Key Terms

Question 1

Asymmetric Information (Information Failure)

Answer 1

A situation in which one party in an economic relationship (often a buyer, seller, lender, or borrower) has more information than another party.

Question 2

Capital Depreciation

Answer 2

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.

Question 3

Currency Depreciation

Answer 3

The decline over time in the value of a currency in terms of another, as a result of market forces.

Question 4

Collateral

Answer 4

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.

Question 5

Common Good

Answer 5

A good defined by rival consumption and non-excludability of access.

Question 6

A good is said to be rival (or rivalrous) if

Answer 6

its consumption/use by one consumer prevents consumption/use by other consumers.

Question 7

A good is said to be non-excludable if

Answer 7

consumers/users cannot be prevented from accessing it.

Question 8

Economic Agent

Answer 8

An economic actor - usually a firm, worker, consumer, or government official - that chooses actions so as to maximise an objective.

Question 9

Environmental Kuznets Curve

Answer 9

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.

Question 10

Externality

Answer 10

Any benefit or cost borne by an individual economic unit that is a direct consequence of another unit’s behaviour and/or economic transaction.

Question 11

A positive externality is

Answer 11

a benefit that is enjoyed by a third-party as a result of the economic transaction.

Question 12

A negative externality is

Answer 12

a cost that is suffered by a third party as a result of the economic transaction.

Question 13

Foreign Aid

Answer 13

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.

Question 14

Foreign Direct Investment

Answer 14

Overseas equity investments by private multinational corporations.

Question 15

Free-Rider Problem

Answer 15

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.

Question 16

Game Theory

Answer 16

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.

Question 17

Gross Domestic Product (GDP)

Answer 17

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.

Question 18

Gross Domestic Product (GDP) per Capita

Answer 18

A measure of output per inhabitant in a country. It is a good approximation of average annual per capita income.

Question 19

Gross National Income (GNI)

Answer 19

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.

Question 20

Institutions

Answer 20

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.

Question 21

Informal institutions

Answer 21

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.

Question 22

Formal institutions

Answer 22

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.

Question 23

Market Price

Answer 23

The current price at which an asset, good or service can be bought or sold. It corresponds to the actual selling price.

Question 24

Nominal values

Answer 24

Are money values measured at current prices (for example, nominal national income corresponds to national income measured at current prices).

Question 25

Real Values

Answer 25

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.

Question 26

Poverty Trap

Answer 26

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.

Question 27

Public Good

Answer 27

A good defined by non-rival consumption and non-excludability of access.

Question 28

Purchasing Power Parity (PPP)

Answer 28

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.

Question 29

Subsistence Economy

Answer 29

An economy in which production is mainly for personal consumption and meeting the basic necessities of life.