Macro Definitions Flashcards
Absolute Advantage
When one country is able to produce a good or service at a lower resource cost than another, thereby producing at a lower unit cost.
Accelerator Effect
The theory of investment that states that the level of investment depends on the rate of change of national income (GDP).
Asymmetric Inflation Target
When a central bank’s inflation target extends further above the ideal level than below it, or more commonly, further below than above the ideal, suggesting that central banks see lower than ideal inflation as less of an issue than higher than ideal inflation.
Automatic Stabilisers
Changes in government spending and taxation receipts which take place automatically in response to the economic cycle, thus working to stabilise fluctuations in the level of economic activity - for example, in a recession, benefits payments increase and tax revenue falls.
Balance of Payments
A measure of money flows into and out of a country over a given time period (usually a year).
Bilateral Exchange Rate
The exchange rate of one currency against another.
Capital Account of the Balance of Payments
The section of the balance of payments that records long-term flows of capital into and out of a country, in the form of purchases and sales of assets - split into two sections (short- and long-term).
Comparative Advantage
When one country can produce a good or service at a lower opportunity cost than another.
Credibility
A principle of fiscal policy, stating that the government’s commitment to economic stability is trusted and understood by the public, business, and the financial markets.
Customs Union
An agreement between two or more countries to abolish all tariffs on trade between them, whilst imposing a common external tariff on trade with non-members.
Cyclical Deficit
A government budget deficit which arises due to the effect of automatic stabilisers in a recession.
Developed Economies
Countries with a relatively high level of income per capita and diversified industrial and tertiary sectors of the economy.
Developing Economies
Countries with a relatively low level of income per capita, and an economy in which the industrial sector is small, and primary production accounts for a large proportion of GDP.
Economic Cycle
Fluctuations in the level of activity (Real DGP) in an economy. A typical economic cycle is comprised of the following sections: Boom, Slowdown, Recession, Recovery.
Economic Development
The process of improving people’s economic well-being and quality of life.
Economic Integration
The process of blurring the boundaries that separate economic activity in one nation from that in another.
Economic Stability
The avoidance of volatility in economic growth rates, inflation and employment levels.
Economic Union
Deepened integration within a single market, centralising economic policy at the macroeconomic level.
Effective Exchange Rate
A more holistic measure of the value of a particular currency, given by tracking the exchange rate of that currency against a basket of currencies of other countries, often weighted according to the amount of trade done with each country.
External Economic Shocks
Unexpected events that cause unpredictable changes in AD and/or AS - examples include fluctuations in the price of oil and recessions in other countries.
Factor Endowments
The mix of land, labour, capital and enterprise that a country possesses. A country’s factor endowment is determined by, among other things, geography, historical legacy, and socioeconomic development.
Factory Intensities
The balance between land, labour and capital required in the production of a particular good or service.
Fiscal Transfers
When tax revenue raised in one country is used to fund government spending in another. Very rare in practice, though has been proposed in the Euro area.
Fixed Exchange Rate
An exchange rate system in which the government intervenes in the forex markets to maintain a constant exchange rate for its currency against another.
Flexibility
A principle of fiscal policy, stipulating that policy should be able to react quickly to unexpected economic shocks, such as sudden changes in AD or AS.
Foreign Currency Reserves
Foreign currencies held by central banks in order to intervene in the foreign exchange markets - by buying its own currency, the central bank will artificially increase its value.
Foreign Direct Investment (FDI)
Investment made my a multinational corporation in a country other than where its operations originate. This may take the form of establishment of branches and productive processes abroad, the purchase of foreign firms, or investment in physical capital abroad.
Free Trade Area
An agreement between two or more countries to abolish all tariffs on trade between them.
Floating Exchange Rate
A system whereby the value of one currency in terms of another is determined by the market forces of supply and demand.
Globalisation
The process that have resulted in ever-closer links between the world’s economies.
Golden Rule
A fiscal policy commitment by the UK government that it will borrow only to invest, not for current expenditure.
Harmonisation
The establishment of a common set of rules and regulations to be followed. E.g. the Euro area has some degree of tax harmonisation.
Human Development Index (HDI)
A measure that, recognising the limitations of GDP per capita as a measure of development, combines multiple outcomes valued in the development process: life expectancy at birth, adult literacy rate, percentage of the relevant population in primary, secondary and further education, and GDP per capita at PPP.
Infant Industries
Industries in an economy that are relatively new and lack the economies of scale necessary to compete in the world market against more established competitors in other countries.
Inflation
A sustained increase in the price level, measured in the UK by changes in the cost of a basket of goods and services bought by a typical household (Consumer Price Index).
Inter-Industry Trade
Trade involving the exchange of goods and services produced in different industries.
International Competitiveness
The ability of an economy’s firms to compete in the world market, and thereby sustain increases in national output and income.
International Monetary Fund (IMF)
A global organisation that aims to promote monetary cooperation and trade.
Intra-Industry Trade
Trade involving the exchange of goods and services produced in the same industry.
Intra-Regional Trade
Trade involving the exchange of goods and services produced in the same region, e.g. between the USA and Canada, or the UK and Germany.
J-Curve Effect
A diagram which shows the trend in a country’s balance of payments position following a depreciation of the exchange rate. A fall in the exchange rate causes an initial worsening of the balance of payments position due to the short-run price inelasticity of demand for both imports and exports. However, in the long run, demand is more elastic, and import and export levels react to the changes in price, thus causing an improvement in the country’s balance of payments position.
Knowledge and Technology Transfer
The process by which knowledge and technology developed in one country is transferred to another, often through licensing and franchising.
Legitimacy
A principle of fiscal policy which states that a fiscal policy framework should have widespread support amongst the public, businesses and politicians.
Liberalisation
Reductions in barriers to international trade, in order to allow foreign firms to gain access to the market for internationally traded goods and services.
Marshall-Lerner Condition
States that for a depreciation of a currency to cause an improvement in the balance of payments position, the sum of the price elasticities of demand for imports and exports must be greater than one.
Monetary Union
The deepest form of economic integration, in which countries share the same currency, and have a common monetary policy as a result.
Monetary Policy Sovreignty
The ability of a country to determine its own monetary policy - will be lost in a monetary union, and to some extent with a fixed exchange rate system.
Non-Accelerating Inflation Rate of Unemployment (NAIRU)
The level of unemployment that exists when the labour market is in equilibrium - aka equilibrium unemployment.
Non-Tariff Barriers
Things other than tariffs which act as barriers to international trade.
Offshoring
Transferring part of the production process to another country, either via outsourcing or by setting up in-house operations abroad.
Operational Independence
When a central bank is given responsibility for conducting monetary policy, independent of political interference. However, the inflation target is still set by government in most cases.
Optimal Currency Area
Conditions that must be met in order to minimise the negative effects of a monetary union, namely: a flexible labour market, mechanisms for fiscal transfers, and the absence of external shocks which act differently on different member economies.
Output Gap
The difference between the actual and potential output of an economy. Positive during a boom, negative during a recession.
Prebisch-Singer Hypothesis
The argument that countries which export mostly primary commodities will face declining terms of trade in the long run, which will trap them in a low level of development as more exports will need to be sold to “pay for” the same volume of imported secondary commodities.
Purchasing Power Parity (PPP)
A measure of the true value of a currency, calculated by equalising the prices of an identical basket of goods in two countries - usually the US and one other.
Relative Unit Labour Costs
The cost of labour per unit of production in one country relative to its main trading partners.
Semi-Floating Exchange Rate
An exchange rate system whereby the exchange rate of one currency against another is allowed to fluctuate within a given range of values.
Single Market
Deepens economic integration by eliminating non-tariff barriers to trade, promoting the free movement of capital and labour, and agreeing on common policies in a number of areas.
Standard of Living
A measure of the material well-being of a country and its citizens.
Stability and Growth Pact
An agreement between members of the EU, made with the aim of supporting the stability of the single currency, which states that government’s budget deficit must not exceed 3% of GDP, and the national debt must not exceed 60% of GDP.
Terms of Trade
The value of a country’s exports relative to the price of its imports, given by the formula:
Index of average export prices/Index of average import prices x 100
Trade Creation
Where the establishment of a customs union results in high-cost domestic production being replaced by lower-cost production from within the customs union.
Trade Diversion
Where the establishment of a customs union results in the in trade switching from a low-cost supplier outside the union to a higher-cost supplier with it.
Trading Possibility Curve
A representation of the potential combinations of two products that a country can consume if it engages in international trade. The TPC lies outside the PPC, demonstrating the gains in consumption that can be brought about via trade.
World Bank
An organisation that provides global development funding.
World Trade Organisation
An international body responsible for negotiating trade agreements and policing the rules of trade to which its members subscribe. Settles trade disputes between members.
