Theme 4 Economic Definitions
Theme 4 Economic Definitions
THEME 4 – A LEVEL – DEFINITIONS
Absolute Poverty
The minimum amount of resources a person needs to meet basic human needs such as food, clean water, shelter and clothing
Absolute Advantage
This occurs when a country can produce a good or service more efficiently than another
Comparative Advantage
This occurs when a country can produce a good or service at a lower opportunity cost than another
Capital Expenditure
Government spending on infrastructure / investment goods which are going to be consumed within the year and can be used several times
Capital Flight
Instead of large amounts of money being left in banks for people to borrow / invest, they are taken out of the country as an indication of the country’s poor economic stability
Central Banks
These manage the currency of a country and controls the money supply
Customs Union
Free Trade between member countries. However, each member of the customs union will have common external tariffs on goods / services on countries outside the union
Current Expenditure
Government Consumption + Transfer Payments + Interest Payments
Money spent on goods / services which only last for a short period of time
Developed Country
Countries which have a high GDP and high living standards
Developing Country
Countries which have a low GDP and low living standards
Economic Development
An increase and improvement in living standards
Emerging Economies
A country that has some characteristics of a developed country – due to its rapid growth – but is not fully there yet
Financial Account
Part of the Balance of Payments which records FDI, portfolio investment and transfers of gold / currency reserves
Financial Markets
Two parties (buyers and sellers) can engage in a range activities such as trading or buying a range of services and assets that are monetary in value
Foreign Currency Gap
Countries may face a shortage of foreign currency which will restrict them purchasing imported capital goods needed to increase productive capacity.
Insufficient foreign currency may be caused as a result of dependency on the export of primary products, dependency on the import of manufactured goods, or capital flight which occurs when assets or money are taken out of a country.
Free Trade
Countries can trade without barriers or restrictions
Gini Coefficient
A measure of Income Inequality
A Gini coefficient of zero expresses perfect equality, where all values are the same (for example, where everyone has the same income).
A Gini coefficient of one (or 100%) expresses maximal inequality among values (e.g., for a large number of people, where only one person has all the income)
Globalisation
Countries becoming more closely integrated economically, socially and culturally
Harrod-Domer Model
The Harrod-Domer Model illustrates how countries with a lower GDP per head are likely to experience more difficulty in financing investment due to their low savings ratio. This results in a reduced capital accumulation.
Human Capital
The economic value of a person’s skills and experience
Human Development Index
Consists of three main dimensions, which are health, GDP per person, and education, and measures the economic & social welfare of countries over time
International Competitiveness
A country’s ability to compete effectively become attractive in international markets
Laffer Curve
This shows that a rise in tax does not necessarily mean tax revenue will rise – if individuals are taxed at an excessively high rate, they may lose motivation to work and will instead end up paying less tax
Lorenz Curve
The Lorenz curve highlights the income distribution of a country against its population
The further the Lorenz curve is from the 45-degree line, the less equal the distribution of income will be.
Perfect equality would be, for example, where 50% of the population gain 50% of the income or 70% of the population gain 70% of the income.
Micro Financing
Microfinance was introduced by Muhammad Yunus from the Grameen Bank of Bangladesh to empower those in poverty to start small business enterprises.
He provided banks with the guarantees required and provided small tiny loans (Microcredit) to help the poor engage in productive business activities to grow their small businesses
Monetary Unions
These are customs unions which adopt a common currency e.g. Eurozone.
Patterns of Trade
Refers to the changes in a country’s imports / exports throughout periods of time
Primary Product Dependency
When a country relies heavily on primary products and services provided in the primary sector
Progressive Taxation
As income rises, so does the amount of tax paid back to the Government. Income Tax tends to be progressive as it is an example of a direct tax
Regressive Taxation
The amount of tax paid from income falls as the income generated rises
Proportional Taxation
The amount of tax paid from income remains the same regardless of a change in income generated
Protectionism
When the government restrict the free entry of imports into their country and so enforce policies such as tariffs or quotas
Quota
Limits placed on the quantity of imports allowed into the country
Relative Poverty
People living below a certain income threshold in a particular country. This is normally when someone earns well below the median level of income of a country.
Tariffs
These are a type of tax that governments impose on imported goods.
They are often used as a way to protect domestic industries from foreign competition by making imported goods more expensive for consumers.
This can help to level the playing field for domestic producers, who may not be able to compete with lower-priced imported goods.
Terms of Trade
(index of export prices / index of import prices) x 100. It measures a country’s relative competitiveness
Trade Creation
When a country is able to buy goods for a lower cost producer instead of a high cost producer
This is the removal of barriers between member countries. This will result in an increase in trade within the trading bloc
Trade Diversion
When a country has to buy to goods for a higher cost producer instead of a low cost producer
Trade Liberalisation
Protectionist policies are removed
Trading Bloc
Trading blocs are groups of countries that agree to reduce or eliminate trade barriers between themselves
Transfer Payments
These are welfare payments taken from the government and provided to low income families to help them achieve a minimum standard of living. Examples of Transfer Payments are: Job Seekers Allowance, Child Benefits, and State Pension
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