Key Terms Flashcards
Asymmetric Information (Information Failure)
A situation in which one party in an economic relationship (often a buyer, seller, lender, or borrower) has more information than another party.
Capital Depreciation
The decrease in the economic value of the capital stock (equipment, buildings, infrastructure and other forms of assets), through obsolescence, wearing out and/or other causes. This is reflected in write-offs to the value of the capital stock.
Currency Depreciation
The decline over time in the value of a currency in terms of another, as a result of market forces.
Collateral
A property or other asset that a borrower contractually permits a lender to seize in case the loan is not repaid, to recoup the losses. The collateral is offered as a way for the lender to secure the loan, therefore loans that are secured by collateral typically have lower interest rates than unsecured loans.
Common Good
A good defined by rival consumption and non-excludability of access.
A good is said to be rival (or rivalrous) if
its consumption/use by one consumer prevents consumption/use by other consumers.
A good is said to be non-excludable if
consumers/users cannot be prevented from accessing it.
Economic Agent
An economic actor - usually a firm, worker, consumer, or government official - that chooses actions so as to maximise an objective.
Environmental Kuznets Curve
A diagram reflecting the empirical relationship between pollution (or other environmental degradation) and income per capita. Environmental degradation first rises and then falls with increasing income per capita, displaying an inverted U-shaped relationship.
There is empirical evidence that this relationship holds for some pollutants, especially local pollutants such as sulfur dioxide and particulate matter in the air, but not for others, particularly global pollutants such as emissions of greenhouse gases.
Externality
Any benefit or cost borne by an individual economic unit that is a direct consequence of another unit’s behaviour and/or economic transaction.
A positive externality is
a benefit that is enjoyed by a third-party as a result of the economic transaction.
A negative externality is
a cost that is suffered by a third party as a result of the economic transaction.
Foreign Aid
The international transfer of public funds in the form of loans and grants either directly from one government to another (bilateral assistance) or indirectly through the vehicle of a multilateral assistance agency such as the World Bank.
Foreign Direct Investment
Overseas equity investments by private multinational corporations.
Free-Rider Problem
The situation in which people can maximise their own welfare while profiting from the actions and efforts of others while not incurring any of the costs of taking action and without personally contributing to these efforts.
Game Theory
A mathematical method of decision making that studies the decisions of agents as alternative strategies with payoffs, in order to determine the optimal course of action for the interested party depending on assumptions about rivals’ behaviour.
Gross Domestic Product (GDP)
The total value of output (of goods and services) produced within the country over a given time period (usually 12 months). It includes all output produced within the country’s territory, by residents and non-residents, regardless of its allocation between domestic and foreign claims.
Gross Domestic Product (GDP) per Capita
A measure of output per inhabitant in a country. It is a good approximation of average annual per capita income.
Gross National Income (GNI)
The total domestic and foreign output claimed by the residents of a country, consisting of GDP plus the factor incomes earned by foreign residents, minus the income earned in the domestic economy by non-residents.
Institutions
Humanly devised systems of rules (“rules of the game”, North 1991) that structure behaviour and social interaction. They comprise formal constraints, informal constraints, and their enforcement characteristics.
Informal institutions
Are private rules of behaviour, which develop gradually and spontaneously. They do not need any legal enforcement (it is in the actors’ interest to follow the rules). Examples of informal institutions are social norms and conventions.
Formal institutions
Are public rules of behaviour designed by a public authority with legislative power, and enforced by public authorities with executive (through police, regulatory agencies, etc.) and judiciary (e.g. public courts) powers. Examples of formal institutions are laws and constitutions.
Market Price
The current price at which an asset, good or service can be bought or sold. It corresponds to the actual selling price.
Nominal values
Are money values measured at current prices (for example, nominal national income corresponds to national income measured at current prices).
Real Values
Are money values measured in constant prices, i.e. corrected by inflation, the rate of increase in the general level of prices of goods and services.
Poverty Trap
A situation in which economic agents or countries cannot escape poverty due to a lack of resources that could otherwise be saved or invested as a means to grow out of poverty. A poverty trap involves a vicious circle where poverty and underdevelopment lead to more poverty and underdevelopment.
Public Good
A good defined by non-rival consumption and non-excludability of access.
Purchasing Power Parity (PPP)
Principle used to calculate GDPs across countries, which uses a common set of international prices for the same basket of goods and services to provide more accurate comparisons of living standards.
Subsistence Economy
An economy in which production is mainly for personal consumption and meeting the basic necessities of life.
