Sunday, July 17, 2011
Wednesday, July 6, 2011
ECONOMIC TERMS
ECONOMIC TERMS
Active Market
This is a term used by stock exchange which specifies the particular stock or share which deals in frequent and regular transactions. It helps the buyers to obtain reasonably large amounts at any time.
Administered Price
The administrative body e.g., the government a marketing board or a trading group determines this price. The competitive market force are not entitled to determine this price. The government fixes a price in accordance with demand supply portion in the market.
Ad-valorem Tax
Ad-valorem tax is a kind of indirect tax in which goods are taxed by their values. In the case of ad-volorem tax, the tax amount is calculated as the proportion of the price of the goods. Value added Tax (VAT) is an ad-volorem Tax.
Advanced Countries
Advanced countries are countries which are industrially advanced, having high national and per capita income and ensure high rate of capital formation. These countries possess highly developed infrastructure and apply most updated and advanced technical know-how in their productive activities. A strong and well organised financial structure is found in these advanced countries.
Amalgamation
It means ‘merger’. As and when necessity arises two or more companies are merged into a large organisation. This merger takes place in order to effect economies, reduce competition and capture market. The old firms completely lose their identity when the merger takes place.
Appreciation
Appreciation means an increase in the value of something e.g., stock of raw materials or manufactured goods. It also includes an increase in the traded value of a currency. It is the antonym of Depreciation. When the prices rise due to inflation, appreciation may occur. It causes scarcity or increase in earning power.
Arbitrage
When a person performs functions of middle man and buys and sells goods at a particular time to cash the price differences of two markets, this action is termed as arbitrage. Purchases are made in the market where price is low and at the same time, goods are sold in other market where the price are high. Thus the middleman earns profit due to price difference in two markets.
Arbitration
Where there is an industrial dispute, the Arbitration comes to the force. The judgement is given by the Arbitrator. Both the parties have to accept and honour the Arbitration. Arbitration is the settlement of labour disputes that takes place between employer and the employees.
Auction
When a commodity is sold by auction, the bids are made by the buyers. Whose ever makes the highest bid, gets the commodity which is being sold. The buyers make the bid
taking into consideration the quality and quantity of the commodity.
Autarchy
If a country is self-sufficient, it does not require the imports for the country. Autarchy is an indicator of self-sufficiency. It means that the country itself can satisfy the needs of its population without making imports from other countries.
Automation
Automation means the use of machinery & technology to replace the labour’s work. Automation increases the demand of skilled workers. Unskilled and semiskilled workers are reduced as a result of automation.
Balanced Budget
When the total revenue of the government exactly equals the total expenditure incurred by the government, the budget becomes a balanced budget. But it is a conservative view point. In present days, the welfare government has to regulate a number of economic and social activities which increase the expenditure burden on the government and results in deficit budget.
Balance of Payment
Balance of payment of a country is a systematic record of all economic transactions completed between its residents and the residents of remaining world during a year. In other words, the balance of payment shows the relationship between the one country's total payment to all other countries and its total receipts from them. Balance of payment is a comprehensive term which includes both visible and invisible items. Balance of payment not only include visible export and imports but also invisible trade like shipping, banking, insurance, tourism, royalty, payments of interest on foreign debts.
Balance of Trade
Balance of trade refers to the total value of a country's export commodities and total value of imports commodities. Thus balance of trade includes only visible trade i.e., movement of goods (exports and imports of goods). Balance of trade is a part of Balance of payment statement.
Balance Sheet
Balance sheet is a statement showing the assets and liabilities of a business at a certain date. Balance sheet helps in estimating the real financial situation of a firm.
Bank
Bank is a financial institution. It accepts funds on current and deposit accounts. It also lends money. The bank pays the cheques drawn by customers against current and deposits accounts. The bank is a trader that deals in money and credit.
Bank Draft
Banker's draft is a negotiable claim drawn upon a bank. Drafts are as good as cash. The drafts cannot be returned and unpaid. Draft is issued when a customer shows his unwillingness to accept cheque in payment for his services or mercantile goods. Bank Draft is safer than a cheque.
Bank Rate
Bank Rate is the rate of discount at which the central bank of the country discounts first class bills. It is the rate of interest at which the central bank lends money to the lower banking institutions. Bank rate is a direct quantitative method of credit control in the economy.
Bilateralism
It implies an agreement between two countries to extend to each other specific privileges in their international trade which are not extended to others.
Birth Rate
Birth Rate (or Crude Birth Rate) is number of the births per thousand of the population during a period, usually a year. Only live births are included in the calculation of birth rate.
Black Money
It is unaccounted money which is concealed from tax authorities. All illegal economic activities are dealt with this black Money. Hawala market has deep roots with this black money. Black money creates parallel economy. It puts an adverse pressure on equitable distribution of wealth and income in the economy.
Blue Chip
It is concerned with such equity shares whose purchase is extremely safe. It is a safe investment. It does not involve any risk.
Blue Collar Jobs
These Jobs are concerned with factory. Persons who are unskilled and depend upon manual jobs that require physical strain on human muscle are said to be engaged in Blue Collar Jobs. In the age of machinery, such Jobs are on the decline these days.
Brain-Drain
It means the drift of intellectuals of a country to another country. Scientists, doctors and technology experts generally go to other prominent countries of the world to better their lot and earn huge sums of money. This Brain-Drain deprives a country of its genius and capabilities.
Bridge Loan
A loan made by a bank for a short period to make up for a temporary shortage of cash. On the part of borrower, mostly the companies for example, a business organization wants to install a new company with new equipments etc. while his present installed company / equipments etc. are not yet disposed off. Bridge loan covers this period between the buying the new and disposing of the old one.
Budget
It is a document containing a preliminary approved plan of public revenue and public expenditure. It is a statement of the estimated receipt and expenses during a fixed period, it is a comparative table giving the accounts of the receipts to be realized and of the expenses to be incurred.
Budget Deficit
Budget may take a shape of deficit when the public revenue falls short to public expenditure. Budget deficit is the difference between the estimated public expenditure and public revenue. The government meets this deficit by way of printing new currency or by borrowing.
Bull
Bull is that type of speculator who gains with the rise in prices of shares and stocks. He buys share or commodities in anticipation of rising prices and sells them later at a profit.
Bull Market
It is a market where the speculators buy shares or commodities in anticipation of rising prices. This market enables the speculators to resale such shares and make a profit.
Buoyancy
When the government fails to check inflation, it raises income tax and the corporate tax. Such a tax is called Buoyancy. It concerns with the revenue from taxation in the period of inflation.
Business Cycle
Business cycle (also known as trade cycle) are species of fluctuations in the economic activity of organised communities. It is composed of period of good trade characterised
by rising prices and low unemployment, alternating with period of bad trade characterised by falling prices and high unemployment. Every trade cycle have five different subphases–depression, recovery, full employment, prosperity (boom) and recession.
Call Money
Call money is in the form of loans and advances which are payable on demand or within the number of days specified for the purpose.
Capital Budgeting
Capital budgeting represents the process of preparing budget for a period of a year or even for several years allocating capital outlays for the various investment projects. In other words, it is the process of budgeting capital expenditure by means of an annual or longer period capital budget.
Capital-labour Ratio
Latest models of machinery and equipment raise the labour efficiency and the output is maximized. Capitallabour ratio is the amount of capital against the given labours that a firm employs. Capital-labour ratio is the ratio of capital to labour.
Capital Market
Capital market is the market which gives medium term and long term loans. It is different from money market which deals only in short term loans.
Capitalism
Capitalism is an economic system in which all means of production are owned by private individuals Selfprofit motive is the guiding feature for all the economic activates under capitalism. Under pure capitalism system economic conditions are regulated solely by free market forces. This system is based on ‘Laissez-faire system’ i.e., no state intervention. Sovereignty of consumer prevails in this system. Consumer behaves like a king under capitalism.
Cash Reserve Ratio (CRR)
The commercial banks are required to keep a certain amount of cash reserves at the central bank. This percentage amount is called CRR. It influences the commercial bank’s volume of credit because variation in CRR affects the liquidity position of the banks and hence their ability to lend.
Census
Census gives us estimates of population. Census is of great economic importance for the country. It tells us the rate at which the total population is increasing among different age groups. In India census is done after every 10 years. The latest census in India has been done in 2001.
Central Bank
Central Bank may be defined as the apex barking and monetary institution whose main function is to control, regulate and stabilize the banking and the monetary system of the country in the national interest.
Cheque
Cheque is an order in writing issued by the drawer to a bank. If the customer has sufficient amount in his account, the cheque is paid by the bank. Cheques are used in place of cash money.
Clearing Bank
Clearing bank is one which settles the debits and credits of the commercial banks. Even of the cash balances are lesser, clearing bank facilitates banking operation of the commercial bank.
Clearing House
Clearing house is an institution which helps to settle the mutual indebtedness that occurs among the members of its organisation.
Closed Economy
Closed economy refers to the economy having no foreign trade (i.e., export and import). Such economies depend exclusively on their own internal domestic resources and have
no dependence on outside world.
Collusion
Producers of an industry reduce competition among themselves to raise their profits. They fix the price themselves with a clear understanding in this regard. This understanding among different firms is called collusion.
Coinage
Art and practice of making coins is called coinage. The metal is melted and moulded to shape into a coin. The coinage is a medium of exchange (money).
Collectivism
Collectivism is a belief that nation's interest is superior to individual interest. This is the collective thinking of the society and polity national leaders and also communist opine the theory of collection.
Commercial Bank
Commercial Bank is an institution of finance. It deals with the banking services through its branches in whole of the country. Operation of current accounts, deposits, granting of loans to individuals and companies etc. are various functions of the commercial bank.
Communism
Communism is a political and economic system in which the state makes the major economic decision State owns the bulk of capital assets. Responsibility for production and distribution lies with the state in this system.
Core Sector
Economy needs basic infrastructure for accelerating development. Development of infrastructure industries like cement, iron and steel, petroleum, heavy machinery etc. can only ensure the development of the economy as a whole. Such industries are core sector industries.
Corporation Tax
It is a tax on company's profit. It is a direct tax which is calculated on profits after interest payments and allowance (i.e., Capital allowance) have been deducted but before dividends are allowed for.
Cost-push Inflation
It arises due to an increase in production cost. Such type of inflation is caused by three factors : (i) an increase in wages, (ii) an increase in the profit margin and (iii) imposition of heavy taxation.
Credit Rationing
Credit rationing takes place when the banks discriminates between the borrowers. Credit rationing empowers the bank to lend to some and to refuse to lend to others. In this way credit rationing restricts lending on the part of bank.
Credit Squeeze
Monetary authorities restrict credit as and when required. This credit restriction is called credit squeeze. Monetary authorities adopt the policy of credit squeeze to control inflationary pressure in the economy.
Custom Duty
Custom duty is a duty that is imposed on the products received from exporting nations of the world. It is also called protective duty as it protects the home industries.
Cyclical Unemployment
It is that phase of unemployment which appears due to the occurrence of the downward phase of the trade cycle. Such an employment is reduced or eliminated when the business
cycle turns up again.
Dear Money
Dear money is that money which can only be borrowed at a high rate of interest. In dear money policy, bank rate and other rates of interest are high and as a result borrowing becomes expensive. Dear money policy is deliberate policy which is adopted by the monetary authorities to check inflation in the economy.
Death Duty
It is a direct tax which is imposed on the estate of deceased person. Death duty or Death Tax is a form of personal tax on property which is levied when property passes from one person to other at the time of death of the former.
Death Rate
Death rate signifies the number of deaths in a year per thousand of the population. It is mostly known as crude death rate. Life expectancy is important determinant of death rate.
A country having high life expectancy will have a high crude death rate.
Decentralisation
Decentralisation means the establishment of various unit of the same industry at different places. Large scale organisation or industry can not be run at one particular place or territory. In order to increase the efficiency of the industry, various units at different places are located.
Debt Service (Total)
The sum of principal repayments and interest actually paid in foreign currency, goods and services on longterm debt (having maturity of more than one year), interest paid on shortterm debt and repayments to IMF.
This is a term used by stock exchange which specifies the particular stock or share which deals in frequent and regular transactions. It helps the buyers to obtain reasonably large amounts at any time.
Administered Price
The administrative body e.g., the government a marketing board or a trading group determines this price. The competitive market force are not entitled to determine this price. The government fixes a price in accordance with demand supply portion in the market.
Ad-valorem Tax
Ad-valorem tax is a kind of indirect tax in which goods are taxed by their values. In the case of ad-volorem tax, the tax amount is calculated as the proportion of the price of the goods. Value added Tax (VAT) is an ad-volorem Tax.
Advanced Countries
Advanced countries are countries which are industrially advanced, having high national and per capita income and ensure high rate of capital formation. These countries possess highly developed infrastructure and apply most updated and advanced technical know-how in their productive activities. A strong and well organised financial structure is found in these advanced countries.
Amalgamation
It means ‘merger’. As and when necessity arises two or more companies are merged into a large organisation. This merger takes place in order to effect economies, reduce competition and capture market. The old firms completely lose their identity when the merger takes place.
Appreciation
Appreciation means an increase in the value of something e.g., stock of raw materials or manufactured goods. It also includes an increase in the traded value of a currency. It is the antonym of Depreciation. When the prices rise due to inflation, appreciation may occur. It causes scarcity or increase in earning power.
Arbitrage
When a person performs functions of middle man and buys and sells goods at a particular time to cash the price differences of two markets, this action is termed as arbitrage. Purchases are made in the market where price is low and at the same time, goods are sold in other market where the price are high. Thus the middleman earns profit due to price difference in two markets.
Arbitration
Where there is an industrial dispute, the Arbitration comes to the force. The judgement is given by the Arbitrator. Both the parties have to accept and honour the Arbitration. Arbitration is the settlement of labour disputes that takes place between employer and the employees.
Auction
When a commodity is sold by auction, the bids are made by the buyers. Whose ever makes the highest bid, gets the commodity which is being sold. The buyers make the bid
taking into consideration the quality and quantity of the commodity.
Autarchy
If a country is self-sufficient, it does not require the imports for the country. Autarchy is an indicator of self-sufficiency. It means that the country itself can satisfy the needs of its population without making imports from other countries.
Automation
Automation means the use of machinery & technology to replace the labour’s work. Automation increases the demand of skilled workers. Unskilled and semiskilled workers are reduced as a result of automation.
Balanced Budget
When the total revenue of the government exactly equals the total expenditure incurred by the government, the budget becomes a balanced budget. But it is a conservative view point. In present days, the welfare government has to regulate a number of economic and social activities which increase the expenditure burden on the government and results in deficit budget.
Balance of Payment
Balance of payment of a country is a systematic record of all economic transactions completed between its residents and the residents of remaining world during a year. In other words, the balance of payment shows the relationship between the one country's total payment to all other countries and its total receipts from them. Balance of payment is a comprehensive term which includes both visible and invisible items. Balance of payment not only include visible export and imports but also invisible trade like shipping, banking, insurance, tourism, royalty, payments of interest on foreign debts.
Balance of Trade
Balance of trade refers to the total value of a country's export commodities and total value of imports commodities. Thus balance of trade includes only visible trade i.e., movement of goods (exports and imports of goods). Balance of trade is a part of Balance of payment statement.
Balance Sheet
Balance sheet is a statement showing the assets and liabilities of a business at a certain date. Balance sheet helps in estimating the real financial situation of a firm.
Bank
Bank is a financial institution. It accepts funds on current and deposit accounts. It also lends money. The bank pays the cheques drawn by customers against current and deposits accounts. The bank is a trader that deals in money and credit.
Bank Draft
Banker's draft is a negotiable claim drawn upon a bank. Drafts are as good as cash. The drafts cannot be returned and unpaid. Draft is issued when a customer shows his unwillingness to accept cheque in payment for his services or mercantile goods. Bank Draft is safer than a cheque.
Bank Rate
Bank Rate is the rate of discount at which the central bank of the country discounts first class bills. It is the rate of interest at which the central bank lends money to the lower banking institutions. Bank rate is a direct quantitative method of credit control in the economy.
Bilateralism
It implies an agreement between two countries to extend to each other specific privileges in their international trade which are not extended to others.
Birth Rate
Birth Rate (or Crude Birth Rate) is number of the births per thousand of the population during a period, usually a year. Only live births are included in the calculation of birth rate.
Black Money
It is unaccounted money which is concealed from tax authorities. All illegal economic activities are dealt with this black Money. Hawala market has deep roots with this black money. Black money creates parallel economy. It puts an adverse pressure on equitable distribution of wealth and income in the economy.
Blue Chip
It is concerned with such equity shares whose purchase is extremely safe. It is a safe investment. It does not involve any risk.
Blue Collar Jobs
These Jobs are concerned with factory. Persons who are unskilled and depend upon manual jobs that require physical strain on human muscle are said to be engaged in Blue Collar Jobs. In the age of machinery, such Jobs are on the decline these days.
Brain-Drain
It means the drift of intellectuals of a country to another country. Scientists, doctors and technology experts generally go to other prominent countries of the world to better their lot and earn huge sums of money. This Brain-Drain deprives a country of its genius and capabilities.
Bridge Loan
A loan made by a bank for a short period to make up for a temporary shortage of cash. On the part of borrower, mostly the companies for example, a business organization wants to install a new company with new equipments etc. while his present installed company / equipments etc. are not yet disposed off. Bridge loan covers this period between the buying the new and disposing of the old one.
Budget
It is a document containing a preliminary approved plan of public revenue and public expenditure. It is a statement of the estimated receipt and expenses during a fixed period, it is a comparative table giving the accounts of the receipts to be realized and of the expenses to be incurred.
Budget Deficit
Budget may take a shape of deficit when the public revenue falls short to public expenditure. Budget deficit is the difference between the estimated public expenditure and public revenue. The government meets this deficit by way of printing new currency or by borrowing.
Bull
Bull is that type of speculator who gains with the rise in prices of shares and stocks. He buys share or commodities in anticipation of rising prices and sells them later at a profit.
Bull Market
It is a market where the speculators buy shares or commodities in anticipation of rising prices. This market enables the speculators to resale such shares and make a profit.
Buoyancy
When the government fails to check inflation, it raises income tax and the corporate tax. Such a tax is called Buoyancy. It concerns with the revenue from taxation in the period of inflation.
Business Cycle
Business cycle (also known as trade cycle) are species of fluctuations in the economic activity of organised communities. It is composed of period of good trade characterised
by rising prices and low unemployment, alternating with period of bad trade characterised by falling prices and high unemployment. Every trade cycle have five different subphases–depression, recovery, full employment, prosperity (boom) and recession.
Call Money
Call money is in the form of loans and advances which are payable on demand or within the number of days specified for the purpose.
Capital Budgeting
Capital budgeting represents the process of preparing budget for a period of a year or even for several years allocating capital outlays for the various investment projects. In other words, it is the process of budgeting capital expenditure by means of an annual or longer period capital budget.
Capital-labour Ratio
Latest models of machinery and equipment raise the labour efficiency and the output is maximized. Capitallabour ratio is the amount of capital against the given labours that a firm employs. Capital-labour ratio is the ratio of capital to labour.
Capital Market
Capital market is the market which gives medium term and long term loans. It is different from money market which deals only in short term loans.
Capitalism
Capitalism is an economic system in which all means of production are owned by private individuals Selfprofit motive is the guiding feature for all the economic activates under capitalism. Under pure capitalism system economic conditions are regulated solely by free market forces. This system is based on ‘Laissez-faire system’ i.e., no state intervention. Sovereignty of consumer prevails in this system. Consumer behaves like a king under capitalism.
Cash Reserve Ratio (CRR)
The commercial banks are required to keep a certain amount of cash reserves at the central bank. This percentage amount is called CRR. It influences the commercial bank’s volume of credit because variation in CRR affects the liquidity position of the banks and hence their ability to lend.
Census
Census gives us estimates of population. Census is of great economic importance for the country. It tells us the rate at which the total population is increasing among different age groups. In India census is done after every 10 years. The latest census in India has been done in 2001.
Central Bank
Central Bank may be defined as the apex barking and monetary institution whose main function is to control, regulate and stabilize the banking and the monetary system of the country in the national interest.
Cheque
Cheque is an order in writing issued by the drawer to a bank. If the customer has sufficient amount in his account, the cheque is paid by the bank. Cheques are used in place of cash money.
Clearing Bank
Clearing bank is one which settles the debits and credits of the commercial banks. Even of the cash balances are lesser, clearing bank facilitates banking operation of the commercial bank.
Clearing House
Clearing house is an institution which helps to settle the mutual indebtedness that occurs among the members of its organisation.
Closed Economy
Closed economy refers to the economy having no foreign trade (i.e., export and import). Such economies depend exclusively on their own internal domestic resources and have
no dependence on outside world.
Collusion
Producers of an industry reduce competition among themselves to raise their profits. They fix the price themselves with a clear understanding in this regard. This understanding among different firms is called collusion.
Coinage
Art and practice of making coins is called coinage. The metal is melted and moulded to shape into a coin. The coinage is a medium of exchange (money).
Collectivism
Collectivism is a belief that nation's interest is superior to individual interest. This is the collective thinking of the society and polity national leaders and also communist opine the theory of collection.
Commercial Bank
Commercial Bank is an institution of finance. It deals with the banking services through its branches in whole of the country. Operation of current accounts, deposits, granting of loans to individuals and companies etc. are various functions of the commercial bank.
Communism
Communism is a political and economic system in which the state makes the major economic decision State owns the bulk of capital assets. Responsibility for production and distribution lies with the state in this system.
Core Sector
Economy needs basic infrastructure for accelerating development. Development of infrastructure industries like cement, iron and steel, petroleum, heavy machinery etc. can only ensure the development of the economy as a whole. Such industries are core sector industries.
Corporation Tax
It is a tax on company's profit. It is a direct tax which is calculated on profits after interest payments and allowance (i.e., Capital allowance) have been deducted but before dividends are allowed for.
Cost-push Inflation
It arises due to an increase in production cost. Such type of inflation is caused by three factors : (i) an increase in wages, (ii) an increase in the profit margin and (iii) imposition of heavy taxation.
Credit Rationing
Credit rationing takes place when the banks discriminates between the borrowers. Credit rationing empowers the bank to lend to some and to refuse to lend to others. In this way credit rationing restricts lending on the part of bank.
Credit Squeeze
Monetary authorities restrict credit as and when required. This credit restriction is called credit squeeze. Monetary authorities adopt the policy of credit squeeze to control inflationary pressure in the economy.
Custom Duty
Custom duty is a duty that is imposed on the products received from exporting nations of the world. It is also called protective duty as it protects the home industries.
Cyclical Unemployment
It is that phase of unemployment which appears due to the occurrence of the downward phase of the trade cycle. Such an employment is reduced or eliminated when the business
cycle turns up again.
Dear Money
Dear money is that money which can only be borrowed at a high rate of interest. In dear money policy, bank rate and other rates of interest are high and as a result borrowing becomes expensive. Dear money policy is deliberate policy which is adopted by the monetary authorities to check inflation in the economy.
Death Duty
It is a direct tax which is imposed on the estate of deceased person. Death duty or Death Tax is a form of personal tax on property which is levied when property passes from one person to other at the time of death of the former.
Death Rate
Death rate signifies the number of deaths in a year per thousand of the population. It is mostly known as crude death rate. Life expectancy is important determinant of death rate.
A country having high life expectancy will have a high crude death rate.
Decentralisation
Decentralisation means the establishment of various unit of the same industry at different places. Large scale organisation or industry can not be run at one particular place or territory. In order to increase the efficiency of the industry, various units at different places are located.
Debt Service (Total)
The sum of principal repayments and interest actually paid in foreign currency, goods and services on longterm debt (having maturity of more than one year), interest paid on shortterm debt and repayments to IMF.
Deficit Financing
It is a practice resorted to by modern government of spending more money than it receives in revenue. It is a policy of bridging a deficit between governments expenditure and revenue. Deliberately budgeting for a deficit is called deficit financing. This practice was popularised by Prof. J. M. Keynes to deal with the depression and unemployment situations and to stimulate economic activity. Deficit financing, though having inflationary effects, has now become a common practice in all countries.
Deflation
Deflation is the reverse case of inflation. Deflation is that state of falling prices which occurs at that time when the output of goods and services increases more rapidly than the volume of money in the economy. In the deflation the general price level falls and the value of money rises.
Devaluation
The loss of value of currency of a country relative to other foreign currency is known as devaluation. Devaluation is a process in which the government deliberately cheapens the exchange value of its own currency in terms of other currency by giving it a lower exchange value. Devaluation is used for improving, the balance of payment situation in the country.
Direct Tax
A tax is said to be a direct tax when it is not intended to be shifted to anybody else. The person who pays it in the first instance is also excepted to bear it. Thus the impact and incidence of direct tax fall on the same person shifting of direct tax is not possible Income Tax is a example of direct tax.
Disinflation
It refers to a process of bringing down prices moderately from their high level without any adverse impact on production and employment. Thus, disinflation is an anti-inflationary measure.
Dissaving
Dissaving occurs when expenditure exceeds income. Raising of loans or utilization of past accumulated savings takes place in such eventuality.
Dividend
Dividend is the amount which the company distributes to shareholders when the profits of the company are calculated by the board of directors.
Economic Integration
Economic integration appears when two or more nations coordinate themselves and their economies are linked up. It may exhibit itself in the form of free trade area or a full economic union. EEC is an example of economic integration.
Engel's Law
This law was formulated by Ernst Engel. This law states that, with given taste and preference, the portion of income spend on food diminishes as income increases. According to this law, smaller a person's income, the greater the proportion of it that he will spend on food and vice versa.
Estate Duty
It is a tax which is levied on the estate of a decreased person. It is also known as death duty. The ownership of state changes hands only after the payments of the estate duty. It is an progressive tax in nature.
Excise Duty
It is a tax which is imposed on certain indigenous production (e.g., petroleum products, cigarettes etc.) of the country. Excise duty may be imposed either to raise revenue or to check the consumption of the commodities on which they are imposed. Excise duty is progressive in nature.
Face Value
It refers to that normal value of coin at which the coin circulates and is accepted in the discharge of debit or obligation. Broadly speaking, the face value refers to domination stamped on a coin / or documents when it is issued. In securities, it refers to par value.
Fascism
It is a form of political system. In it every economic consideration rests on one criterion—the increase in the people's standard of living. It also lays emphasis on military
strength and prestige of the country. It is the extreme nationalism and the ultimate goal is self-sufficiency.
Federal Economy
It refers to a federation which is an association of two and more states. A federal state is a union of state in which authority is divided between the federal (or central) government and the state governments. In a federal economy both the centre and the states are independent in the exercise of this authority.
Fiduciary Issue
Generally bank-note are backed by gold. But when they are not backed by gold and government securities replace gold, it is called fiduciary issue. Such fiduciary issue results in inflation.
Fertility Rate
The term fertility refers to the actual bearing of children or ‘occurrence of births’. Fertility rate measures the average number of the live births per 1000 women. This rate is one of the most important and useful aids to population projection. It helps in assessing population trends in the economy.
Fiscal Policy
Fiscal policy is that part of government economic policy which deals with taxation, expenditure, borrowing, and the management of public debt in the economy. Fiscal policy primarily concerns itself with the flow of funds in the economy. Fiscal policy primarily concerns itself with the flow of funds in the economy. It exerts a very powerful influence on the working of economy as a whole.
GEM
GEM (Gender Empowerment Measure) is a composite index measuring gender inequality in three basic dimensions of empowerment–economic participation and decision making, political participation and decision making, and power over economic resources.
GDI
GDI (Gender Related Development Index) is a composite index measuring average achievement in the three basic dimensions captured in the human development index–a long and healthy life, knowledge and a decent standard of living–adjusted to account for inequalities between men and women.
Gini-coefficient
It represents the measurement of inequality derived from the ‘Lorenz Curve,’ with every increase in the degree of inequality, the curvature of the Lorenz Curve also increases and
the area between the curve and 45° line becomes larger.
The Gini-coefficient is measured as—
G =Area between Lorenz Curve & 45° Line/Area above the 45° Line
Giffin Goods
Giffin goods have the positive relationship between price and quantity demanded and as a result demand curve of Giffin goods slopes upward from left to right. This phenomenon was first observed by Sir Robert Giffin in relation to the demand for bread by poor labours.
Gresham's Law
“Bad money (if not limited in quantity) drives good money out of circulation”—This statement was given by Sir Thomas Gresham, the economic Adviser of Queen Elizabeth. This law states that people always want to hoard good money and spend bad money when two forms of money are in circulation at the same time.
Gross Domestic Product (GDP)
It is the money value of all final goods and services produced within the geographical boundaries of the country during a given period of time (usually a year). GDP can be calculated both at current prices and at constant prices. If we add net factor income from abroad to the GDP, we get ‘Gross National Product’ (GNP).
Gross National Product (GNP)
It refers to the money value of total output or production of final goods and services produced by the nationals of a country during a given period of time, generally a year.
Gross National Product Deflator
It is a Price Index Number used to correct the money value of Gross National Product (GNP) for price changes so as to isolate the changes which have taken place in the physical output of goods and services.
Guild Socialism
This form of socialism accepts the leadership of artisans. The operation of the whole economy specially the management and control of industries lies in the hands of artisans Socialism established by artisans is termed a Guild Socialism.
HDI
HDI (Human Development Index) is a composite index measuring average achievement in three basic dimensions of human life–a long and healthy life, knowledge and a decent standard of living.
Import Duty
Import duty is a tax on imports imposed on an ad-valorem basis i.e., fixed in the form of a percentage on the value of the commodity imported.
Indirect Tax
Indirect tax is that tax which is levied on goods or services produced or purchased. Indirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense to another.
Inflation
A situation of a steady and sustained rise in general prices is usually known as inflation. Inflation is a state in which the value of money is falling i.e., prices are rising.
Joint Demand
Joint demand appears in case of complementary goods. When two commodities are complementary to one another and cannot be used separately, they have joint demand. Bread and butter, sugar and tea, pen and ink are a few examples of joint demand. In joint demand a change in demand of one commodity bring about the proportionate change in demand for the other.
Joint Sector
When a sector is jointly owned, managed and run by both public and private sector, it is called joint sector. This sector indicates the partnership between the two i.e., public and private sector.
Labour Union
Labour union represents that organisation of workers which works for improving working condition of labours and also for raising their wage by adopting ‘collective bargaining’ measures with the management of the industry in particular.
Laffer Curve
This curve is given by American economist Prof. Arthur Laffer. It represents relationship between total tax revenue and corresponding tax rates.
Laissez Faire
It is a French word meaning ‘non-interference’. This doctrine was popularised by classical economists who gave the view that government should interfere as little as possible in the economic activities of the individuals.
Life Expectancy at Birth
The number of years a newborn infant would live if prevailing pattern of age specific mortality rates at the time of birth were to stay the same throughout the child’s life.
Liquidation
It refers to the termination (or winding up) of a registered company. Liquidation takes place because of company's insolvency. In liquidation, assets are turned into cash for settling outstanding debts and for apportioning the balance, if any, amongst the owners.
Liquidity
Assets which can easily be converted into cash money are said to have liquidity. Land does not possess liquidity at it takes longer time to get converted into cash.
Liquidity Ratio
The commercial banks under banking regulations have to maintain a certain specified proportion of their total deposits of various categories in liquid assets. This maintainable proportion is called liquidity ratio.
Lock-out
Lock-out refers to such a situation when the management does not permit the workers to work unless they agree to accept the employer's term. Lock-out is the closing of work by the management for an uncertain period of time to put pressure on the labour union. It is an action by the employer equivalent to a strike by employees.
Lorentz Curve
This curve shows the degree of inequalities of a frequency distribution in a graphical manner. It is a curve on a graph which shows the cumulative proportion of a statistical population against this cumulative share of some characteristic. This curve is commonly used to depict income distribution showing the cumulative percentage of people from the poorest up and their cumulative share of national income.
Lump Sum Tax
Lump sum tax is a fixed amount which has imperative nature irrespective of the income level. This tax is not equitable in nature.
Merit Goods
Merit goods refer those goods that are very essential to the society as a whole and hence the government ensures their availability to all consumers, regardless of their ability to pay to reasonable price.
Mixed Economy
It refers to that economic system in which both private and public sector co-exists. Indian economy is an example of a mixed economy.
Monetary Policy
Monetary policy comprises all measures applied by the monetary authorities with a view to produce a deliberate impact on the nature and volume of money so as to achieve the objectives of general economic policy. It aims at regulating the flow of currency, credit and other money substitutes in an economy with a view to affect the total stock of such assets as well as to influence the demand of the community for such assets.
Monetary Reforms
When a new currency is introduced in a country due to hyperinflation or due to a deliberate policy measure (such as decimalization) it is termed as monetary reform.
Monopoly
Monopoly refers to that market structure where there is only one seller in the market who controls the entire market supply and no substitute of the product is available in the market.
Monopsony
Monopsony is that market situation in which there is only one single buyer of the product in the market. In other word, ‘buyer's monopoly’ is termed as monopsony.
Multinational Company
It is a large scale company which has its production base in several countries and the bulk of the production is produced in outside nations. This company produces more overseas
than they do in its parent country. Increased trade and economies of scale have encouraged such type of companies in the recent years.
National Income
In the simplest way it can be defined as ‘factor income accruing to the national residents of a country.’ It is the sum of domestic factor income and net factor income earned from abroad. Net national product at factor cost is called national income.
Net National Product (NNP)
When depreciation is deducted from GNP i.e., Gross National Product, we get Net National Product (NNP).
Oligopoly
Oligopoly is that form of imperfect competition in which there are only a few firms in the industry (or group) producing either homogeneous products or may be having product differentiation in a given line of production.
Open Economy
Open economy is that economy which is left free and the government imposes no restrictions on trade with areas outside that economy.
Okun’s Law
Arthur Okun presented an empirical relationship between cyclical movements in GNP and unemployment. Okun found that an annual 2•5% increase in the rate of real growth above the trend growth results in a 1% decrease in the rate of unemployment. This relationship is known as Okun’s Law.
Perfect Competition
Perfect competition is the market in which there are many firms selling identical products with no firm large enough relative to the entire market to be able to influence market price.
Poverty Line
Poverty line is a virtual line demarcating persons living below and above it. In India all those persons are treated living below poverty line who are not able to earn that much of income which is not sufficient to acquire food equivalent to 2100 calories per person per day in urban areas and 2400 calories per person per day in rural areas. As per UNDP, one US dollar (1993 PPP US $) per person per day is treated as poverty line.
PQLI
PQLI is known as Physical Quality of Life Index which is used to assess the level of social development. This index was developed by Jim Grant for The Overseas Development Council PQLI is calculated by using indices of (i) Adult literacy rate, (ii) IMR, (iii) Life Expectancy.
Price Mechanism
Price mechanism signifies the working of those market forces which establishes equilibrium in the economy. Laissez faire policy is the basis for the working of price mechanism.
Price Ring
It is an unofficial syndicate by which the prices are controlled with the prior understanding among the traders. These dealers under a price ring decide not to over-bid one another at the public auction to keep the prices low. This price ring may discourage outsiders from coming to the auctions.
Private Sector
Private Sector is that part of the economy which is not owned by the government and is under the hands of private enterprise. In other words, private sector is not under direct government control. Private sector includes the personal as well as the corporate sector.
Privatisation
Privatisation is the antithesis of nationalisation. When the government owned public industries are denationalised and the disinvestment process is initiated, it is called privatisation.
Public Debt
Public debt represents borrowing by the state and public authorities. All loans taken by the public authorities constitute public debt.
Public Goods
Public goods are those goods which belong to the entire community. None of the individual of the society can be made deprived of using these public goods. National defence, Police, Street lighting etc. are examples of public goods.
Public Sector
Public sector signifies those undertakings which are owned, managed and run by public authorities. Public sector includes direct government enterprise, the nationalized industries and public corporations. In this sector of the economy the government acts itself as an entrepreneur.
Peril Point
It indicates that point beyond which tariff reductions would threaten the existence of domestic industry.
Quick Asset
Those assets are quick assets which are liquid or nearly liquid in nature and easily be turned into cash.
Quoted Company
That company is called quoted company whose share prices are quoted on a stock exchange.
Reflation
It signifies general increase in the level of business activity in the economy. Reflation generally involves greater government expenditure and the easing of credit to encourage increased production.
Regressive Tax
It is a tax in which rate of taxation falls with an increase in income. In regressive taxation incidence falls more on people having lower incomes than that of those having higher incomes.
Repressed Inflation
It is a state in which aggregate demand is greater than the total supply of goods and services in an economy, but prices are prevented from rising to eliminate excess demand. The holding down of price is sometimes done by government as a means of suppressing inflation.
Reserve Asset Ratio
It is the ratio of a bank’s reserve assets to its eligible liabilities.
Revolving Credit
It is a bank credit that is renewed automatically until notice of cancellation is received. Revolving credits may be sanctioned for an unlimited amount in total but with a limit on
the amount that may be drawn at any one time or within a specified period, e.g., one month.
Seasonal Unemployment
It is that unemployment which is caused by seasonal variation in demand for labour by various industries, such as agriculture, construction and tourism. Seasonal unemployment
normally declines in spring as more outdoor work can be undertaken.
Security
Security refers to a share, bond or government stock that can be bought and sold, usually on the stock exchange or on a secondary market, and carries a right to some form of income, either in the form of a fixed rate of interest or dividends.
Shadow Price
It is an imputed value for a good based on the opportunity costs of the resources used to produce it such values are of particular significance in resolving problems of resource allocating with respect to the effect on welfare.
Share Capital
It is the amount of money raised by a company by issuing shares. The authorized share capital is the amount that a company is allowed to issue as laid down in its Articles of Association. The issued share capital is the amount actually issued i.e., the number of issued shares multiplied by their par value. Fully paid share capital is the amount raised by payment of the full par value of the issued shares.
Single Tax System
It is a system in which all tax revenues are raised from one form of taxation.
Socialism
The political doctrine that the means of production (machines, materials and output) should be owned by society and specifically either by the state, as in the case of nationalized industries or by the workers directly, as in the case of producer co-operatives.
Social Security
Provision by the state out of taxation of welfare assistance to those in need as a result of illness, unemployment, or old age compare national insurance refers to social security.
Soft Currency
A currency with limited convertibility into gold and other currencies, either because it is depreciating due to balance of payments difficulties or because controls have been placed on it to prevent the exchange rate falling.
Special Drawing Rights (SDRs)
It is a reserve asset (known as ‘Paper Gold’) created within the framework of the International Monetary Fund in an attempt to increase international liquidity, and now forming a part of countries official reserves along with gold, reserve positions in the IMF and convertible foreign currencies.
Special Tax (Unit Tax)
It is a tax imposed per unit of a commodity rather than on the value of the commodity compare ad-valorem.
Stabilization Policy
It is Government economic policy announced at reducing the cyclical and other fluctuations that take place in a market economy.
Stagflation
It is a state of the economy in which economic activity is slowing down, but wages and prices continue to rise. The term is a blend of the words stagnation and inflation.
Surplus Value
It is the difference between the amount paid to a factor and the revenue earned by selling the output it produced.
Tariff
It is a tax or a duty on imports, which can be levied either on physical units, e.g., per tonne (specific), or on value (ad-valorem). Tariffs may be imposed for a variety of reasons including; to raise government revenue, to protect domestic industry from subsidized or low-wage imports, to boost domestic employment, or to ease a deficit on the balance of payments.
Trade Gap
It signifies the size of the deficit (or surplus) in the balance of trade i.e., the difference in value between visible imports and exports.
Trade Union
It is an organisation of employees who join together to further their interests. Trade Unions negotiate on behalf of their members in collective bargaining with employers, and in the event of a dispute may put pressure on employers by withdrawing labour (i.e. strike) or by some less drastic form of action (i.e. go-slow, working to rule).
Transfer Payment
It is a payment made by public authority other than one made in exchange for goods or services produced. Transfer payments are not the part of National Income. Examples includes unemployment benefit and child benefits.
Vital Statistics
Vital statistics refers to those data which are associated with vital events of masses like birth, death, marriage divorce etc.
VAT (Value Added Tax)
VAT seeks to tax the value added at every stage of manufacturing and sale, with a provision of refunding the amount of VAT already paid at the earlier stages to avoid double taxation. In other words, the tax already paid can be claimed at the next stage of value addition.
Wealth Tax
Wealth tax is that tax which is imposed on the value of total assets but the wealth upto a certain limit is exempted from such tax.
Welfare State
It refers to a nation that provides to all at least the minimum standards in respect of education, health, housing, pensions and other social benefits.
Wholesale Price Index
Wholesale Price Index is that index which is calculated on the basis of wholesale prices. It is calculated in a similar way to the Retail Price Index.
Exchange Rate In Maldives
Exchange rate is the rate at which one currency is exchanged for another. In Maldives they were following fixed exchange rate, that is 12.85 Rufiyaa is equals to 1 US Dollar. But the recommendation from IMF because of the large and sustained current account deficit, Maldivian Rufiyaa's value has devalued against Dollar.Government changed to managed floating exchange rate, that is 10. 48 to 15.42. Now it reached its capping level that is Mrf15.42 = $1. Now again its the same effect of fixed exchange rate, if there is no cap it may be 20 or 25 Rufiyaa for 1 dollar. Devaluation makes exports cheaper and imports expensive, as a import oriented country, Maldivives exports become expensive and it lead to inflation and further current account deficit in balance of payment. Here living cost increased by 30 to 40%. The countries like China and Japan they devalued their currency because they are import oriented country, that is good for them. However devaluation will improve current account of balance of payment when the price elasticity of demand for export is greater than one, that is elastic( Marshell Learner Condition). Further more J Curve effect also is there, that is it will take a long period of time to improve current account by devaluation, that is at least 4 to 6 years. So we cannot expect a rapid improvement in economy and current account of the country.Government is saying that they will keep the rate that is Mrf 10 = $1, but it is impossible in short run. In my opinion we have to wait a long period of time for further improvement.In spite of this the SAARC Summit is going to held in Maldives may bring some foreign currency, aids and further improvement.
Sunday, June 19, 2011
GCE A level Economics - Global Economy
Name 5 strategies to promote growth and development:
Aid, debt cancellation, investment (humans, agriculture, manufacturing and tourism), inward/outward looking strategies, interventionist approaches, free market approaches, microfinance and fair trade.
What kinds of aid are there?
Emergency aid, Tied aid (condition attached), bilateral aid (one country gives to another) and multilateral aid (countries give to an organisation).
Name 5 benefits of aid.
Decrease absolute poverty
- Fill saving gap
- Provide funds for infrastructure (allows for industrialisation)
- Improves human capital
- Aid may contribute to increases in globalisation and trade
- The reduction of world inequality
- Fill saving gap
- Provide funds for infrastructure (allows for industrialisation)
- Improves human capital
- Aid may contribute to increases in globalisation and trade
- The reduction of world inequality
Name 5 disadvantages of aid
Results in dependency culture
- May not benefit intended recipients (due to corruption)
- There is no clear evidence that aids contributes to the reduction of absolute poverty or to growth and development
- Right wing economists argue aid distorts market forces and leaves inefficient allocation of resources
- Left-wing economists argue aid is a form of economic imperialism whereby political influence is desired
- Aid derived from concessional loans include interest which has an opportunity cost
- May not benefit intended recipients (due to corruption)
- There is no clear evidence that aids contributes to the reduction of absolute poverty or to growth and development
- Right wing economists argue aid distorts market forces and leaves inefficient allocation of resources
- Left-wing economists argue aid is a form of economic imperialism whereby political influence is desired
- Aid derived from concessional loans include interest which has an opportunity cost
Why is debt cancellation called for?
Countries such as Gambia struggle to service the debt, making repayments representing a disproportionate amount of public expenditure.
Name 5 arguments for the cancellation of debt.
Developing countries would have more foreign currency to buy from developed countries
- If money released from debt cancellation is spent on capital goods then potential economic growth
- Help reduces absolute poverty as less money spent servicing debts
- Reduce the savings and foreign exchange gap
- May help conserve the environment (e.g debt for nature swaps)
- If money released from debt cancellation is spent on capital goods then potential economic growth
- Help reduces absolute poverty as less money spent servicing debts
- Reduce the savings and foreign exchange gap
- May help conserve the environment (e.g debt for nature swaps)
Name 5 arguments against the cancellation of debt
Debt cancellation programmes take longer than aid
- Unless conditions are attached, there's no guarantee that the countries will persue sound macroeconomic policies
- Corruption might misplace financial benefits
- Shareholders in banks in dev. countries may bear the burden of debt cancellation
- May be less effective than policies to reduce protectionism in developed countries
- Unless conditions are attached, there's no guarantee that the countries will persue sound macroeconomic policies
- Corruption might misplace financial benefits
- Shareholders in banks in dev. countries may bear the burden of debt cancellation
- May be less effective than policies to reduce protectionism in developed countries
What is seen as the most effective investment in human capital? Evidence suggests that investment in primary education in developing country yields higher return than other types of education (promotes literacy)
Why might a country benefit from investment in agriculture?
- Because they have a comparative advantage and thus resources are allocated more efficiently
- Can benefit financially from selling goods with a high income elasticity of demand
- Can benefit financially from selling goods with a high income elasticity of demand
Why is it seen that investment in manufacturing will aid growth/development?
The structural/dual sector mode (Lewis model) is based on the view that development requires a move away from traditional agriculture (subsistence farming) to more productive manufacturing.
Name the 5 key features of the Lewis model
Describes the transfer of surplus labour from low productivity agriculture sector to high productivity industrial sector
- Because of excess worker supply, marginal productivity (MP) of agricultural workers may be close to zero (diminishing returns)
- With MP zero, opportunity cost of transferring workers from agricultural to industrial sector would be zero
- Industrialisation associated with investment (transnational firms?) which will increase productivity and profitability, which when invested will further increase growth
- Share of profits as a percentage of GDP will increase as will the savings ratio, providing more funds for investment and continued economic growth.
- Because of excess worker supply, marginal productivity (MP) of agricultural workers may be close to zero (diminishing returns)
- With MP zero, opportunity cost of transferring workers from agricultural to industrial sector would be zero
- Industrialisation associated with investment (transnational firms?) which will increase productivity and profitability, which when invested will further increase growth
- Share of profits as a percentage of GDP will increase as will the savings ratio, providing more funds for investment and continued economic growth.
List 3 criticisms of the Lewis model
- Profits made in the industrial sector might not be invested locally, especially if they are transnational firms
- Reinvestment may not take the form of capital equipment
- Empirical evidence suggests the assumption of surplus labour in the agricultural sector and full employment in the industrial sector is invalid, e.g. favelas (slums) in South America
- Reinvestment may not take the form of capital equipment
- Empirical evidence suggests the assumption of surplus labour in the agricultural sector and full employment in the industrial sector is invalid, e.g. favelas (slums) in South America
Name 5 advantages of the tourism to a developing country
likely to attract investment by transnational hotel chains which will in turn increase GDP by the multiplier
- Jobs will be created direct and through the multiplier
- Increased GDP and investment will mean more tax revenue = better public services
- Can help preserve national heritage of a country (Egypt)
- Foreign investment may lead to better infrastructure (new roads?)
- Jobs will be created direct and through the multiplier
- Increased GDP and investment will mean more tax revenue = better public services
- Can help preserve national heritage of a country (Egypt)
- Foreign investment may lead to better infrastructure (new roads?)
Name 5 drawbacks of tourism to a developing country
- May mean an increase on imports and BOP will be affected by TNCs repatriating shareholders
- Tourism is income elastic - tough times in a recession
- Employment may only be seasonal and low paid (TNCs may bring in own managers)
- Tourism can be subject to fashion (Spain has seen a loss of custom from Europeans)
- Externalities (increase in waste, pollution)
- Tourism is income elastic - tough times in a recession
- Employment may only be seasonal and low paid (TNCs may bring in own managers)
- Tourism can be subject to fashion (Spain has seen a loss of custom from Europeans)
- Externalities (increase in waste, pollution)
What are inward and outward-looking strategies?
Strategies adopted by countries to work towards diversification and industrialisation.
Name 2 inward-looking strategies
Import substitution (replace imports with domestically produced manufactured goods) and protectionism.
What is the desired effect of inward-looking strategies?
To enable a country to diversify in a controlled way until its domestic base is strong. This will be most effective where the country's domestic market is large enough to allow for economies of scale.When achieved the industry will be strong enough to cope with foreign competition.
What are the 2 main drawbacks of inward-looking strategies?
- Comparative advantage is distorted and so resources will be allocated inefficiently
- the lack of foreign competition may result in inefficiency
Name 4 types of outward-looking strategies
- Free trade
- Deregulation of capital markets
- Promotion of foreign direct investment
- Devaluation of exchange
What were post WW2 government interventionist practices characterised by?
- Import substitution policies
- Nationalisation
- Fixed lower prices for farmers to sell to state cont. boards
- Price subsidies on necessities
- Over-valued exchange rate (aimed at keeping down the cost of imports)
What negative effects did the post WW2 government strategies lead to?
- Low economic growth
- Resource and allocative inefficiency because of no profit motive
- Government failure
- Corruption by civil servants
- Increasing fiscal deficits (from subsidies and nationalised ind.)
- Increasing BOP (over valued currency)
What are the key components of free market approaches?
- Free market analysis (assumes markets are efficient and the best way to allocate markets)
- Public choice theory (politicians, civil servants and governments use their power for their own self interest)
What will a free market be characterised by?
- Trade liberalisation
- Market liberalisation
- Supply side policies
- Structural adjustment programmes
Why have modern governments seen the need to intervene in a market-friendly way?
- Asymmetric information
- Externalities
- Absence of property rights
- Investment decisions
What are the four key features of microfinance?
- offers poor families small loans (microcredit)
- differs to development lending in that it insists of repayment
- interest charged to cover costs
- focus on groups where the only alternative is the high interest informal sector
Who are the main customers of microfinance?
- women (over 97% of clients)
- self-employed, often household-based entrepeneurs
- small farmers in rural areas
- small shopkeepers, street vendors and service providers in urban areas
What do fair trade schemes aim to do?
'address the injustice of low prices' by guaranteeing that producers receive a fair price. This is done by paying an above-market price, provided certain labour and productions standards are met.
Name 4 benefits of fair-trade schemes
- Producers receive a higher price
- Extra money to spend on education, health, conversion to organic farming and other development programmes
- Smaller price fluctuations allowing producers to be shielded from market forces
- Extra money can be used to increase product quality
- Producers are enabled to diversify into other products
What criticisms of fair trade schemes are there?
- Distorts market forces: lower prices should be a signal to switch to growing other crops
- Certification based on normative views on how to organise labour
- coffee fair trade only avail. to co-ops of small producers
- no incentive to improve quality
- only 10% of premium trickles to producer
- may create a dependency trap for producers
What is globilisation? Globilisation refers to a variety of ways in which countries are becoming more and more closely integrated, economically, culturally and politically.
What is globalisation characterised by?
- An increase in trade as a proportion of world GDP
- Increased movements of financial capital between countries
- Increased international specialisation and division of labour
- a growing importance of transnational companies (TNC) and foreign direct investment
Give 5 reasons for recent modern globalisation
- Fall in transport and logistical costs
- Decline in the cost and increase in the efficiency of communications
- Lowering of trade barriers since WW2
- thanks to WTO negotiating reductions in tariffs
- Collapse of communism and opening of China opens up new countries (good for TNCs)
What are the benefits of globalisation?
- enables law of comparative advantage allowing an increase in world output and living standards
- for consumers a wider variety of goods at a lower price
- for producers, lower production costs, markets and economies of scale
What are the disadvantages of globalisation?
- promoted exploitation of workers, children, farmers and the environment
- external costs (global warming due to 'food miles', less legislation in developing countries)
- Increase inequality as the rich can take advantage of internet
- Liberalisation and integration of financial markets may lead to increased global instability
How can international trade be measured?
Exports as a proportion of world GDP.
What does the law of comparative advantage state?
If a country has an absolute advantage in the production of all goods, it can still benefit from specialisation and trade if it specialises in the production of goods in which it has a comparative advantage. The main prerequisite is that there is a difference in the opportunity cost of producing the products.
Where does the terms of trade have to be in order for trade to be beneficial?
Between the opportunity cost ratios.
How does one measure the terms of trade?
index of export prices
------------------------------- X 100
index of import prices
What are 3 criticisms of the law of comparative advantage?
- Free trade doesn't have to be fair trade (monopsony power can be exerted on develop. countries)
- The law is based on unrealistic assumption. such as constant production costs, zero transport costs and no barriers to trade.
- The law does not take into account the future of certain products (a country may be more efficient at producing petrol engines but if the demand for it is going to shoot down in the future then it will be a poor strategy to gear a country up for producing it)
Name 5 arguments for protectionism
- to protect infant industries (too small for econ. of scale)
- to protecti geriatric industries (firms need time to restructure)
- ensures employment
- prevents dumping
- correct BOP deficit on current account
- restrict imports from countries without adequate H&S+env regs
- Strategic reasons (less depedant in war?)
- Raise tax revenue via tariffs
- In retaliation to other countries
What are the 4 main types of protection/ import barriers?
Tariffs, quotas, subsidies (to domestic producers), administrative regulations and by artifically holding down a fixed exchange rate to be more competitive (China accused)
What are tariffs and how do they affect the market?
They are taxes on imported goods (custom duties).
When imposed they -
- increase P
- reduce consumers' surplus
- rise domestic output, increase producer surplus
- reduce imports
- create a deadweight, net welfare loss
What do quotas do?
Place a physical restriction on the amount of goods that can be imported. They have a similar effect to tariffs by increasing prices of imported goods and increasing the revenues of domestic produces, but do not give extra tax revenue.
What do subsidies to domestic producers do?
They are grants given to domestic producers that artificially lower their production costs, enabling their goods to be more competitive domestically and internationally.
How do administrative regulations act as a barrier to trade?
Via labelling, H&S regs, environmental standards and country of origin documentations such regulations increase the costs of foreign producers.
Name 4 arguments against protectionism.
- inefficient resource allocation (trade barriers distrt comparative advantage and reduce specialisation, reducing world output + so living standards)
- higher prices and less chocie for consumers
- less incentive for domestic producers to become more efficient
- can be hard to remove considering the effect on domestic producers and their dependancy on trade barriers
What does the World Trade Organisation do?
Liberalises trade by lowering trade barriers, settles disputes between member countries and provides a system of trade rules. It does this by providing the government with a forum for negotiating trade agreements.
Name 2 of WTOs set of principles
- Most-favoured-nation principle implying that countries shouldn't favour between trading partners (tariffs should be reduced to all countries not just one)
- National treatment whereby imported and locally produced products must be treated equally once the foreign goods have entered the market.
How can the WTO's work be seen as less successful?
- Reducing barriers to trade in services hasn't gone so well
- Non-tariff barriers such as administrative regulations have offset some of the gains from tariff reduction
Explain and describe the 4 kinds of trading blocs?
- Free trade areas (trade barriers removed between member countries)
- Customs unions (Free trade between member states and a common external tariff. Eg. EU)
- Common markets (custom unions with the added bonus of being able to freely move around factors of products eg. labour)
- Monetary unions (custom unions that adopt a common currency eg. the Euro)
Explain and describe the consequences of trading blocs.
- Trade creation (removal of trade barriers= inc. specilisation)
- Trade diversion (member countries can buy goods from other member countries rather than countries outside bloc)
What is the current account composed of?
- The trade in goods balance (val. of goods export. - val. of goods import.)
- Trade in services balance (val. of services export. - val. of goods import.)
- Income balance (income flows into country from non-re sidents minus income flows out of country from residents to non-residents)
- Current transfers (food aid, UK's contribution to the EU's Common Agricultural Policy)
What is included within the capital and financial account?
Transactions associated with changes of ownership of the UK's foreign financial assets and liabilities including foreign direct investment (FDI), shares, bonds, changes in foreighn exchange reserves and short-term capital flows ('hot money').
Why has the UK had a large deficit on the current account in recent years?
- high value of sterling '96-'08
- continuous economic '92-'08
- relatively low productibity of the UK's workers resulting in higher average costs
- relocation of manufacturing to countries with lower labour costs
- 'Chindia effect', the industrialisation of China and India has led to a flood of cheap imports into the UK
What is an exchange rate?
The price of one currency in terms of another.
List 5 causes of changes in the exchange rate
- Relative inflation rates
- Relative interest rates
- The state of the economy
- BOP on the current account
- Political stability
- Speculation
What are the direct effects of a change in the UK exchange rate?
- Price of exports from the UK cheapen
- more internationally competitive
- Price of imports into the UK increase
- Decrease BOP deficit
What is the Marshall-Lerner condition
For there to be an improvement in the current account, the Marshall- Lerner condition must be fulfilled (i.e. the sum of the price elasticities of demand for imports and exports must be greater than 1).
Why does the J curve effect occur in regards to exchange rates?
There could be a time lag before the full effects of a depreciation of currency work through the economy so that in the SR the sum of PED would be less than 1 but greater than 1 in the LR.
What happens to BOP in order to form the J curve?
The current account deteriorates since demand for imports is price inelastic in the SR because of contracts, stocks and adaptation to price changes.
In the LR, BOP improves as demand ofr imports and exports may become more elastic, and if the Marshall-Lerner condition is fulfilled, the current account will improve.
What are the 5 convergence criteria of the European Monetary Union (EMU)?
- Fiscal deficit below 3% of GDP
- Public sector net debt (national debt) less than 60% of GDP
- Inflation rate within 2% of the three lowest interest rates in EU
- Long-term interest rates within 2% of three lowest interest rates
- Exchange rates kept within 'normal' fluctuation margins of European's exchange rate mech.
What are the 5 tests set out by the chancellor to determine whether the UK should join the Euro?
- Are the business cycles of the UK and European economies converging so the European Central Bank's interest rates suit
- Are economies flex. enough to cope if there's external shocks to the world economy
- Will joining Euro...
...encourage FDI?
...be good for financial services
...promote higher economic growth, stability and a long-term increase in employment?
Name 4 main advantages of a monetary union
- No transaction costs (comiss.)
- Price transparency (to compare)
- Firms can benefit from economies of scale as trade conditions are eased
- Encouragement to TNCs to invest in Euro zone countries (little evidence)
Name 5 main disadvantages of a monetary unions
- Loss of independent monetary policy (can't set own interest rates)
- ECB aims to keep inflation below 2%, more stringent and deflationary than BOE's
- Loss of exchange rate flexibility against other Euro adopters
- Transition costs
- Meeting requirements of the growth and stability pact may result in slower economic growth
Define 'international competitiveness'
The extent to which a firm can sell its goods and services in domestic and international markets at a price and quality that is attractive in those markets.
How might international competitiveness be measured?
- Relative unit labour costs
- Relative productivity measures
- Composite indices
...such as the global competitiveness index
...contains 12 pillars of competitiveness
Name 5 factors that influence international competitiveness?
- Real exchange rate
- Wage & Non-wage costs
- Labour productivity
- Education and training
- Human capital
- Quantity of capital equipment per workers
- R+D
- Infrastructure
- Labour market flexibility
What is the real exchange rate?
The nominal exchange rate adjusted for changes in price levels between economies
= nominal exchange rate x foreign price level / domestic price level
Name 5 non-wage costs can influence international competitiveness
- NI contributions from employers
- Health & safety regs
- Environmental regs
- Employment protection and anti-discrimination laws
- Pension scheme contributions
What is the main way in which a government can promote international competitiveness?
Supply side policy.
They could potentially promote investment in capital equipment or a focus of quality and design (via subsidies perhaps?).
What is the World Bank's definition of poverty?
Where people have incomes below the minimum level to meet basic needs such as food, shelter, clothing, access to clean water, sanitation facilities, education and information. The World Bank has set international poverty lines at $1 and $2 (PPP). In 2008 the lower level was set at $1.25 at 2005 GDP (PPP).
What is relative poverty?
A subjective measure whereby people live below a certain income threshold in a particular country.
How is the human poverty index (HPI) calculated?
1. % people who are not expected to reach 40
2. % people who are illiterate
3. % children who are illiterate and % population who do not have access to safe water and health care
2. % people who are illiterate
3. % children who are illiterate and % population who do not have access to safe water and health care
What is the HPI-2 and how is it calculated?
A measure of poverty more relevant to developed countries.
Elements include...
1. Probability at birth of not surviving to age 60 (x100)
2. Adults lacking functional literacy skills
3. Population below income poverty line (50% of median adjusted household dispoosable income)
4. Rate of long-term unemployment (lasting 12 months or more)
Name 5 factors that influence inequality
- education and training
- wage rate
- inheritance
- ownership of assets. e.g. houses and shares
- pension rights
- unemployment
- social benefits
- the tax system
What is the Lorenz curve and how does it represent poverty?
It measures the degree of inequality by plotting the cumulative percentage of the population against the cumulative percentage of total income.
What is the Gini coefficient?
It is a measure of the degree of inequality and so income distribution in a country. It will have a measure between 0 and 1, with 0 showing abs. equality and 1 abs. inequality.
Measure by G=A/B
Name four consequences of inequality
- The very poor will not have the collateral needed to start businesses
- Absolute poverty remains high
- Those on low incomes will have low marginal propensity to save, limiting investment
- High income earners may spend a lot on imported goods or transfer earnings abroad
- social issues may increase (crime)
What is economic development?
A normative concept dependant on value judgements referring to changes in living standards and welfare over time.
How might one measure economic development?
The Human Development Index (HDI).
How is the HDI formulated?
- GDP per head (PPP)
- Health (measured in terms of life expectancy)
- Education (measured in terms of the school enrolment ratio and life expectancy)
How can one criticise the HDI?
Ignores indicators such as...
- % access to clean water
- % employed in agriculture
- energy consumption per person
- mobile phones per thousand
Name 5 problems with primary product dependency?
- subject to price fluctuations
- revenues and foreign exchange earnings entirely subject on price as inelastic demand
- difficulty of planning investment and output (due to price fluctuations)
- natural disasters
- protectionism by developed countries
- low income elasticity of demand products
- uncertain yields (poor harvest, or not finding as much copper as expected)
What does the Prebisch-Singer hypothesis state?
That countries that export commodities would be able to import less and less for a given level of exports. Terms of trade for primary commodity exporters had a tendency to decline due to manufactured good's greater income elasticity of demand, making their prices rise more rapidly relative to primary product prices.
Name 3 ways in which the Prebisch-Singer hypothesis can be criticised
- Some countries have developed on the basis of primary products (e.g. Botswana: diamonds)
- If a developing country has a comparative advantage then resources will be used more efficiently when specialising
- Primary product prices rose sharply until mid. 2008 whilst manufactured products were falling
- YED for some primary products is very great such as for diamonds gold
- Outlook for some countries can be very good such as Bolivia's ownership of over half of known reserves of lithium (for batteries)
How does the savings gap work?
Low incomes mean low savings which means low investment which results in low capital accumulation. Low capital accumulation then ends up continuing the cycle with low incomes earnt.
Why might there be a foreign exchange gap?
- Due to dependence on export earnings from primary products
- Due to dependence on imports of capital goods and other manufactured goods
- Servicing debt
- Capital flight
What is capital flight and how is it at detriment to a country's economy?
When individuals or companies decide to place cash deposits in foreign banks or buy shares or other assets in foreign countries.
This could mean a greater saving gap and foreign currency gap. This will lead to economic growth being restricted.
It will also mean a reduction in the tax base as the country loses tax payable on these assets.
Why has debt become a problem?
- Risky decisions to borrow are often made at times of low interest rates or at times of a strong economy
- increases in oil prices
- fall in the value of exchange rates, increasing the burden of foreign debt
- loans taken out to finance expenditure which do not aid the payback of the loan at all
How should the significance of a countries debt be assessed?
By its ability to serve the debts, not the absolute size of it.
What is corruption?
The use of power for personal gain. This might take the form of extortion, bribery and the diversion of resources to the governing elite.
What is government failure?
Where government intervention results in a net welfare loss.
What did Thomas Malthus say?:
That at the end of the 18th century, famine was inevitable as population grow geometrically where as food production grows arithmetically.
How relevant is Malthus today?
Even though his views were mainly proved wrong by the lack of famine in 19th century Britain, some cite they are relevant for developing countries today. Malawi and Mozambique are subject to this whereby population growth outstrips GDP, resulting in falling GDP per capita.
Why might their be a lack of human capital?
- Low school enrolment
- AIDS means that school fees can not be afforded by some parents as they do not work, many teachers stop teaching due to aids and the training of workers may be disrupted by AIDS, putting TNCs off.
How does a lack of human capital affect a country?
- Mainly slower rates of economic growth due to productivity of the workforce being low
What is the infrastructure?
Infrastructure includes a whole range of structures that are required for a smoothly running economy. This includes transport, telecommunications, energy supply, water supply and waste disposal.
What macroeconomic objectives are there?
Balance of payments
Inflation
Growth - sustainable
Fiscal balance
Unemployment - small
Redistribution of income
What is aggregate demand made up of?
CGI + (x-m)
Consumption, government spending, investment + net exports
What does aggregate demand show?
The relationship between GDP demanded and the price level
What may cause a shift in AD?
Change in -
Asset prices
Interest rates
FDI
Speculation about the economy
Exchange rate
Government spending changes
Tax rates
What does the short run aggregate supply curve show (SRAS)?
The relationship between the total quantity of final goods and services supplied (real output) and the price level, holding everything else constant.
What might cause the SRAS curve to shift?
Changes in wage costs
New legislation (health and safety leg may increase bus's costs)
Changes in the prices of raw material and components
Changes in taxation on firms
Changes in
What does the long run aggregate supply curve show?
The relationship between the total quantity of final goods and services supplied (real output) and the price level, where there is full employment.
What is the difference between neo-classical and Keynesian aggregate supply curves?
Keynesian economics holds that the economy can be at long-run equilibrium at less than full employment. The neoclassical models holds that the economy can only be in equilibrium at full employment, thus resulting in the vertical line.
What may cause a shift in LRAS?
Increase in capital stock
Increase in human capital
Greater access to raw materials
Technological change
The size of the labour force
What is the difference between monetary policy and fiscal policy?
Monetary policy refers to the use of interest rates, money supply and exchange rates where as fiscal policy refers to the use of taxation and government expenditure in order to influence the level of economic activity in a country.
What methods of monetary policy are there?
Changes in interest rates
Inflation targets
Quantitative easing
What kind of fiscal policy methods are there?
Automatic stabilisers
Discretionary fiscal policy
What are automatic stabilisers?
Government expenditures of revenues from taxes that change automatically in line with changes in GDP and the state of the economy.
Give 2 examples of automatic stabilisers.
Progressive taxation
Welfare payments such as unemployment pay and various means-tested benefits (e.g. pension credits for those on low income)
What is discretionary fiscal policy?
Deliberate changes in taxes and public expenditure designed to achieved a government's macroeconomic objectives.
E.g. public expenditure on infrastructure (roads and bridges in the USA), green technoogy and targeted subsidies to distressed industries (e.g. motor industry) and tax cuts.
What are supply side policies?
Policies aimed at increasing aggregate supply often targeting either labour, product or capital markers.
What are 3 supply side policies aimed at the labour market?
Increasing human capital
Decreasing employment benefits
Decreasing trade union power
'Back to work' schemes to increase the size of the labour market
Reduction in income tax rates
Reduction in employment protection legislation (makes employing workers more attractives for firms)
Name 3 supply-side policies aimed at the product market?
Take emphasis away from public sector - privatisation, deregulation and contracting out
Trade liberalisation
Promotion of new/small firms
Name 2 supply-side policies aimed at the capital market
Deregulation of the financial markets
Reduction in corporation tax/ capital gains
Name 5 criticisms of supply-side policies
Increased inequality
Time lags
The incentive effects of tax cuts may be over-estimated
Ineffectiveness
Adverse affects of deregulation (collapse of banking system due to excessive risks?)
What 2 problems face policy makers in their decisions?
Inaccurate information
Risks and uncertainties
What are the four elements of public finance?
Public expenditure
Taxation
Public sector net borrowing
Public sector net debt
How is public expenditure categorised?
Current expenditure - day to day expenditure on goods and services, e.g. salaries of teachers, drugs for the NHS
Capital expenditure - relates to expenditure on long-term investment projects such as new hospitals and roads
Transfer payments - payments made by the state to individuals in the form of benefits which there is no production in return
What is 'crowding out'?
Can refer to either resource crowding out or financial crowding out whereby actions by the public sector decrease availability or increase prices in the private sector.
Resource crowding out occurs when the economy is operating at full employment an an increase in public expenditure results in insufficient resources being available for the private sector.
Financial crowding out occurs when increased public expenditure or tax cuts are financed by increased public sector borrowing, so increasing demand for loanable funds and driving up interest rates.
Give 5 determinants of the size and pattern of government expenditure
Debt interest
Political party in power
GDP
Size and age distribution of economy (aging population = more pensions)
Redistribution of income and need for it as regards to poverty
Discretionary fiscal policy
What is the different between direct and indirect taxation?
Direct taxes are levied on income and wealth whereas indirect taxes are those levied on expenditure (e.g. VAT)
What three kinds of tax are there?
Progessive - proportion of income paid in tax rises as income increases
Proportional - the proportion of income paid in tax remains constant as income increases
Regressive - the proportion of income paid in tax falls as income increases
Name 4 implications of a change in taxation
Increase in taxes represent leakage from circular flow and so a downward multiplier effect on GDP
Increase in indirect tax on product will means leftward shift in the supply curve
Indirect taxes wold increase prices above marginal cost, resulting in allocative inefficiency, unless external costs are associated with the production of the product
Increase in indirect taxes cause cause further via wage-price spiral
Explain four effects of a change in income tax
Income distribution (progressive so less equitable?)
Incentives to work
Tax revenues (laffer curve - optimum % to maximise cash revenue)
Level of economic activity (changes amount of disposable income)
Explain five effects of a change in indirect taxes
Income distribution (VAT shown to be regressive, makes i.d less even)
Incentives to work (possible that peeps work harder to maintain standard of living)
Tax revenues (increase in indirect taxes would increase revenues assuming goods are price inelastic)
Rate of inflation
Economic activity (rise in vat a leakage from circular flow of income, downward multiplier)
Explain five effects of a change in indirect taxes
Income distribution (VAT shown to be regressive, makes i.d less even)
Incentives to work (possible that peeps work harder to maintain standard of living)
Tax revenues (increase in indirect taxes would increase revenues assuming goods are price inelastic)
Rate of inflation
Economic activity (rise in vat a leakage from circular flow of income, downward multiplier)
What problems can national debt cause?
Opportunity cost
Crowding out
Danger of inflation
Why is public sector net borrowing (PSNB) important?
- Net borrowing could be inflationary because aggregate demand would be increasing
- PNSB must not exceed 3% GDP to meet criteria for euro entry
- Taxes as a %GDP give indication of the size of the state sector relative to the whole economy
What is public sector net borrowing / fiscal borrowing?
The difference between public expenditure (current and capital) and tax revenue
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