Definitions Flashcards
Economics
Economics is the study of how a society uses its scarce resources to satisfy its wants.
Scarcity
A situation in which resources are not enough to satisfy everybody’s wants.
Opportunity cost
The value of the best alternative given up by a decision to do something else.
Positive statements
Objective statements that can be tested based on empirical or actual evidence.
Normative statements
Subjective statements based on value judgments.
Ceteris paribus
With other things held constant.
Free market
An economic system where decisions are made by individual buyers and sellers who act in their own self interest, where consumers aim to maximise utility while producers aim to maximise profit.
Planned economies
An economic system where economic decisions are made by the state or government.
Production Possibility Curve (PPC)
A PPC shows the combinations of two products that can be produced by an economy with full use of all resources, using the best available production methods.
Free good
A good that does not require scarce resources.
Public good
Non-excludable and non-rivalrous good.
Non-excludable
Costly, impossible for one user to exclude others from using a good.
Non-rivalrous
When one person uses a good, it does not prevent others from using it.
Merit goods
Goods where people do not realise the true personal benefit and have positive externalities.
Demerit goods
Goods which harms the consumer and have negative externalities.
Demand
The quantity that buyers are willing and able to buy at a particular price.
Normal goods
When there is an increase in income, demand for normal goods increases.
Inferior goods
When there is an increase in income, demand for inferior goods decreases.
Supply
The quantity of a good or service that producers are willing and able to supply at a particular price.
Market price
The price at which buyers want to buy the same quantity that sellers want to sell.
Elasticity
The responsiveness of the quantity demanded to a change in price.
Income Elasticity of Demand (YED)
The responsiveness of demand to a change in the real income of consumers.
Positive YED
When income increases, the demand for the good increases.
Negative YED
When income increases, the demand for the good decreases.
Cross Elasticity of Demand (XED)
The responsiveness of demand for good X following changes in the price of a related good Y.
Price Elasticity of Supply (PES)
The responsiveness of the quantity supplied to a change in the price of a product.
Consumer surplus
The difference between the value a consumer places on units consumed and the payment needed to actually purchase that product.
Producer surplus
The difference bteween the price a producer is willing to accept and what is actually paid.
Tax
Charges imposed by government on incomes, profits and some types of consumer goods and services to fund their expenditure.
Subsidies
A direct payment or grants by government to producers, make the price paid by consumers less than it should be.
Incidence of tax
The extent to which tax burden is borne by producer or the consumer.
Maximum price (price ceiling)
Legal maximum on the price at which a good or servicce can be sold and market price must not exceed this price.
Minimum price (price floor)
Legal minimum on the price at which a good or service can be sold, market must not go below this price.
Transfer payments
Hand-outs or payments made by government to certain members of the community.
National income
Total income for an economy
Gross domestic product (GDP)
Total amout of goods and services produced in an economy during a period of time.
Groos national income (GNI)
Total output produced by a country’s citizens wherever they produce it.
Gross national product (GNP)
GDP + Net property income from abroad (income country’s residents earn on their physical/financial assets minus returns on assets held in the country but owned by foreigners)
Net national income (NNI)
Gross national income minus the depreciation of fixed capital assets through wear and tear and obsolescence.
Basic price
Amount receivable by the producer from the purchaser for a unit of a product minus any tax on the product plus any subsidy on the product.
Open economies
Economies involved in trade with other countries
Closed economies
Economies that do not trade with other economies (self-sufficient)
Circular flow of income
Simple model of the process by which income flows around the economy.
Aggregate demand (AD)
Total spending on goods and servcies at a given price level in the economy in a given time period.
Aggregate supply (AS)
Total output (real GDP) that producers in an economy are willing and able to supply at different price levels in a given period of time.
Short run aggregate supply (SRAS)
Total output of an economy that will be supplied in a period of time on the assumption that price of factors of production remain unchanged.
Long run aggregate supply (LRAS)
Total output of a country supplied in the period when prices of factors of production have fully adjusted to changes in aggregate demand and price level.
Economic growth
An increase in an economy’s output in the short run; increase in a country’s productive potential in the long run.
Nominal GDP
A measure of the value of all final goods and services produced within a country’s borders at current market prices.
Real GDP
A measure of a country’s output in terms of the value of tis goods and services, its investments, its govermment spending and its exports.
Frictional unemployment
Temporary and arises when people are in-between jobs.
Structural unemployment
Caused by changing structure of economic activity.
Cyclical unemployment
Caused by lack of aggregate demand
Inflation
Sustained increase in economy’s price level over a period of time
Consumer price index (CPI)
Shows average changes in prices of a representative basket of products purchased by households.
Retail price index (RPI)
A measure of changes in the prices of consumer goods.
Money values / nominal values
Values at the prices operating at that time.
Real values
Values adjusted for inflation.
Cost-push inflation
Inflation caused by increase in costs of production.
Demand-pull inflation
Inflation caused by increase in aggregate demand (AD) not matched by equivalent increase in aggregate supply (AS).
Deflation
Sustained fall in price level (Negative inflation rate)
Disinflation
Fall in inflation rate (Positive inflation rate)
Economic policy
Deliberate attempt from government to increase economic welfare.
Fiscal policy
The use of taxation and government spending to influence aggregate demand.
Cyclical budget deficit
Budget deficit caused by changes in economic activity.
Structural budget deficit
Budget deficit caused by an imbalance between government spending and taxation.
Direct tax
Tax on income of people and firms and cannot be avoided.
Indirect tax
Tax that is levied on goods or services.
Progressive tax
Takes a higher percentage from those with higher incomes.
Regressive tax
Takes a higher percentage from those with lower incomes.
Monetary policy
Policy instruments to influence the price of quantity of money.
Interest rates
Price of borrowing and the reward for saving.
Money supply
Total amount of money in a country.
Absolute advantage
The ability of a country to produce a product more efficiently than another country.
Comparative advantage
The ability of one country to produce goods at a lower opportunity cost than another country.
Free trade
The exchange of products between countries without any restrictions.
Economic integration
An arrangement among nations that typically includes the reduction or elimination of trade barriers and the coordination of monetary and fiscal policies.
Customs union
A trade bloc where there is free trade between member countries and a common external tariff on imports from non-members.
Economic union
A trade bloc where there is free trade between member countries, a common external tariff and some common economic policies, which may include a common currency.
Trade creation
Where high cost domestic production is replaced by more efficiently produced imports from within the customs union.
Trade diversion
Where trade with a low-cost country outside a customs union is influenced by higher cost products supplied from within.
Trading possibility curve
A curve that shows the effects of a country specialising and training.
Terms of trade
A numerical measure of the relationship between export and import prices.
Tariff
Taxes usually on imports but may also be imposed on exports.
Import duty
Taxes collected on imports and some exports by a country’s customs authorities.
Quota
A non-tariff barrier to trade, restrictions on maximum quantity of imports.
Export subsidies
Payments to domestic producers by the government.
Embargoes
A law that bars trade with another country.
Voluntary export restraint
A situation where two countries make an agreement to limit the volume of their exports to one another over an agreed period of time.
Excessive adminstrative burdens (‘red tape’)
A government may seek to discourage imports by requiring importers to fill out time consuming forms and set artificially high product standards to restrict foreign competition.
Dumping
Refers to the selling of the same good to a foreign country at a lower price than that charged to the domestic buyers and often below the marginal cost of production.
Balance of payments (BOP)
A record or overall statement of a country’s economic transaction with the rest of the world over a period of time.
Capital account
Within the BOP, a record of capital transfer and acquisition and disposal of non-produced, non-financial assets (physical assets).
Marshall-Lerner condition
Currency devaluation will only improve trade balance if sum of PED of imports and exports is greater than one.
Financial account
A record of the transfer of financial assets between the country and the rest of the world.
Net errors and omissions
Figure included to ensure BOP balances.
Hot money
Money flowing out of the country in search to maximise interest or capital gain. (short term)
Nominal exchange rate
Price of one currency in terms of another currency.
Trade weighted exchange rate
The price of one currency against a basket of currencies.
Real effective exchange rate
Measures a currency’s value in terms of its real purchasing power.
Floating exchange rate
Exchange rate that is determined by market forces of demand and supply.
Depreciation
Fall in currency value caused by market forces
Appreciation
Rise in currency value caused by market forces
Fixed exchange rate
An exchange rate set by government and maintained by central bank.
Managed float exchange rate
- Combines features of a floating exchange rate and a fixed exchange rate system.
- Influenced by state intervention.
Devaluation
Decision by government to lower the international price of the currency.
J-curve effect
A fall in exchange rate causing an increase in current account deficit before it reduces due tot he time it takes for demand to respond.
Revaluation
Decision by government to raise the international price of its currency.
Expenditure switching policies
Policy measures designed to encourage people to switch from buying foreign-produced products to buying domestically produced products.
Expenditure dampening policies
Policy measures designed to reduce imports and increases exports by reducing demands.
Automatic stabilisers
Changes in government spending and taxation that occur to reduce fluctuations in aggregate demand without any alteration in government policy.
