Key Terms

Question 1

What is meant by absolute advantage?

Answer 1

A country will have an absolute advantage when its output of a product is greater per unit of resource used than any other country.

Question 2

What is meant by absolute poverty?

Answer 2

Absolute poverty is when someone doesn’t have the income or wealth to meet their basic needs.

Question 3

What is the accelerator process?

Answer 3

The accelerator process is where any change in demand for goods/services beyond current capacity will lead to a greater percentage increase in the demand for capital goods that firms need to produce these goods/services.

Question 4

What is meant by aggregate demand?

Answer 4

Aggregate demand is the total demand, or total spending, in an economy at a given price level over a given period of time.

Made up of:
- Consumption
- Investment
- Government Spending
- Net exports

Question 5

What is the formula for aggregate demand?

Answer 5

AD = C + I + G + (X - M)

• Consumption
• Investment
• Government Spending
• Exports
• Imports

Question 6

What is meant by aggregate supply?

Answer 6

Aggregate supply is the total amount of goods and services which can be supplied in an economy at a given price level over a given period of time.

Question 7

What is meant by the term ‘aid’

Answer 7

Aid is the transfer of resources from one country to another.

Question 8

What is meant by allocative efficiency?

Answer 8

Allocative efficiency is when the price of a good is equal to the price that consumers are happy to pay for it.

Question 9

What is meant by asymmetric information?

Answer 9

Asymmetric information is when buyers have more information than sellers (or the opposite) in a market.

Question 10

What is meant by automatic stabilisers?

Answer 10

Automatic stabilisers are parts of fiscal policies that will automatically react to changes in the economic cycle.

e.g.
During recession, G increases due to more unemployment benefits, Reducing problems of the recession.

Question 11

What is meant by average cost?

Answer 11

Average cost is the cost of production per unit of input

e.g.
A firm’s total cost for a given period of time, divided by the quantity produced.

Question 12

What is meant by average revenue?

Answer 12

Average revenue is the revenue per unit sold.

e.g.
A firm’s total revenue for a given period of time, divided by the quantity sold.

Question 13

What is meant by balance of payments?

Answer 13

Balance of payments is a record of a country’s international transactions.

e.g.
Flows of money into and out of a country.

Question 14

What is meant by bank rate?

Answer 14

Bank rate is the official rate of interest set by the Monetary Policy Committee of the Bank of England.

Question 15

What is meant by barriers to entry?

Answer 15

Barriers to entry are any potential difficulties that make it hard for a firm to enter a market.

Question 16

What is meant by barriers to exit?

Answer 16

Barriers to exit are any potential difficulties that make it hard for a firm to leave a market.

Question 17

What is meant by black market?

Answer 17

A black market is economic activity which occurs without taxation and government regulation.

Question 18

What is meant by budget deficit?

Answer 18

Budget deficit is when government spending is greater than revenue.

Question 19

What is meant by budget surplus?

Answer 19

Budget surplus is when government spending is less than revenue.

Question 20

What is meant by capital account on the balance of payments?

Answer 20

Capital account is a part of the record of a country’s international flows of money.

This includes transfers of non-monetary and fixed assets, such as through emigration and immigration.

Question 21

What is meant by a cartel?

Answer 21

A cartel is a group of producers that agree to limit production in order to keep the prices of goods or services high.

Question 22

What is meant by the central bank?

Answer 22

The central bank is the institution responsible for issuing a country’s banknotes, acting as a lender of last resort for other banks, and implementing monetary policy.

Question 23

What is meant by circular flow of income?

Answer 23

Circular flow of income is the flow of national output, income and expenditure between households and firms

national ouput = national income = national expenditure.

Question 24

What is a command economy?

Answer 24

A command economy is an economy where governments, not markets, determine how to allocate resources.

Question 25

What is comparative advantage?

Answer 25

A country has comparative advantage if the opportunity cost of it producing a good is lower than the opportunity cost for other countries.

Question 26

What is competition policy?

Answer 26

Competition policy is a government policy aimed at reducing monopoly power in order to increase efficiency and ensure fairness for consumers.

Question 27

What is concentration ratio?

Answer 27

A concentration ratio shows how dominant firms are in a market.

Question 28

What is conglomerate integration?

Answer 28

Mergers or takeovers between firms which operate in completely different markets.

Question 29

What is consumer surplus?

Answer 29

Consumer surplus is the difference when a consumer pays less for a good than they were prepared to.

Question 30

What is consumption?

Answer 30

Consumption is the purchase/use of goods or services

Question 31

What is contestability?

Answer 31

A market is contestable if it’s easy for new firms to enter the market.

Question 32

What is cost-push inflation?

Answer 32

Cost-push inflation is inflation caused by the rising costs of inputs to production.

Question 33

What is creative destruction?

Answer 33

Creative destruction occurs when the innovation and invention of new products and production methods causes the destruction of existing markets and creates new ones.

Question 34

What is cross elasticity of demand (XED)?

Answer 34

XED is a measure of how the quantity demanded of one good/service responds to a change in the price of another good/service.

Question 35

What is the current account on the balance of payments?

Answer 35

A part of the record of a country’s international flows of money.

Consists of:
- trade in goods
- trade in services
- international flows of income
(salaries, interest, profit, dividends)
- transfers