ation. minus total economic costs (explicit plus level of real GDP, or potential GDP. They implicit). If economic profi t is positive, the can also impact on economic growth by disposable income The income of fi rm is earning supernormal (abnormal) contributing to increases in potential GDP. consumers that is left over after the profi t; if it is zero, the fi rm is earning Consists of fi scal and monetary policies. payment of income taxes. normal profi t; if it is negative, the fi rm is To be contrasted with supply-side policies. distribution of income Concerned with making a loss. demerit goods Goods that are considered how much of an economy’s total income economically less developed countries to be undesirable for consumers and are different individuals or different groups According to the World Bank’s classifi cation overprovided by the market. Reasons in the population receive, and involves system, includes countries that have a for overprovision may be that the goods answering the ‘for whom’ basic economic per capital GNI below a particular level have negative externalities, or consumer question. (which changes from year to year); some ignorance about the harmful effects. diversifi cation Generally refers to change common characteristics include low levels depreciation (of a currency) Refers to a involving greater variety, and is used to of GDP per capita, high levels of poverty, decrease in the value of a currency in the refer to increasing the variety of goods and large agricultural sectors and large urban context of a fl oating (or fl exible) exchange services produced and/or exported by a informal sectors (though it is dangerous to rate system or managed exchange rate country; it is the opposite of specialisation. generalise about these characteristics). Glossary 543 economically more developed equality (though this is only one possible expenditure-switching policies Policies countries According to the World Bank’s interpretation of equity). that involve switching consumption classifi cation system, includes countries away from imported goods and towards that have a per capital GNI above a errors and omissions In the balance domestically produced goods, in order to particular level (which changes from year of payments, refers to an item that is correct a current account defi cit; include to year); they generally have relatively included to account for possible omissions trade protection policies and depreciation. high levels of GDP per capita, relatively and errors in items that have been low levels of poverty, small agricultural included or excluded, in order to ensure explicit costs Costs of production that sectors, and large industrial and services that the balance of payments balances, i.e. involve a money payment by a fi rm to sectors (though it is dangerous to that the sum of credits and debits is equal an outsider in order to acquire a factor of generalise about these characteristics). to zero. production that is not owned by the fi rm. Is a type of opportunity cost; should be economics The study of choices leading excess demand In the context of contrasted with implicit costs. to the best possible use of scarce resources demand and supply, occurs when the in order to best satisfy unlimited human quantity of a good demanded is greater export promotion Refers to a growth needs and wants. than the quantity supplied, leading to a and trade strategy where a country shortage of the good; see shortage. attempts to achieve economic growth by economies of scale Decreases in the expanding its exports. As a trade strategy, average costs of production that occur as excess supply In the context of demand it looks outward towards foreign markets a fi rm increases its output by varying all and supply, occurs when the quantity of a and is based on stronger links between its inputs (i.e. in the long run). Economies good demanded is smaller than the quantity the domestic and global economies. To be of scale explain the downward-sloping supplied, leading to a surplus; see surplus. contrasted with import substitution. portion of the long-run average total cost exchange rate The rate at which one externality Occurs when the actions curve: as a fi rm increases its size, the costs currency can be exchanged for another, or per unit of output fall. of consumers or producers give rise to the number of units of foreign currency positive or negative side-effects on other elasticity In general, this is a measure that correspond to the domestic currency; people who are not part of these actions, of the responsiveness or sensitivity of a can be thought of as the ‘price’ of a and whose interests are not taken into variable to changes in any of the variable’s currency, which is expressed in terms of consideration. Positive externalities give determinants. See specifi c elasticities: price another currency. rise to positive side-effects; negative elasticity of demand, cross-price elasticity of excise taxes Taxes imposed on spending externalities to negative side-effects. demand, income elasticity of demand, price on particular goods or services (for elasticity of supply. factor endowments The factors of example, gasoline/petrol); are a type of production that a country is ‘endowed empowerment Creation of conditions for indirect tax. See indirect taxes. with’, or possesses. Differing factor equality of opportunities; involves increasing excludable A characteristic of goods endowments among countries suggests that the political, social, and economic power of according to which it is possible to exclude different countries are better suited to the individuals or groups of individuals. people from using the good by charging production of certain kinds of goods and a price for it; if someone is unwilling or services than others, or, to put it differently, entrepreneurship One of the factors they are more effi cient in the production of of production, involving a special unable to pay the price they will be excluded from using it. Most goods are excludable. It some things rather than others. Differing human skill that includes the ability to factor endowments form the basis of the innovate by developing new ways of doing is one of the two characteristics of ‘private goods’. See also rivalrous. theory of comparative advantage. (Also known things, to take business risks and to seek as ‘resource endowments’.) new opportunities for opening and running expansionary fi scal policy Refers to a business. Entrepreneurship organises the fi scal policy usually pursued in a recession, factors of production All resources, other three factors of production (land, involving an increase in government or inputs (land, labour, capital, labour and capital) and takes on the risks of spending or a decrease in taxes (or both). entrepreneurship) used to produce goods success or failure of a business. May be contrasted with contractionary and services. equilibrium A state of balance such that fi scal policy. See also fi scal policy. fi nancial account In the balance of there is no tendency to change. See also expansionary monetary policy Refers payments, refers to infl ows minus outfl ows market equilibrium and equilibrium level of to monetary policy usually pursued in a of funds due to foreign direct investment, output (or of real GDP). recession, involving a decrease in interest portfolio investment and changes in reserve assets. equilibrium level of output The level rates, intended to increase investment and of output (real GDP) where the aggregate consumption spending; also known as fi nancial account balance See balance demand curve intersects the aggregate supply ‘easy monetary policy’. May be contrasted on fi nancial account. curve (also known as the ‘equilibrium level with contractionery monetary policy. See also of income’). Note the distinction between monetary policy. fi scal policy Manipulations by the government of its own expenditures and short-run equilibrium level of output and long- expenditure approach A method used to run equilibrium level of output. taxes in order to infl uence the level of measure the value of aggregate output of an aggregate demand; it is a type of demand- equilibrium level of real GDP See economy, which adds up all spending on side policy or demand management. equilibrium level of output. fi nal goods and services produced within a country within a given time period. As fi xed costs Costs that arise from the equilibrium price The price determined suggested by the circular fl ow model, it is use of fi xed inputs, which do not change in a market when quantity demanded is equivalent to measurement by the income as output increases or decreases (hence equal to quantity supplied, and there is no approach and the output approach. they are ‘fi xed’). Fixed costs arise only in tendency for the price to change; it is the the short run, or the period of time when price that prevails when there is market expenditure fl ow In the simple circular there is at least one fi xed input. Examples equilibrium. fl ow of income model, it is the fl ow of include rental payments, property taxes spending from households to fi rms to buy and insurance premiums. equilibrium quantity The quantity that the goods and services produced by the is bought and sold when a market is in fi rms; the expenditure fl ow is equal to the fi xed exchange rate Refers to an equilibrium, i.e. when quantity demanded income fl ow and the value of output fl ow. exchange rate that is fi xed by the central is equal to quantity supplied. bank of a country, and is not permitted to expenditure-reducing policies Policies change in response to changes in currency equity The condition of being fair or that involve reducing expenditures in the supply and demand. Maintaining the just; should be contrasted with the term domestic economy so as to bring about value of a currency at its fi xed rate requires ‘equality’. Often used in connection a decrease in imports in order to correct constant intervention by the central bank with income distribution, in which case a current account defi cit; they include or government. it is usually interpreted to mean income contractionary fi scal and monetary policies. 544 Glossary fi xed exchange rate system An freely fl oating exchange rate An GNI per capita Gross national income exchange rate system where exchange exchange rate determined entirely by divided by the number of people in the rates are fi xed by the central bank of each market forces, or the forces of supply population; is an indicator of the amount country. See fi xed exchange rate. and demand. There is no government of income in an economy per person in intervention in the foreign exchange the population. fl exible labour market See labour market market to infl uence the value of fl exibility. the exchange rate. Also known as governance Refers to the way of governing, and the exercise of power fl oating exchange rate See freely fl oating ‘fl oating exchange rate’ or ‘fl exible exchange rate’. in the management of an economy’s exchange rate. economic and social resources, in order fl oating exchange rate system See freely freely fl oating exchange rate system An to achieve particular objectives such as fl oating exchange rate system. exchange rate system where exchange economic growth and development. rates are determined entirely by market foreign aid Consists of concessional forces; see freely fl oating exchange rate. government budget A type of plan of fi nancial fl ows from the developed world a country’s tax revenues and government to economically less developed countries, frictional unemployment A type of expenditures over a period of time (usually and includes concessional loans and grants. unemployment that occurs when workers a year). are between jobs; workers may leave See also concessional loan and offi cial government debt See public debt. development assistance. To be contrasted their job because they have been fi red, with multilateral development assistance. or because their employer went out of government intervention The practice business, or because they are in search of a of government to intervene (interfere) in foreign debt Refers to external debt, better job, or they may be waiting to begin markets, preventing the free functioning meaning the total amount of debt (public a new job; tends to be short term. of the market, usually for the purpose of and private) incurred by borrowing from full employment (i) In the context achieving particular economic or social foreign creditors (i.e. lenders). The global of the production possibilities model, objectives. problem of debt involves large volumes of refers to maximum use of all resources in government spending Spending public (i.e. government) debt. the economy to produce the maximum undertaken by the government, as part quantity of goods and services that of its fi scal policy or as part of an effort foreign direct investment (FDI) Refers the economy is capable of producing to meet particular economic and social to investment by fi rms based in one (production possibilities), implying zero objectives (such as provision of subsidies, country (the home country) in productive unemployment. (ii) In the context of the provision of public goods, etc.). activities in another country (the host AD–AS model, refers to the natural rate of country). Firms that undertake FDI are unemployment, or unemployment that grant A type of foreign aid consisting of called multinational corporations. prevails when the economy is producing funds that are in effect gifts (they do not have to be repaid). foreign exchange Refers to foreign potential output, or real GDP, determined by the position of the LRAS curve (when national currencies, i.e. for any country, it green GDP Gross domestic product refers to currencies other than its own. the economy is in long equilibrium). See also natural rate of unemployment). Note (GDP) which has been adjusted to take into account environmental destruction formal collusion An agreement between that in this context, ‘full employment’ and/or health consequences of fi rms (usually in oligopoly) to limit refers to employment of labour resources. environmental problems. output or fi x prices, in order to restrict competition; is likely to involve the full employment level of output (real GDP) The level of output (or real GDP) gross domestic product (GDP) A formation of a cartel. Also known as ‘open measure of the value of aggregate output collusion’. at which unemployment is equal to the natural rate of unemployment; the level of an economy, it is the market value of all fi nal goods and services produced free entry and exit The condition in of output (real GDP) where there is no within a country during a given time which fi rms face no barriers to entering or defl ationary or recessionary gap. Also period (usually a year); it is a commonly exiting an industry, characteristic of the known as potential output (potential GDP). used measure of the value of aggregate market structures of perfect competition and output; to be contrasted with gross national monopolistic competition. game theory A mathematical technique analyzing the behaviour of decision- income (GNI). free rider problem Occurs when makers who are dependent on each other, people can enjoy the use of a good and who use strategic behaviour as they gross national income (GNI) A measure without paying for it, and arises from try to anticipate the behaviour of their of the total income received by the non-excludability: people cannot be rivals. Has become an important tool in residents of a country, equal to the value excluded from using the good, because it microeconomics, often used to analyse of all fi nal goods and services produced is not possible to charge a price. Is often the behaviour of oligopolistic fi rms; is by the factors of production supplied by associated with public goods, which are based heavily on the work of American the country’s residents regardless of where a type of market failure: due to the free mathematician and economist John Nash. the factors are located; GNI = GDP plus rider problem, private fi rms fail to produce these goods. GDP See gross domestic product. income from abroad minus income sent abroad. Formerly known as gross national GDP defl ator See price defl ator. free trade The absence of government product (GNP); may be contrasted with intervention of any kind in international GDP per capita Gross domestic product gross domestic product (GDP). trade, so that trade takes place without divided by the number of people in the any restrictions (or barriers) between population; is an indicator of the amount gross national product (GNP) See gross individuals or fi rms in different countries. of domestic output per person in the national income. population. free trade area A type of trading bloc, growth See economic growth. consisting of a group of countries that Gini coeffi cient A summary measure of growth maximisation A possible goal agree to eliminate trade barriers between the information contained in the Lorenz of fi rms, that differs from the goal of themselves; it is the most common type curve of an economy, defi ned as the area profi t maximisation assumed by standard of integration area, and involves a lower between the diagonal and the Lorenz microeconomic theory, involving the degree of economic integration than a curve, divided by the entire area under achievement of the highest possible customs union or common market. Each the diagonal. The Gini coeffi cient has a growth, for various reasons such as member country retains the right to value between 0 and 1; the larger the Gini achieving economies of scale, diversifying, pursue its own trade policy towards non- coeffi cient, and the closer it is to 1, the achieving market power, or others. member countries. An example of a free greater is the income inequality. trade area is NAFTA (North American Free hidden unemployment Unemployment GNI See gross national income. Trade Agreement). that is not counted in offi cial Glossary 545 unemployment statistics because of such abroad minus the same income factors abroad. The presence of infant industries factors as the exclusion of ‘discouraged that are sent abroad. is considered to be one of the strongest workers’, the practice of considering part- arguments in favour of trade protection time workers as full-time workers, and income approach A method used to policies in developing countries. others. measure the value of aggregate output of an economy, which adds up all income earned inferior good A good the demand for homogeneous product A product by the factors of production in the course which varies negatively (or indirectly) that is completely standardised and not of producing all goods and services within a with income; this means that as income differentiated; is characteristic of products country in a given time period. As suggested increases, the demand for the good in perfect competition. by the circular fl ow model, it is equivalent decreases. to measurement by the expenditure approach household indebtedness The degree and the output approach. infl ation A continuing (or sustained) to which households have debts (see increase in the general price level. indebtedness). income distribution See distribution of income. infl ation targeting A type of monetary human capital The skills, abilities and policy carried out by some central banks knowledge acquired by people, as well as income elastic demand Relatively high that focuses on achieving a particular good levels of health, all of which make responsiveness of demand to changes infl ation target, rather than focusing them more productive; considered to be in income; YED (income elasticity of on the goals of low and stable rate a kind of ‘capital’ because it provides a demand) > 1. See income elasticity of demand. of infl ation and low unemployment; stream of future benefi ts by increasing the common infl ation targets are between amount of output that can be produced in income elasticity of demand A measure 1.5% and 2.5%. the future. of the responsiveness of demand to changes in income; measured by the infl ationary gap A situation where real Human Development Index (HDI) A percentage change in quantity demanded GDP is greater than potential GDP, and composite indicator of development divided by the percentage change in price. unemployment is lower than the natural which includes indicators that measure rate of unemployment; it arises when the three dimensions of development: income income fl ow In the simple circular fl ow AD curve intersects the SRAS curve at a per capita, levels of health and educational of income model, refers to the fl ow of higher level of real GDP than potential attainment; is considered to be a better income of households that they receive GDP. indicator of development than single by selling their factors of production indicators such as GNI per capita. (resources) to fi rms; the income fl ow is informal collusion See tacit collusion. equal to the expenditure fl ow and the value humanitarian aid Foreign aid extended of output fl ow. infrastructure Numerous types in regions where there are emergencies of physical capital resulting from caused by violent confl icts or natural income inelastic demand Relatively investments, making major contributions disasters such as fl oods, earthquakes and low responsiveness of demand to changes to economic growth and development tsunamis, intended to save lives, ensure in income; YED (income elasticity of by lowering costs of production and access to basic necessities such as food, demand) < 1. See income elasticity of increasing productivity; include power, water, shelter and health care, and provide demand. telecommunications, piped water supplies, assistance with reconstruction. sanitation, roads, major dam and canal income redistribution See redistribution works for irrigation and drainage, urban implicit costs Costs of production of income. transport, ports and airports. involving sacrifi ced income arising from increasing returns to scale Refers to the use of self-owned resources by a fi rm; injections In the circular fl ow of income the situation where the output of a fi rm model, refer to the entry into income fl ow is a type of opportunity cost; should be changes more than in proportion to a contrasted with explicit costs. of funds corresponding to investment, change in all its inputs; given a percentage government spending or exports. import quota see quota. increase in all inputs, output increases by a larger percentage. May be contrasted integration See economic integration. import substitution Also known as with constant returns to scale and decreasing import-substituting industrialisation, returns to scale. interest (i) A payment, per unit of time, refers to a growth and trade strategy where for the use of borrowed money (borrowers a country begins to manufacture simple indebtedness Refers to the level of debt, pay interest, lenders receive interest). (ii) consumer goods oriented towards the or the amount of money owed to creditors A payment, per unit of time, to owners of domestic market (such as shoes, textiles, (lenders); may be on a household, fi rm, or capital resources. country level. beverages, electrical appliances) in order interest rate Interest expressed as a to promote its domestic industry; it indirect taxes Taxes levied on spending percentage; in the case of borrowed presupposes the imposition of protective to buy goods and services, called indirect money, it is interest as a percentage of the measures (tariffs, quotas, etc.) that will because, whereas payment of some amount borrowed. Changes in interest prevent the entry of imports that compete or all of the tax by the consumer is rates form the basis of monetary policy. with domestic producers. To be contrasted involved, they are paid to the government with export promotion. authorities by the suppliers (fi rms), that is, International Monetary Fund (IMF) An indirectly. international fi nancial institution improvement in the terms of trade An composed of 185 member countries, increase in the value of the terms of trade industrial policies Government whose purpose is to make short-term index. See terms of trade. policies designed to support the growth loans to governments on commercial incentive-related policies Policies of the industrial sector of an economy; terms (i.e. non-concessional) in order to involving reduction of various types of may include support for small and stabilise exchange rates, alleviate balance taxes (such as income taxes and business medium-sized fi rms or support for ‘infant of payments diffi culties and help countries taxes), in the expectation that the tax cuts industries’ through tax cuts, grants, meet their foreign debt obligations. low interest loans and other measures, will change the incentives faced by tax- interventionist policy Any policy payers; for example, cuts in income taxes as well as investment in human capital, research and development, or based on government intervention may encourage the desire to work; cuts in in the market; to be contrasted with business taxes may encourage investment. infrastructure development in support of industry. market-oriented policy. See also government Are a type of supply-side policy. intervention. incidence of taxes See tax incidence. infant industry A new domestic industry that has not had time to establish itself interventionist supply-side policy Any income In the current account of the and achieve effi ciencies in production, policy based on government intervention balance of payments, refers to infl ows of and may therefore be unable to compete in the market intended to affect the wages, rents, interest and profi ts earned with more ‘mature’ competitor fi rms from supply-side of the economy, usually to shift the LRAS curve to the right, increase 546 Glossary potential output and achieve long term abolishing or reducing minimum wages, long-run average total cost curve A economic growth; see industrial policy as an reducing job security and reducing curve that shows the lowest possible example. May be contrasted with market- unemployment benefi ts. Are a type of average cost that can be attained by a fi rm based supply side policy. supply-side policy. for any level of output when all of the fi rm’s inputs are variable. investment Includes spending by fi rms labour market rigidities Factors or the government on capital goods (i.e. preventing the forces of supply and long-run equilibrium level of buildings, machinery, equipment, etc.) demand from operating in the labour output The level of output (real GDP) and all spending on new construction market, and therefore preventing labour that results when the economy is in long (housing and other buildings). market fl exibility; include minimum wage run equilibrium, occurring when the legislation, job security, etc. See labour aggregate demand and short-run aggregate J-curve effect A curve that plots market reforms. supply curves intersect at a point on the the balance of trade (exports minus long run aggregate supply curve; occurs imports) on the vertical axis and time land A factor of production which where the vertical LRAS curve intersects the on the horizontal axis, showing that a includes all natural resources: land and horizontal axis, known as potential output. country with a devaluing/depreciating agricultural land, as well as everything currency may see a worsening in its trade that is under or above the land, such as long-run Phillips curve See Phillips balance (an increase in a trade defi cit) minerals, oil reserves, underground water, curve. in the period immediately following the forests, rivers and lakes. Natural resources devaluation or depreciation, while in a are also called ‘gifts of nature’ or ‘natural long term growth trend In the business later period the trade defi cit will begin capital’. cycle diagram, refers to the line that to shrink provided the Marshall–Lerner runs through the business cycle curve, condition holds (see Marshall–Lerner law of demand A law stating that there representing average growth over long condition). is a negative causal relationship between periods of time; shows how output grows the price of a good and quantity of the over time when cyclical fl uctuations are joint supply Refers to production of good demanded, over a particular time ironed out. The output represented by two or more goods that are derived from a period, ceteris paribus: as the price of the the long-term growth trend is known as single product, so that it is not possible to good increases, the quantity of the good potential output. produce more of one without producing demanded falls (and vice versa). more of the other (for example, butter and Lorenz curve A curve illustrating the skimmed milk are both produced from law of diminishing returns A law degree of equality (or inequality) of whole milk, and producing more of one that states that as more and more units income distribution in an economy. It means producing more of the other as of a variable input (such as labour) are plots the cumulative percentage of income well). added to one or more fi xed inputs (such received by cumulative shares of the as land), the marginal product of the population. Perfect income equality would Keynesian aggregate supply curve An variable input at fi rst increases, but there be represented by a straight line. The aggregate supply curve that has a fl at comes a point when the marginal product closer the Lorenz curve is to the straight (horizontal) section, and upward sloping of the variable input begins to decrease. line, the greater the equality in income section and a vertical section. This relationship presupposes that the distribution. fi xed input(s) remain fi xed, and that the Keynesian multiplier The ratio technology of production is also fi xed loss Refers to the difference between of real GDP divided by a change in (unchanging). economic costs and total revenue of a fi rm any of the components of aggregate when economic costs are greater than spending (consumption C, investment I, law of supply A law stating that there revenues; it is negative economic profi t. government spending G, or net exports is a positive causal relationship between See economic profi t. X − M); alternatively it is 1/(1-MPC), the price of a good and quantity of the where MPC is the marginal propensity to good supplied, over a particular time luxuries Goods that are not necessary consume. The value of this ratio is usually period, ceteris paribus: as the price of the or essential; they have a price elastic greater than one because of a multiplied good increases, the quantity of the good demand (PED>1) and income elastic demand effect of an initial change in a component supplied also increases (and vice versa). (YED>1). To be contrasted with necessities. of aggregate spending on the fi nal value of macroeconomic objectives Objectives real output. leakages In the circular fl ow of income model, refer to the withdrawal from the of policy makers in the macroeconomy; kinked demand curve A model income fl ow of funds corresponding to include full employment, low rate of developed to explain price infl exibility of savings, taxes or imports; also known as infl ation, economic growth, an equitable oligopolistic fi rms that do not collude (do ‘withdrawals’. distribution of income and external not agree to collaborate in order to limit balance (balance of trade and avoidance of competition between them). long run (i) In microeconomics, it is a balance of payments problems). time period in which all inputs can be labour A factor of production, which changed; there are no fi xed inputs. macroeconomics The branch of includes the physical and mental effort (ii) In macroeconomics, it is the period of economics that examines the economy that people contribute to the production time when prices of resources (especially as a whole by use of aggregates, which of goods and services. wages) change along with changes in the are wholes or collections of many price level. individual units, such as the sum of labour market fl exibility Refers to consumer behaviours and the sum of the operation of market forces (supply long-run aggregate supply (LRAS) fi rm behaviours, total income and output and demand) in the labour market; curve A curve showing the relationship of the entire economy as well as total to be contrasted with labour market between real GDP produced and the price employment and the general price level. rigidities. May be achieved by reducing level when wages (and other resource or eliminating interference with prices) change to refl ect changes in the managed exchange rates Exchange rates market forces (for example, reducing or price level, ceteris paribus. The LRAS curve that are for the most part free to fl oat to eliminating minimum wages and labour is vertical at the full employment level their market levels (i.e. their equilibrium union activities, reducing job security, of GDP, or potential GDP, indicating that levels) over long periods of time; however, etc.); see labour market reforms. in the long run the economy produces central banks periodically intervene in potential GDP, which is independent of order to stabilise them over the short term. labour market reforms Reforms the price level. intended to make labour markets more managed exchange rate system The competitive and fl exible, to make long run average total costs The lowest exchange rate system in use since 1973, wages respond to the forces of supply possible average costs that can be attained also known as the ‘managed fl oat’; see and demand, to lower labour costs and by a fi rm for any level of output when all managed exchange rates. increase employment by lowering the the fi rm’s inputs are variable, i.e. in the managed fl oat See managed exchange natural rate of unemployment; include long run. rates. Glossary 547 marginal benefi t The extra or additional where too much or too little of goods microeconomics The branch of benefi t received from consuming one or services are produced and consumed economics that examines the behaviour more unit of a good. from the point of view of what is socially of individual decision-making units, most desirable. consumers and fi rms; is concerned with marginal cost The extra or additional consumer and fi rm behaviour and how cost of producing one more unit of output. market power Refers to the control that their interactions in markets determine a seller may have over the price of the marginal private benefi ts (MPB) The prices in goods markets and resource product it sells; the greater the market markets. extra benefi t received by consumers power, the greater is the seller’s control when they consume one more unit of a over price. Also known as ‘monopoly Millennium Development Goals good. power’. (MDGs) Eight development goals marginal private costs (MPC) The extra adopted by the Millennium Declaration market structure The characteristics of of 2000, consisting of 18 targets to be costs to producers of producing one more a market organisation that determine the unit of a good. achieved by the year 2015; among the behaviour of fi rms within an industry. eight goals, four include eradicating marginal product The extra or market supply Refers to the sum of extreme poverty and hunger, achieving additional output that results from one all individual fi rm supplies of a good or universal primary education, reducing additional unit of a variable input (such service. child mortality, promoting gender as labour). equality. market-based supply-side policy Any marginal propensity to consume policy based on promoting well- minimum price A legal price set by the (MPC) The fraction of additional income functioning, competitive markets in government which is above the market spent on domestically produced goods order to infl uence the supply-side equilibrium price; this does not allow and services. Determines the size of the of the economy, usually to shift the the price to fall to its equilibrium level Keynesian multiplier; the larger the MPC, LRAS curve to the right, increase determined by a free market; also known the larger the multiplier. potential output and achieve long as a price fl oor. marginal propensity to import term economic growth; include labour minimum wage A minimum price of (MPI) The fraction of additional income market reforms, competition policies labour (the ‘wage’) set by governments spent on imports. The larger the MPI, the and incentive-related policies. May be in the labour market, in order to ensure smaller the Keynesian multiplier. contrasted with interventionist supply side that low-skilled workers can earn a wage policy. high enough to secure them with access marginal propensity to save (MPS) The market-oriented policy A policy to basic goods and services. It is a type of fraction of additional income that is price fl oor. saved. The larger the MPS, the smaller the in which government intervention is Keynesian multiplier. limited, economic decisions are made monetarist/new classical mainly by the private decision-makers model Actually includes two different marginal propensity to tax (MPT) The (fi rms and consumers) and the market models of the macroeconomy (the fraction of additional income that is paid has signifi cant freedom to determine monetarist and the new classical); both as taxes. The larger the MPT, the smaller resource allocation; to be contrasted with are based on the following principles: the Keynesian multiplier. interventionist policy. the importance of the price mechanism marginal revenue The additional Marshall–Lerner condition A condition in coordinating economic activities, revenue arising from the sale of an stating when depreciation or devaluation the concept of competitive market additional unit of output. of a country’s currency will lead to an equilibrium, and thinking about the improvement in that country’s balance economy as a harmonious system marginal social benefi ts (MSB) The of trade: the sum of the price elasticities that automatically tends toward full extra benefi ts to society of consuming one of demand for imports and exports must employment. more unit of a good; are equal to marginal be greater than 1 for the trade balance monetary policy Policy carried out private benefi ts (MPB) when there are no to improve (for a trade defi cit to become consumption externalities. by the central bank, aiming to change smaller). This usually holds over the interest rates in order to infl uence marginal social costs (MSC) The extra longer term, but not in the shorter term aggregate demand; it is a type of demand- costs to society of producing one more (see J-curve). side policy, or demand management. unit of a good; are equal to marginal maximum price A legal price set by the monetary union A high form of private costs (MPC) when there are no government, which is below the market production externalities. economic integration, involving the equilibrium price; this does not allow adoption by a group of countries of a marginal tax rate The tax rate paid on the price to rise to its equilibrium level single currency, such as some of the additional income; refers to the tax rate determined by a free market; also known countries of the European Union (‘euro that applies to the highest tax bracket of as a price ceiling. zone’ countries) that have adopted the an individual’s personal income. merit goods Goods that are held to euro. Monetary integration in addition involves the adoption of a common market Any kind of arrangement where be desirable for consumers, but which monetary policy carried out by a single buyers and sellers of a particular good, are underprovided by the market. central bank, which is necessitated by the service or resource are linked together to Reasons for underprovision may be that use of a single currency. carry out an exchange. the good has positive externalities, or consumers with low incomes cannot money Anything that is acceptable as market demand Refers to the sum of all afford it (and so do not demand it), or payment for goods and services; more individual consumer demands for a good consumer ignorance about the benefi ts of precisely, money consists of currency or service. the good. (coins and paper money) and checking market equilibrium Occurs where micro-credit A programme to provide accounts. quantity demanded is equal to quantity credit (loans) in small amounts to people monopolistic competition One of supplied, and there is no tendency for the who do not ordinarily have access to the four market structures, with the price or quantity to change. credit. ‘Micro’ is the Greek word for following characteristics: a large number ‘small’, and refers to the small amounts of market failure Occurs when the of fi rms; substantial control over market the loans, the very small size of businesses market fails to allocate resources price; product differentiation; no or activities that are fi nanced by the effi ciently, or to provide the quantity barriers to entry. Examples include the loans (very small businesses are known and combination of goods and services shoe, clothing, detergent, computer, as ‘micro-enterprises’) and the short mostly wanted by society. Market publishing, furniture and restaurant repayment periods involved. failure results in allocative ineffi ciency, industries. 548 Glossary monopoly One of the four market natural rate of unemployment activities, including emergency assistance, structures, with the following Unemployment that occurs when the promotion of sustainable development, characteristics: a single or dominant economy is producing at its potential poverty alleviation, protection of child large fi rm in the industry; signifi cant or full employment level of output health, provision of technical assistance, control over price; produces and sells a (real GDP), and is equal to the sum and many more. unique product with no close substitutes; of structural, frictional plus seasonal high barriers to entry into the industry. unemployment. non-price competition Occurs when Examples include telephone, water and fi rms compete with each other on the electricity companies in areas where they necessities Goods that are necessary or basis of methods other than price (such operate as a single supplier. essential: they have a price inelastic demand as product differentiation, advertising (PED<1) and income inelastic demand and branding). Non-price competition monopoly power Occurs whenever a (YED<1). To be contrasted with luxuries. occurs in oligopoly and monopolistic fi rm has the ability to control the price of competition. the product it sells (also known as ‘market negative causal relationship A power’). relationship between two variables in non-price determinants of demand The which an increase in the value of one variables (other than price) that can multilateral development assistance causes a decrease in the value of the other, infl uence demand, and that determine the Lending to developing countries for the i.e. the two variables change in opposite position of a demand curve; a change in purpose of assisting their development directions; also known as an indirect any determinant of demand causes a shift on non-concessional terms (market rates relationship. of the demand curve, which is referred to of interest and repayment periods) by as a ‘change in demand’. multilateral organisations, i.e. organisations negative externality A type of composed of many countries, including externality where the side-effects on non-price determinants of supply The development banks such as the World third parties are negative or harmful, also variables (other than price) that can Bank, and the International Monetary known as ‘spillover costs’. To be contrasted infl uence supply, and that determine the Fund; to be contrasted with foreign aid. with positive externality; see also externality. position of a supply curve; a change in any determinant of supply causes a shift of multilateral trade agreement A negative externality of consumption A the supply curve, which is referred to as a trade agreement (or agreement to lower negative externality caused by ‘change in supply’. international trade barriers) between many consumption activities, leading to a countries; at the present time these are situation where marginal social benefi ts non-price rationing The apportioning mainly carried out within the framework are less than marginal private benefi ts or distributing of goods among interested of the World Trade Organization (WTO), and (MSB < MPB); see also externality and users/buyers through means other than involve agreements between WTO member negative externality. price, often necessary when there are price ceilings (maximum prices); may include countries. May be contrasted with bilateral negative externality of production A trade agreement and regional trade agreement. waiting in line (queues) and underground negative externality caused by production markets; to be contrasted with ‘price multinational corporation (MNC) A activities, leading to a situation where rationing’, which involves distributing fi rm involved in foreign direct investment marginal social costs are greater than goods among users by means of market- (FDI); it is a fi rm that is based in one marginal private costs (MSC > MPC); see determined prices. country (the home country) and that also externality and negative externality. non-produced, non-fi nancial assets A undertakes productive investments in net exports Refers to the value of exports another country (the host country). part of the capital account of the balance minus the value of imports. of payments, which includes a variety multiplier See Keynesian multiplier. nominal GDP Gross domestic product of items such as mineral rights, forestry rights, fi shing rights and airspace. national income The total income of an measured in terms of current (or nominal) economy, often used interchangeably with prices, which are prices prevailing at the non-rivalrous A characteristic of some the value of aggregate output, particularly time of measurement. Does not account goods where the consumption of the in the context of macroeconomic models for changes in the price level; to be good by one person does not reduce (such as the AD-AS model). distinguished from real GDP. consumption by someone else; it is one of the two characteristics of public goods (to national income statistics Statistical nominal value Value that is in money terms, measured in terms of prices that be contrasted with rivalrous). See also non- data used to measure an economy’s excludable. national income and output as well as prevail at the time of measurement, and other measures of economic performance. that does not account for changes in the normal good A good the demand price level; to be distinguished from real for which varies positively (or directly) nationalisation A transfer in ownership values. with income; this means that as income of a fi rm away from the private sector increases, demand for the good increases. and toward government ownership; a non-collusive oligopoly A type of nationalised fi rm is a government-owned oligopoly where fi rms do not make normal profi t The minimum amount fi rm. agreements among themselves (i.e. do of revenue that a fi rm must receive not collude) in order to fi x prices or so that it keeps the business running natural capital Refers to an expanded collaborate in some way. See the kinked (as opposed to shutting down); also meaning of the factor of production land, demand curve, one of the better-known defi ned as the amount of revenue including everything that is included in models of non-collusive oligopoly. needed to cover implicit costs, including land plus additional natural resources non-excludable A characteristic of some entrepreneurship. (This presupposes that occurring naturally in the environment total revenue is also enough to cover such as the air, biodiversity, soil quality, goods where it is not possible to exclude someone from using a good, because it is explicit costs.) Normal profi t is included the ozone layer and the global climate. Is among the economic costs of the fi rm, considered to be a type of ‘capital’ because not possible to charge a price; it is one of the two characteristics of public goods (to and is earned when economic profi t is it provides a stream of future benefi ts as zero. it is necessary for humankind’s ability to be contrasted with excludable). See also live, survive and produce in the future. non-rivalrous. normative economics The body of non-governmental organisations economics based on normative statements, natural monopoly A single fi rm (a which involve beliefs, or value judgements monopoly) that can produce for the entire (NGOs) Non-profi t organisations that provide a very wide range of services and about what ought to be. Normative market at a lower average cost than two statements cannot be true or false; they or more smaller fi rms. This happens when humanitarian functions; in developing countries they provide foreign aid, can only be assessed relative to beliefs and the market demand for the monopolist’s value judgements. Normative economics product is within the range of falling all of which takes the form of grants (there are no loans involved). They are forms the basis of economic policies; to be long-run average cost, where there are contrasted with positive economics. economies of scale. involved with an enormous range of Glossary 549 Offi cial Development Assistance perfectly elastic supply Refers to a price positive externality A type of externality (ODA) The most important part of elasticity of supply value of infi nity, and where the side-effects on third parties foreign aid, referring to foreign aid that is arises in the case of a horizontal supply are positive or benefi cial, also known as offered by countries or by international curve; see price elasticity of supply. ‘spillover benefi ts’; to be contrasted with organisations composed of a number of negative externality; see also externality. countries (it does not include aid offered perfectly inelastic demand Refers to a by non-governmental organisations). price elasticity of demand value of zero, positive externality of consumption A and arises in the case of a vertical demand positive externality caused by consumption oligopoly One of the four market curve; see price elasticity of demand. activities, leading to a situation where structures, with the following marginal social benefi ts are greater than characteristics: small number of large perfectly inelastic supply Refers to a marginal private benefi ts (MSB > MPB); see fi rms in the industry; fi rms have price elasticity of supply value of zero, and also externality and positive externality. signifi cant control over price; fi rms arises in the case of a vertical supply curve; are interdependent; products may be see price elasticity of supply. positive externality of production A positive externality caused by production differentiated or homogeneous; there are personal income taxes Taxes paid by high barriers to entry. Examples include activities, leading to a situation where households or individuals in households marginal social costs are less than the car industry, airlines, electrical on all forms of income, including wages, appliances (differentiated products) and marginal private costs (MSC < MPC); see rental income, interest income, and also externality and positive externality. the steel, aluminium, copper, cement dividends (income from ownership industries (homogeneous products). of shares in a company); is the most potential output (potential GDP) The open collusion See formal collusion. important source of government tax level of output (real GDP) that can be revenues in many countries (especially produced when there is ‘full employment’, open economy An economy that economically more developed countries). meaning that unemployment is equal to has international trade: (imports and the natural rate of unemployment; also exports) usually appears in connection Phillips curve A curve showing the known as the full employment level of output. with economic theories and models relationship between unemployment and as virtually all economies in the real infl ation. The short-run Phillips curve poverty The inability of an individual world are open economies (though to shows a negative relationship between the or family to afford an adequate standard varying degrees). To be contrasted with rate of infl ation and the unemployment of goods and services; this standard may closed economy. rate (as the rate of infl ation increases, be absolute or relative; see absolute poverty unemployment falls) suggesting that in and relative poverty. opportunity cost The value of the next the short run policy-makers can choose best alternative that must be given up or between the competing alternatives of poverty cycle Arises when low incomes sacrifi ced in order to obtain something low infl ation or low unemployment result in low (or zero) savings, permitting else. by selecting appropriate demand-side only low (or zero) investments in physical, policies. The long-run Phillips curve human and natural capital, and therefore output approach A method used to is a vertical line at the natural rate of low productivity of labour and of land, measure the value of aggregate output of unemployment, indicating that there is which in turn gives rise to low, if any, an economy, which calculates the value no negative relationship between infl ation growth in income (sometimes growth of all fi nal goods and services produced in and unemployment, and suggesting may be negative), and hence low incomes the country within a given time period. that policy-makers do not have a choice once again. A poverty cycle may occur As suggested by the circular fl ow model, between the two competing alternatives. in a family, a community, a part of an it is equivalent to measurement by the In the long run, the only impact of economy, or in an economy as a whole. expenditure approach and the income an increase in aggregate demand is to An important feature of the poverty approach. increase the rate of infl ation, while the cycle is that poverty is transmitted from generation to generation. overallocation of resources Occurs level of real output is unaffected and the when too many resources are allocated to unemployment rate remains unchanged at poverty trap See poverty cycle. the production of a good relative to what the natural rate of unemployment. preferential trade agreement An is socially most desirable, resulting in its physical capital One of the factors of overproduction. agreement between two or more countries production, which is itself produced (it to lower trade barriers between them on overvalued currency A currency whose doesn’t occur naturally), used to produce particular products, resulting in easier value is higher than its free-market value; goods and services; includes machinery, access to the markets of other members for may occur if the exchange rate is fi xed tools, factories, buildings, road systems, the selected products, compared with the (or pegged), or in a managed exchange airports, telephone supply lines, etc. Also access of countries that are not members. rate system, but not in a freely fl oating referred to as ‘capital’, or ‘capital good’ or exchange rate system. To be contrasted ‘investment good’. price ceiling A maximum price set by with undervalued currency. the government for a particular good, portfolio investment Financial meaning that the price that can be legally parallel market See underground investment, including investment in charged by the sellers of the good cannot market. stocks and bonds. Appears as an item in be higher than the legal maximum price. the fi nancial account of the balance of Results in a shortage of the product. per capita Per person, or per head. For payments. example, GDP per capita is total GDP price competition Occurs when a fi rm divided by the number of people in the positive causal relationship A lowers its price to attract customers away population. relationship between two variables in from rival fi rms, thus increasing sales at which an increase in the value of one the expense of other fi rms. May occur in perfect competition One of the four causes an increase in the value of the the case of monopolistic competition or market structures, with the following other, i.e. the two variables change in the oligopoly, but not in perfect competition characteristics: a large number of small same direction; also known as a direct (or monopoly). fi rms; no control over price; all fi rms sell relationship. a homogeneous product; no barriers to price control Setting of minimum or entry, perfect information and perfect positive economics The body of maximum prices by the government (or resource mobility. Examples include economics based on positive statements, private organisations) so that prices are agricultural commodity markets and the which are about things that are, were or unable to adjust to their equilibrium level foreign exchange market. will be. Positive statements may be true determined by demand and supply. Price or false. They form the basis of theories controls result in shortages or surpluses. perfectly elastic demand Refers to a and models that try to explain economic price elasticity of demand value of infi nity, events. To be contrasted with normative price defl ator A price index used to and arises in the case of a horizontal economics. calculate real GDP from nominal GDP; demand curve; see price elasticity of demand. better known as the ‘GDP defl ator’. 550 Glossary price discrimination The practice of tries to capture market shares from rival is full employment of resources and charging a different price for the same fi rms; results in lower profi ts for fi rms. productive effi ciency. product when the price difference is not production possibilities curve (PPC) A justifi ed by differences in costs of production. prices as incentives The ability of prices, and changes in prices, to convey curve showing production possibilities. price elastic demand Relatively high information to consumers and producers production possibilities frontier responsiveness of demand to changes in that motivates them to respond by (PPF) See production possibilities curve. price; PED (price elasticity of demand) > 1. offering them incentives to behave in See price elasticity of demand. their best-self-interest; compare with prices productive effi ciency Occurs when as signals, which together with prices as fi rms produce at the lowest possible cost; price elastic supply Relatively high incentives lead to an effi cient allocation of is one of the conditions for producing on responsiveness of supply to changes in resources (assuming no market failures). the production possibilities curve (PPC). price; PES (price elasticity of supply) > 1. The condition for productive effi ciency is See price elasticity of supply. prices as signals The ability of prices, that production takes place where ATC is and changes in prices, to communicate minimum. price elasticity of demand (PED) A information to consumers and producers, measure of the responsiveness of the quantity on the basis of which they make economic productivity Refers to the quantity of of a good demanded to changes in its price, decisions. output produced for each hour of work of given by the percentage change in quantity the working population; for an economy demanded divided by the percentage primary commodity Any product that as a whole it can be measured as real GDP change in price. In general, if there is a large is produced in the primary sector, which divided by the total number of hours responsiveness of quantity demanded (PED includes agriculture, forestry, fi shing and worked. Increases in productivity are a > 1), demand is referred to as being elastic; the extractive industries; also known as major factor leading to economic growth. if there is a small responsiveness (PED < 1), ‘commodity’. profi t A payment, per unit of time, to demand is inelastic. primary products All products produced owners of entrepreneurship/management price elasticity of supply (PES) A in the primary sector of an economy; also (a factor of production). See economic profi t measure of the responsiveness of the known as commodities; see primary sector. and normal profi t. quantity of a good supplied to changes in profi t maximisation The goal of fi rms, its price, given by the percentage change primary sector A part of an economy that is dominated by agriculture, also according to the standard theory of the fi rm. in quantity supplied divided by the It involves making profi t as large as possible, percentage change in price. In general, if including fi shing, forestry and all extractive activities (such as mining). and is achieved by producing the level of there is a large responsiveness of quantity output where the difference between total supplied (PES > 1), supply is referred prisoner’s dilemma A problem in game revenue and total costs is the largest, or where to as being elastic; if there is a small theory showing that in some situations, marginal cost is equal to marginal revenue. responsiveness (PES < 1), supply is inelastic. although it is in the best interests of programme aid Foreign aid involving decision-makers to co-operate, when each price fl oor A minimum price set by fi nancial support to sectors, such as education, actor acts in his/her best interests there the government for a particular good, health care, agriculture, urban development, results an outcome where they are all worse meaning that the price that can be legally the fi nancial sector (credit, banking, off. Is often used to illustrate the strategic charged by the sellers of the good cannot insurance), the environment, or others. be lower than the legal minimum price. interdependence of oligopolistic fi rms. Results in a surplus of the product. progressive taxation Taxation where, private good A good that is both as income increases, the fraction of price inelastic demand Relatively low rivalrous and excludable. To be contrasted income paid as taxes increases; there is an responsiveness of demand to changes in with public good. increasing tax rate. price; PED (price elasticity of demand) < 1. privatisation A transfer of ownership project aid Foreign aid involving support See price elasticity of demand. from the public sector (the government) to for specifi c projects, such as building price inelastic supply Relatively low the private sector, i.e. private owners. schools, clinics, hospitals, irrigation systems, other agricultural infrastructure, or others. responsiveness of supply to changes in producer price index (PPI) Consists price; PES (price elasticity of supply) < 1. of several indices of prices received by proportional taxation Taxation where, See price elasticity supply. producers of goods at various stages in the as income increases, the fraction of price leadership A type of tacit (or production process (such as a PPI for inputs, income paid as taxes remains constant; informal) collusion among oligopolistic a PPI for intermediate goods, and a PPI for there is a constant tax rate. fi nal goods); considered to be predictors of fi rms, where a dominant fi rm in the protection of trade See trade protection. industry (which may be the largest, or the changes in the consumer price index (CPI) one with lowest costs) sets a price and also because they measure price changes at an public debt Refers to the government’s initiates any price changes; the remaining earlier stage in the production process. accumulation of budget defi cits minus budget surpluses; is the total amount fi rms in the industry become price-takers, producer surplus Refers to the difference owed by the government to all creditors accepting the price that has been established between the price received by fi rms for (lenders); also known as ‘government debt’. by the leader. Under price leadership price selling their good and the lowest price changes tend to be infrequent, and are they are willing to accept to produce the public good A good that is non-rivalrous undertaken by the leader only when major good. In a diagram, it is shown as the area (its consumption by one person does not demand or cost changes occur. under the price received by producers and reduce consumption by someone else) and price support Minimum prices (or above the supply curve. non-excludable (it is not possible to exclude someone from using the good). Since it is price fl oors) set by the government product differentiation Occurs when not possible to exclude someone from using for agricultural products; see minimum price. each fi rm in an industry tries to make the good even though they do not pay for it, its product different from those of its price taker A fi rm that accepts a price at fi rms do not have an incentive to produce it. competitors; usually in order to create which it sells its product. Usually refers to Public goods are therefore provided by the some monopoly power; products can be fi rms in perfect competition, which being government. This is a type of market failure. small and numerous have no control differentiated by physical differences, over price, and therefore accept the price quality differences, location, services, and purchasing power parity (PPP) exchange determined in the market; may also be product image. rates Special exchange rates between used to refer to fi rms in oligopoly that currencies that makes the buying power of production possibilities All possible each currency equal to the buying power practice tacit collusion and accept a price combinations of the maximum amounts set by a price leader (see price leadership). of US$1, and therefore equal to each other. of two goods that can produced by an The use of PPP exchange rates to convert price war Competitive price-cutting by economy, given fi xed and unchanging GDP (or GNI or any other output or fi rms; usually in oligopoly. As each one resources and technology, when there income variable) eliminates the infl uence Glossary 551 of price level differences across countries taken to be a particular percentage (often short run (i) In microeconomics, it is a and is very important for making cross- 50%) of society’s median income. As time period during which at least one input country comparisons. incomes increase and the median income is fi xed and cannot be changed by the fi rm. rises, the standard also rises. (ii) In macroeconomics, it is the period of quintiles Division of a population into time during which the prices of resources, fi ve equal groups with respect to the rent A payment, per unit of time, to particularly the price of labour (wages) do distribution of a variable, such as income; owners of land resources who supply their not change (they are constant). for example, the lowest income quintile land to the production process. refers to 20% of the population with the short-run aggregate supply (SRAS) lowest income. reserve assets Refers to foreign currency curve A curve showing the relationship reserves that the central bank maintains between the price level and the quantity quota A type of trade protection that and can buy or sell to infl uence the value of real GDP produced by fi rms when involves setting a legal limit to the of the country’s currency exchange rate; resource prices do not change. quantity of a good that can be imported in the balance of payments appears as an over a particular time period (typically item in the fi nancial account. Also known short-run equilibrium level of a year). (More generally, a ‘quota’ is a as ‘offi cial reserves’. output In the monetarist/new classical limited or fi xed number of things.) model, it is the level of output (real resources Factors of production, used by GDP) determined by the intersection rate of interest See interest rate. fi rms as inputs in the production process; of the aggregate demand and short run see factors of production. aggregate supply curves; in the Keynesian rational economic decision- model, it is the level of output determined making The assumption in economics resource allocation Assigning available by the intersection of the aggregate that all economic decision-makers resources, or factors or production, to demand and Keynesian aggregate supply act in their best self-interest, trying to specifi c uses chosen among many possible curves. In both models, equilibrium may maximise the satisfaction or benefi t they and competing alternatives; involves occur where there is (i) a recessionary receive from their economic decisions; answering the ‘what to produce’ and ‘how (defl ationary) gap, (ii) an infl ationary gap, for example consumers try to maximise to produce’ basic economic questions. or (iii) full employment output. the satisfaction of consumption, fi rms maximise profi t, workers try to secure the returns to scale Refers to the short-run Phillips curve See Phillips highest wage possible, etc. relationship between inputs and output, curve. and in particular by how much output real GDP Gross domestic product (GDP) changes if all inputs change (increase or shortage In the context of demand and measured in constant prices, i.e. prices decrease) by the same proportion; see supply, is the amount by which quantity that prevail in one particular year, called constant, increasing and decreasing returns demanded is greater than quantity a ‘base year’; this is useful for making to scale. supplied. comparisons of changes in GDP over time shut-down price The price at which that have taken into account the infl uence revaluation (of a currency) Refers to an of changing prices. increase in the value of a currency in the a fi rm that is making losses and will context of a fi xed exchange rate system stop producing in the short run. In real value Value that has eliminated the (compare with appreciation, which is an perfect competition, it is given by price = infl uence of changes in the price level. increase in currency value in the contest minimum average variable cost. (If price is of a fl oating or managed exchange rate greater than average variable cost, the fi rm reallocation of resources Refers to system). reassigning resources to particular uses, so will go on producing in the short run even that the allocation of resources changes revenue maximisation The objective if it is making a loss.) and becomes a new allocation. of some fi rms to maximise revenue (rather than profi t, as assumed by the slope In the case of a straight line, refers recession An economic contraction, standard theory of the fi rm). The revenue- to the change in the dependent variable where there is falling real GDP (negative maximising fi rm produces the level of divided by the change in the independent growth) and increasing unemployment of output where its marginal revenue is equal variable between any two points on resources which last six months or more. to zero (as that is where total revenue is the line. According to mathematical maximum). convention, where the dependent recessionary gap A situation where variable is plotted on the vertical axis, real GDP is less than potential GDP, and rivalrous A characteristic of a good the slope is the ‘rise over run’ (i.e. the unemployment is greater than the natural according to which its consumption by vertical change divided by the horizontal rate of unemployment; it arises when the one person reduces its availability for change), however in microeconomics AD curve intersects the SRAS curve at a someone else; most goods are rivalrous. It where quantity, the dependent variable, is lower level of real GDP than potential is one of the two characteristics of ‘private plotted on the horizontal axis, the slope is GDP. Also known as ‘defl ationary gap’. goods’. See also excludable. the ‘run over rise’ (the horizontal change divided by the vertical change). redistribution of income Refers to satisfi cing A goal of fi rms to achieve changing the distribution of income, satisfactory results, rather than pursue a social optimum Refers to a situation giving rise to a new distribution. single maximising objective, such as to that is the best from the social point of regional trade agreement A trade maximise profi ts or revenues; based on the view, determined by the achievement agreement (or agreement to lower argument that large, modern fi rms have of allocative effi ciency (or economic international trade barriers) between numerous objectives which may partly effi ciency); occurs when marginal social overlap or confl ict, thus forcing them to benefi ts are equal to marginal social costs several countries that are located within = a geographical region (such as NAFTA, or compromise and reconcile confl icts, rather (MSB MSC). North American Free Trade Agreement). than pursue optimal results. social safety net A system of May be contrasted with bilateral trade scarcity The condition in which government transfers of cash or goods to agreement and multilateral trade agreement. available resources (land, labour, capital, vulnerable groups, undertaken to ensure that these groups do not fall below a regressive taxation Taxation where, entrepreneurship) are limited; they are not socially acceptable minimum standard of as income increases, the fraction of enough to produce everything that human living; see also transfer payments. income paid as taxes decreases; there is a beings need and want. decreasing tax rate. seasonal unemployment A type of social sciences Academic disciplines unemployment that occurs when the that study human society and social relative poverty The inability of relationships, concerned with discovering an individual or a family to afford an demand for labour in certain industries changes on a seasonal basis because of general principles describing how societies adequate standard of goods and services, function and are organised; include where the adequate standard is relative variations in needs; for example, farm workers are hired during peak harvesting anthropology, economics, political and changes over time; this standard is science, psychology, sociology and others. defi ned as what is ‘typical’ in a society, seasons and let off for the rest of the year. 552 Glossary social scientifi c method The same as substitute goods Two or more goods economy to continue to produce and the scientifi c method, it is a method of that satisfy a similar need, so that one satisfy needs and wants into the future; investigation used in sciences and social good can be used in place of another. If depends crucially on the preservation sciences allowing the accumulation of two goods are substitutes, an increase in of the environment over time. scientifi c and social scientifi c knowledge; the price of one leads to an increase in the Related to the concept of sustainable involves making a hypothesis based on demand for the other. development, meaning ‘Development observations, testing the hypothesis, and which meets the needs of the present rejecting or accepting the hypothesis supernormal profi t Refers to positive without compromising the ability of based on empirical (real-world) evidence. economic profi t, arising when total future generations to meet their own revenue is greater than total economic needs’ (according to the Brundtland social surplus The sum of consumer costs (implicit plus explicit costs); is also Commission), which is the idea that the and producer surplus; it is maximum in known as ‘abnormal profi t’. See economic use of natural resources in the present a competitive market with no market profi t. should not leave behind fewer or lower failures. See consumer surplus and producer quality resources for use by future surplus. supply Indicates the various quantities of a good that fi rms (or a fi rm) are willing generations. social welfare See welfare. and able to produce and sell at different tacit collusion Refers to cooperation possible prices during a particular time spare capacity Refers to physical capital that is implicit or understood between period, ceteris paribus (all other things cooperating oligopolistic fi rms, that fi rms have available but do not being equal). use; arises in a recession when there is without a formal agreement, with unemployment of resources. supply curve A curve showing the the objectives to coordinate prices, relationship between the quantities of avoid competitive price-cutting, limit specialisation Occurs when a fi rm a good that fi rms (or a fi rm) are willing competition, reduce uncertainties and or a country concentrates production and able to produce and sell during a increase profi ts; may take the form of on one or a few goods and services. In particular time period and their respective price leadership. international trade theory, specialisation prices, ceteris paribus (all other things being tariffs Taxes on imported goods; forms the basis for the gains from trade, equal). arising when countries specialise according they are the most common form of to their comparative advantage, and when supply of money The amount of money trade restriction. Tariffs may serve two fi rms specialise in production of goods in circulation, determined by the central purposes: to protect a domestic industry and services that offer them economies of bank of a country; in combination with from foreign competition (a protective scale. Specialisation of labour occurs when the demand for money, the supply of tariff); or to raise revenue for the workers perform one or a few tasks, and is money determines the equilibrium rate of government (a revenue tariff). Whatever one factor leading to economies of scale. interest. (In practice central banks have the purpose, the impacts on the economy diffi culties in accurately controlling the are the same. specifi c tax A tax calculated as an supply of money.) absolute amount per unit of the good or tax incidence Refers to the burden of a service sold. supply shock Events that have a tax, or those who are the ultimate payers sudden and strong impact on short-run of the tax. speculation (currency) Buying and aggregate supply (SRAS), leading to SRAS selling of something in the hope of technical effi ciency See productive curve shifts; for example, a war or violent effi ciency. making a profi t. ‘Currency speculation’ confl ict that destroys physical capital involves buying and selling currencies and disrupts the economy, favourable or terms of trade Relates the prices a based on expectations of changes in the unfavourable weather conditions, etc. country receives for its exports to the value of a currency (exchange rates) in prices paid for its imports, and is given order to make a profi t in the future. supply-side policies A variety of policies by the ratio of index of average export that focus on aggregate supply, namely stagfl ation Arising from a combination prices to index of average import prices factors aiming to shift the long-run times 100. An increase in the value of the works ‘stagnation’ and ‘infl ation’, aggregate supply (LRAS) curve to the right, refers to the simultaneous appearance of of this ratio indicates a terms of trade in order to achieve long-term economic improvement, meaning that a country infl ation and recession (and therefore also growth. They do not attempt to stabilise unemployment). can now buy more imports for the same the economy (i.e. to reduce the severity amount of exports; a decrease in the value strategic interdependence Characteristic of the business cycle). There are two of this ratio indicates a terms of trade of oligopolies, refers to the mutual major categories of supply-side policies: deterioration, meaning that a country interdependence of fi rms and their strategic market-based and interventionist. To be can now buy fewer imports for the same behaviour (planning their actions based on contrasted with demand-side policies. amount of exports. guesses about what their rivals will do), in surplus In general, this is the excess of view of the expectation that what happens theory of absolute advantage According something over something else to which to this theory, if countries specialise in to the profi ts of one fi rm depends on the it is being compared. (i) In the context of strategies adopted by the other fi rms. and export the goods in which they have demand and supply, it is the extra supply an absolute advantage (can produce structural unemployment A type of that results when quantity supplied is with fewer resources), there results an unemployment that occurs as a result greater than quantity demanded. (ii) In the improvement in resource allocation and of technological changes and changing case of consumer and producer surplus, increased production and consumption in patterns of demand (causing changes it is the extra benefi t consumers get by each country. in demand for labour skills), as well as paying less for a good than the amount changes in the geographical location of they are willing to pay, or the extra benefi t theory of comparative jobs, and labour market rigidities. producers get by receiving a higher price advantage According to this theory (also for the good they are selling than the price known as a law), as long as opportunity subsidy An amount of money paid by they are willing to receive. (iii) In the case costs in two (or more) countries differ, the government to fi rms for a variety of the government budget, a surplus occurs it is possible for all countries to gain of reasons: to prevent an industry from when government revenues are greater from specialisation and trade according failing, to support producers’ incomes, or than government expenditures. (iv) In to their comparative advantage; this as a form of protection against imports the balance of payments, a surplus in an results in an improvement in the global (due to the lower costs and lower prices account occurs when the credits (infl ows allocation of resources, resulting in greater that arise from the subsidy). A subsidy of money from abroad) are larger than global output and consumption. Is a given to a fi rm results in a higher level the debits (outfl ows of money to other more powerful explanation of the gains of output and lower price for consumers. countries). from trade than the theory of absolute May also be paid to consumers as fi nancial advantage. assistance or for income redistribution. sustainability Refers to maintaining the ability of the environment and the Glossary 553 third degree price discrimination See also free trade area, customs union and value of output fl ow In the circular fl ow Occurs when a fi rm price discriminates common market. of income model, refers to the value of (i.e. changes different prices that are not output that is sold by fi rms and purchased justifi ed by difference in costs) among transfer payments Payments made by by consumers, which is equal to the different consumer groups; is based on the the government to individuals specifi cally expenditure fl ow and the income fl ow. principle that different consumer groups for the purpose of redistributing income, have different price elasticities of demand thus transferring income from those who variable costs Costs that arise from the (PED) for a product, so that higher prices are work and pay taxes towards those who use of variable inputs, and that vary or charged to consumers with a lower PED and cannot work and need assistance. Groups change as output increases or decreases lower prices to consumers with a higher PED. receiving transfer payments may include (hence they are ‘variable’). An example of older people, sick people, very poor people, a variable cost is wages, or the payment tied aid The practice whereby donors children of poor families, unemployed for labour resources (a variable input). make the recipients of foreign aid spend people and others; in their entirety they a portion of the borrowed funds on the are referred to as ‘vulnerable groups’. wage A payment, per unit of time, to purchase of goods and services from those who provide labour; this includes all the donor country. It occurs only in the underallocation of resources Occurs wages and salaries, as well as supplements context of bilateral (not multilateral) aid. when too few resources are allocated to (such as bonuses and commissions). the production of a good relative to what tight monetary policy See contractionary is socially most desirable, resulting in its weighted price index A measure of monetary policy. underproduction. average prices in one period relative to average prices in a reference period called total costs The sum of fi xed and variable underemployment The number of a base period; a weighted price index is costs. underemployed people, defi ned as all a price index that ‘weights’ the various people above a particular age (i.e. not goods and services according to their total product The total quantity of children) who have part-time jobs when relative importance. In the consumer output produced by a fi rm. they would prefer to have full-time jobs; price index (CPI), goods and services total revenue The amount of money or have jobs that do not make full use of are weighted according to their relative their skills and education. importance in consumer spending. received by fi rms when they sell a good (or service); it is equal to the price (P) of the underground market Refers to a market welfare In general, refers to the well- good times the quantity (Q) of the good that arises whenever a buying/selling being of a population. In microeconomics, sold. Therefore total revenue = P × Q. transaction is unrecorded; may involve it is measured by the amount of social legal goods and services (such as plumbing surplus (consumer and producer surplus) tradable permits Permits that can done by a plumber who does not report that is generated in a market. Welfare is be issued to fi rms by a government or the income) or illegal goods and services greatest, i.e. social surplus is greatest, in an international body, and that can be (such as drugs). May also arise due to the competitive market equilibrium when traded (bought and sold) in a market, the imposition of price ceilings leading to there are no externalities, and marginal objective being to limit the total amount shortages. Also known as ‘parallel market’. social benefi ts are equal to marginal social of pollutants emitted by the fi rms. If a costs (MSB=MSC). fi rm can produce its product by emitting a undervalued currency A currency lower level of pollutants than the level set whose value is lower than its free-market welfare loss Refers to loss of a portion of by its permits, it can sell its extra permits value; may occur if the exchange rate social surplus that arises when marginal in the market. If a fi rm needs to emit more is fi xed (or pegged), or in a managed social benefi ts are not equal to marginal ≠ pollutants than the level set by its permits, exchange rate system, but not in a freely social costs (MSB MSC), due to market it can buy more permits in the market. fl oating exchange rate system. To be failure. contrasted with overvalued currency. Tradable permits are part of cap-and-trade withdrawals See leakages. schemes. unemployment The number of World Bank A development assistance unemployed people, defi ned as all people trade creation The replacement of organisation, composed of 185 member above a particular age (i.e. not children) higher cost products (imported or countries which are its joint owners, who are not working and who are actively domestically produced) by lower cost that extends long-term credit (loans) to looking for a job. imports that results when a trading bloc is developing country governments for formed and trade barriers are removed. (To unemployment rate A measure of the the purpose of promoting economic be contrasted with trade diversion.) amount of unemployment in an economy, development and structural change. trade diversion The replacement expressed as a percentage, calculated by It consists of two organisations: the of lower cost products (imported or taking the total number of unemployed International Bank for Reconstruction domestically produced) by higher cost people in an economy and dividing by the and Development (IBRD), which lends imports that results when a trading bloc is labour force, and multiplying by 100. to middle income countries on non- formed and trade barriers are removed. (To concessional (i.e. commercial) terms unit elastic demand Refers to a price be contrasted with trade creation.) (therefore its activities and lending do elasticity of demand value of one; see price not form part of foreign aid); and the trade liberalisation The policy of elasticity of demand. International Development Association liberalising (freeing up) international (IDA), which has similar activities to the unit elastic supply Refers to a price trade by eliminating trade protection and IBRD but extends loans to low income elasticity of supply value of one; see price barriers to trade (i.e. tariffs, quotas, etc.) countries on highly concessional terms; elasticity of supply. these activities form part of foreign aid trade protection Government urban informal sector That part of (see concessional loans). About 75% of intervention in international trade an urban economy that lies outside the World Bank lending is through the IBRD. through the imposition of trade formal economy, consisting of economic restrictions (or barriers) to prevent the World Trade Organization (WTO) An activities that are unregistered and legally free entry of imports into a country and international organisation that provides unregulated. In developing countries these protect the domestic economy from the institutional and legal framework for activities are often a very large part of foreign competition. the trading system that exists between the urban economy; unlike in developed member nations worldwide, responsible countries, where they are usually pursued trading bloc A group of countries for liberalising trade, operating a system of to avoid taxes and labour laws, in that have agreed to reduce tariff and trade rules and providing a forum for trade developing countries they are a matter of other barriers to trade for the purpose of negotiations between governments, and physical survival of substantial portions of encouraging the development of free or for settling trade disputes. freer trade and cooperation between them. the population.

554 Glossary