Macro Definitions

Question 1

Absolute Advantage

Answer 1

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.

Question 2

Accelerator Effect

Answer 2

The theory of investment that states that the level of investment depends on the rate of change of national income (GDP).

Question 3

Asymmetric Inflation Target

Answer 3

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.

Question 4

Automatic Stabilisers

Answer 4

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.

Question 5

Balance of Payments

Answer 5

A measure of money flows into and out of a country over a given time period (usually a year).

Question 6

Bilateral Exchange Rate

Answer 6

The exchange rate of one currency against another.

Question 7

Capital Account of the Balance of Payments

Answer 7

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).

Question 8

Comparative Advantage

Answer 8

When one country can produce a good or service at a lower opportunity cost than another.

Question 9

Credibility

Answer 9

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.

Question 10

Customs Union

Answer 10

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.

Question 11

Cyclical Deficit

Answer 11

A government budget deficit which arises due to the effect of automatic stabilisers in a recession.

Question 12

Developed Economies

Answer 12

Countries with a relatively high level of income per capita and diversified industrial and tertiary sectors of the economy.

Question 13

Developing Economies

Answer 13

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.

Question 14

Economic Cycle

Answer 14

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.

Question 15

Economic Development

Answer 15

The process of improving people’s economic well-being and quality of life.

Question 16

Economic Integration

Answer 16

The process of blurring the boundaries that separate economic activity in one nation from that in another.

Question 17

Economic Stability

Answer 17

The avoidance of volatility in economic growth rates, inflation and employment levels.

Question 18

Economic Union

Answer 18

Deepened integration within a single market, centralising economic policy at the macroeconomic level.

Question 19

Effective Exchange Rate

Answer 19

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.

Question 20

External Economic Shocks

Answer 20

Unexpected events that cause unpredictable changes in AD and/or AS - examples include fluctuations in the price of oil and recessions in other countries.

Question 21

Factor Endowments

Answer 21

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.

Question 22

Factory Intensities

Answer 22

The balance between land, labour and capital required in the production of a particular good or service.

Question 23

Fiscal Transfers

Answer 23

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.

Question 24

Fixed Exchange Rate

Answer 24

An exchange rate system in which the government intervenes in the forex markets to maintain a constant exchange rate for its currency against another.

Question 25

Flexibility

Answer 25

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.

Question 26

Foreign Currency Reserves

Answer 26

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.

Question 27

Foreign Direct Investment (FDI)

Answer 27

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.

Question 28

Free Trade Area

Answer 28

An agreement between two or more countries to abolish all tariffs on trade between them.

Question 29

Floating Exchange Rate

Answer 29

A system whereby the value of one currency in terms of another is determined by the market forces of supply and demand.

Question 30

Globalisation

Answer 30

The process that have resulted in ever-closer links between the world's economies.

Question 31

Golden Rule

Answer 31

A fiscal policy commitment by the UK government that it will borrow only to invest, not for current expenditure.

Question 32

Harmonisation

Answer 32

The establishment of a common set of rules and regulations to be followed. E.g. the Euro area has some degree of tax harmonisation.

Question 33

Human Development Index (HDI)

Answer 33

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.

Question 34

Infant Industries

Answer 34

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.

Question 35

Inflation

Answer 35

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).

Question 36

Inter-Industry Trade

Answer 36

Trade involving the exchange of goods and services produced in different industries.

Question 37

International Competitiveness

Answer 37

The ability of an economy's firms to compete in the world market, and thereby sustain increases in national output and income.

Question 38

International Monetary Fund (IMF)

Answer 38

A global organisation that aims to promote monetary cooperation and trade.

Question 39

Intra-Industry Trade

Answer 39

Trade involving the exchange of goods and services produced in the same industry.

Question 40

Intra-Regional Trade

Answer 40

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.

Question 41

J-Curve Effect

Answer 41

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.

Question 42

Knowledge and Technology Transfer

Answer 42

The process by which knowledge and technology developed in one country is transferred to another, often through licensing and franchising.

Question 43

Legitimacy

Answer 43

A principle of fiscal policy which states that a fiscal policy framework should have widespread support amongst the public, businesses and politicians.

Question 44

Liberalisation

Answer 44

Reductions in barriers to international trade, in order to allow foreign firms to gain access to the market for internationally traded goods and services.

Question 45

Marshall-Lerner Condition

Answer 45

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.

Question 46

Monetary Union

Answer 46

The deepest form of economic integration, in which countries share the same currency, and have a common monetary policy as a result.

Question 47

Monetary Policy Sovreignty

Answer 47

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.

Question 48

Non-Accelerating Inflation Rate of Unemployment (NAIRU)

Answer 48

The level of unemployment that exists when the labour market is in equilibrium - aka equilibrium unemployment.

Question 49

Non-Tariff Barriers

Answer 49

Things other than tariffs which act as barriers to international trade.

Question 50

Offshoring

Answer 50

Transferring part of the production process to another country, either via outsourcing or by setting up in-house operations abroad.

Question 51

Operational Independence

Answer 51

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.

Question 52

Optimal Currency Area

Answer 52

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.

Question 53

Output Gap

Answer 53

The difference between the actual and potential output of an economy. Positive during a boom, negative during a recession.

Question 54

Prebisch-Singer Hypothesis

Answer 54

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.

Question 55

Purchasing Power Parity (PPP)

Answer 55

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.

Question 56

Relative Unit Labour Costs

Answer 56

The cost of labour per unit of production in one country relative to its main trading partners.

Question 57

Semi-Floating Exchange Rate

Answer 57

An exchange rate system whereby the exchange rate of one currency against another is allowed to fluctuate within a given range of values.

Question 58

Single Market

Answer 58

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.

Question 59

Standard of Living

Answer 59

A measure of the material well-being of a country and its citizens.

Question 60

Stability and Growth Pact

Answer 60

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.

Question 61

Terms of Trade

Answer 61

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

Question 62

Trade Creation

Answer 62

Where the establishment of a customs union results in high-cost domestic production being replaced by lower-cost production from within the customs union.

Question 63

Trade Diversion

Answer 63

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.

Question 64

Trading Possibility Curve

Answer 64

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.

Question 65

World Bank

Answer 65

An organisation that provides global development funding.

Question 66

World Trade Organisation

Answer 66

An international body responsible for negotiating trade agreements and policing the rules of trade to which its members subscribe. Settles trade disputes between members.