International Economics I

Question 1

Define Absolute Advantage

Answer 1

If a country using the same factors of production can produce more of a product, then it has an absolute advantage.

Question 2

Define Absolute Poverty

Answer 2

When people are unable to afford sufficient necessities to maintain
life; those on less than $1.90 a day

Question 3

Define currency appreciation

Answer 3

An increase in the value of the currency using floating exchange rates

Question 4

Define Automatic Stabilisers

Answer 4

Automatic stabilisers are automatic fiscal changes as the economy moves through stages of the business cycle – e.g. a fall in tax revenues from the circular flow during a recession or an increase in state welfare benefits when unemployment is rising

Question 5

Define Balance of Payments

Answer 5

A record of all financial dealings over a period of time between
economic agents of one country and another

Question 6

Define Capital Account

Answer 6

A part of the balance of payments; records debt forgiveness,
inheritance taxes, transfers of financial assets and sales of assets

Question 7

Define Capital Expenditure

Answer 7

Government spending on investment goods such as new roads,
schools and hospitals, which will be consumed in over a year

Question 8

What is a central bank?

Answer 8

A financial institution that has direct responsibility to control the money
supply and monetary policy, to manage gold reserves and foreign
currency and to issue government debt

Question 9

Define a common market

Answer 9

Members trade freely in all economic resources and impose a
common external tariff

Question 10

Define Comparative Advantage

Answer 10

When a country is able to produce a good more cheaply relative to
other goods produced; it has a lower opportunity cost

Question 11

Define the Current Account

Answer 11

A part of the balance of payments; records payments for the purchase
and sale of goods and services, as well as incomes and transfers

Question 12

Define currency depreciation

Answer 12

A fall in the value of a currency under floating exchange rates

Question 13

Define currency devaluation

Answer 13

When the currency is decreased against another under a fixed system

Question 14

Define a Developed Country

Answer 14

A country with a high GDP Per Capita and high standards of living

Question 15

Define a Developing Country

Answer 15

A coutnry with a low GDP Per Capita and low standard of living

Question 16

Define discretionary fiscal policy

Answer 16

Deliberate manipulation of government expenditure and taxes to
influence the economy; expansionary and deflationary fiscal policy

Question 17

Define exhange rates

Answer 17

The rate at which one currency is traded against another.

Question 18

Define the Financial Account

Answer 18

A part of the balance of payments; records FDI, portfolio investment
and the transfer of gold and currency reserves

Question 19

Define Financial Markets

Answer 19

A financial market is any exchange that facilitates the trading of financial instruments, such as stocks, bonds, foreign exchange, or primary commodities such as oil and gas.

Question 20

Define a fixed/pegged exhange rate system

Answer 20

The value of the currency is set against the value of another and that
exchange rate does not change unless the government manipulates it

Question 21

What is a Foreign Currency Gap

Answer 21

When a country does not export enough to finance the purchase of
goods from overseas

Question 22

What is Foreign Direct Investment

Answer 22

Investment by one private sector company in one country into another
private sector company in another

Question 23

Define the Gini Coefficient

Answer 23

A measure of income inequality; the ratio of the area between the
degree line (the line of perfect equality) and the Lorenz curve and the
whole area under the 45 degree line

Question 24

What is the Harrod-Domar Model

Answer 24

Savings provide the funds that are used for investment, and growth
rates depend on the level of saving and the productivity of investment.
Therefore, growth in developing countries is limited by the lack of
investment

Question 25

Define HDI

Answer 25

Measures an economy’s development based on income, health and
education

Question 26

What is the Laffer Curve

Answer 26

Shows that a rise in tax rates does not necessarily lead to a rise in tax
revenue, due to the impact on incentives and work

Question 26

Define International Competitiveness

Answer 26

The ability of a country to compete effectively and become attractive in
international markets

Question 27

Define Market Bubble

Answer 27

When the price of an asset rises massively and greatly exceeds the
value of the asset itself

Question 28

Define Market Rigging

Answer 28

A group of individuals or institutions collude to fix prices or exchange
information that will lead to gains for themselves at the expense of
other participants in the market

Question 29

Marshall Lerner Condition

Answer 29

The sum of the price elasticities of imports and exports must be more
than one if a currency depreciation is to have a positive impact on the
trade balance

Question 30

Define a Monetary Union

Answer 30

Two or more countries with a single currency

Question 31

Define Moral Hazards

Answer 31

When individuals act in their own best interests knowing there are
potential risks- another cause of financial market failure

Question 32

Define Primary Product Dependancy

Answer 32

When a country relies heavily on primary products, such as
agricultural goods or mining.

Question 33

Define National Debt

Answer 33

The sum of government debts built up over many years

Question 34

Define Protectionism

Answer 34

When government enact policies to restrict the free entry of imports
into their country, such as tariffs and quotas

Question 35

Define a Quota

Answer 35

Limits placed on the level of imports allowed into a country

Question 36

Define Relative Poverty

Answer 36

When income falls below an average income threshold. In the UK, this
is those on less than 60% of median household income

Question 37

Define Revaluation

Answer 37

When the currency is increased against the value of another under a
fixed system

Question 38

Define Terms of Trade

Answer 38

The ratio of an index of a country’s export prices to an index of its
import prices.
average export price index x100
average import price index

Question 39

Define Trade Creation

Answer 39

domestic consumers in countries import more goods and services as import prices fall from a removal of import tariffs and import quotas; production will shift to a lower cost producer.

Question 40

Define Trade Liberalisation

Answer 40

Reduction or removal of protectionist policies

Question 41

Define Trading blocs

Answer 41

A group of countries that reduce or remove trade barriers between
them

Question 42

Define Unit labour costs

Answer 42

The cost of employing workers for each unit of a good
total wages / real output

Question 43

Define Terms of Trade

Answer 43

measures the rate of exchange of one product for another when two countries trade

Question 44

Define Market failure

Answer 44

When the market fails to allocate scarce resources with maximum efficiency.
When the market fails to maximise to social welfare.