Macroeconomic Year 2 Definitions Flashcards
Exchange rates
Price of one country’s currency in terms of another currency
Fixed exchange rates
Happens when two countries currencies will always be exchanged at the same price
Floating exchange rates
Rates are determined by the private market ( FOREX ) through supply and demand
Marshall Lerner condition
States that a devaluation of a currency improves the BoP ( current account ) only if the sum of price inelasticities of demand for imports and exports are greater that one
J-Curve
Demand for both imports and exports tend to be price inelastic so changing prices won’t have an immediate effect due to the time scale
Terms of trade
Measure of a country’s relative competitiveness ( index )
Index of Export Prices/ Index of Import Prices *100
Globalisation
The process of interaction and integration among people, companies and governments worldwide
Protectionism
Represents any attempt to impose restrictions on trade in goods and services
Tariffs
A tax on imports
Quotas
Quantitative ( volume ) limits on the level of imports allowed into a country in a year
Technical barriers to trade
including product labelling rules and stringent sanitary standards. These increase product compliance costs and impose monitoring costs on export agencies
Export subsidies
A payment to encourage domestic production by lowering their costs ( exporting )
Domestic subsidies
Government help ( state aid ) for domestic businesses facing financial problems ( compete with imports )
Import licensing
Governments grants importers the license to import goods
Fledgling industry
Certain industries possess possible comparative advantage but haven’t yet exploited economies of scale
Strategic industries
Sectors of the economy that are deemed critical for a country’s national security, economic well-being or technological advancement
Dumping
Goods are dumped when they are sold for export at less than their normal value. It’s a type of predatory pricing behaviour and a form of price discrimination
Free trade area
When atleast two states partially or fully abolish custom tariffs on most ( if not all ) goods traded between them
Customs union
A free trade area with a common external tariff
Single market
Composed of a customs union with common policies on product regulation and freedom of movement of the factors of production
Monetary union
Composed of a customs union/ single market with a common currency
Full economic union
Complete free trade, a common external tariff, a single market, monetary union and also fiscal and supply-side union- i.e. the same federal taxation policies. e.g. The USA
WTO
World Trade Organisation, sets the global rules concerning trade between nations
Trade creation
Refers to the increase in economic welfare from joining a free trade area, such as a customs union
Trade diversion
Occurs due to the existence of a common external tariff
Traditional Phillips curve ( Keynesian )
Suggests a trade-off between inflation and unemployment, you can’t achieve both together
Stagflation
High rates of inflation at the same time as high rates of unemployment
Neo-Classical Phillips curve
Agree that policies to reduce unemployment will lead to inflation, but they further argue any change in unemployment will only be temporary
NRU
Natural Rate of Unemployment - Unemployment is fixed in the long term at this rate
NAIRU
Non-Accelerating Interest Rate of Unemployment - NRU exists at NAIRU
The lowest unemployment rate that can be sustained without causing wages to grow and inflation to rise
Money illusion
Where individuals focus on nominal levels of income and wealth
Adaptive expectations
Employers and employees realise that nothing has changed so demand for labour reverts to NRU
Income inequality
When levels of income are unevenly distributed within an economy
Wealth inequality
When levels of wealth are unevenly distributed within an economy
Absolute poverty
Where household income is below a necessary level to maintain basic living standards ( food, shelter, housing ), income less than $2 a day in extreme poverty
Relative poverty
Individuals whose incomes are less than 60% of median incomes
Balance of Payments Current Account
Balance of trade in goods and services + Services + Balance of primary income + Balance of secondary income ( Balance is always money in money out )
Gini-Coefficient
Lies between 1 and 0, a higher number suggests more income inequality
Central Bank
A national bank that provides financial and banking services for its country’s government and commercial banking system, as well as implementing monetary policy and issuing currency
Money supply
The total amount of money in circulation or in existence in a country
Interest rate
Cost of borrowing money
Base rate
The interest rate that the central bank charges commercial banks for loans ( determines all other rates of interest in the economy )
Privatisation
Moving public sector organisations and functions to the private sector
Infrastructure
The man-made environment of a country
Functions of money
Medium of exchange
Store of value
Unit of account
Standard of deferred payment
Narrow Money (M0)
Physical currency in circulation issued by the BoE and reserves held by commercial banks at the central bank
Broad Money (M4)
Narrow Money + all money held in accounts of banks and building societies
Liquidity
The ease with which assets can be converted into cash ( M0 very liquid/ M4 less liquid )
Fisher Equation
MV=PT
M = Money Supply
V = Velocity ( of money spent ) - Fixed
P = Price Level
T = Number of transactions in the economy - Fixed
