CIE Economics AS definitions

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Creeping inflation

a low rate of inflation.

Capital

a man-made aid to production.

Elasticity

a numerical measure of responsiveness of one variable following a change in another variable,

Deflation

a sustained fall in the price level.

Inflation

a sustained increase in an economy's price level.

Consumption

spending by households on goods and services; the process by which consumers satisfy their wants.

Equilibrium quantity

the amount that is traded at the equilibrium price.

Investment

the creation of capital goods; spending by firms on capital goods.

Demand schedule

the data from which a demand curve is drawn.

Incidence

the extent to which the tax burden is borne by the producer or the consumer or both.

Fiscal drag

the income of people and firms being pushed into higher tax brackets as a result of inflation.

Economic system

the means by which choices are made in an economy.

Exchange rate

the price of one currency in terms of another currency.

Equilibrium price

the price where demand and supply are equal, where the market clears.

Marginal rate of taxation

the proportion of extra income taken in tax.

Demand

the quantity of a product that consumers are willing and able to buy at different prices.

Foreign direct investment (FDI)

the setting up of production units or the purchase of existing production units in other countries.

Aggregate expenditure

the total amount spent in the economy at different levels of income.

Government spending

the total of local and national government expenditure.

Aggregate demand (AD):

the total spending on an economy's goods and services at a given price level in a given time period.

Fiscal policy

the use of taxation and government spending to influence aggregate demand.

Economic structure

the way in which an economy is organised in terms of sectors.

Deadweight loss

the welfare loss when due to market failure desirable consumption and production does not take place.

Long run

time period when all factors of production are variable.

Division of labour

where a manufacturing process is split into a sequence of individual tasks.

Information failure

where people do not have full or complete information.

Inelastic

where the relative change in demand or supply is less than the change in price.

Current account

within the balance of payments, a record of the trade in goods, trade in services, investment income and current transfers.

Financial account

within the balance of payments, a record of the transfer of financial assets between the country and the rest of the world.

Embargo

a ban on imports and/or exports.

Real effective exchange rate

a currency's value in terms of its real purchasing power.

Devaluation:

a decision by the government to lower the international price of the currency.

Revaluation

a decision by the government to raise the international price of its currency.

Disinflation

a fall in the inflation rate.

Net errors and omissions

a figure included to ensure the balance of payments balances.

Quota

a limit on imports or exports.

Voluntary export restraint

a limit placed on imports reached with the agreement of the supplying country. Wants: needs that are not always realised.

Terms of trade

a numerical measure of the relationship between export and import prices.

Price elasticity of demand (PED)

a numerical measure of the responsiveness of the quantity demanded to a change in price of a product.

Price elasticity of supply (PES)

a numerical measure of the responsiveness of the quantity supplied to a change in the price of the product.

Subsidy

a payment made by government to producers to reduce the market price.

Minimum price

a price that is fixed; the market price must not go below this price.

Trade bloc

a regional group of countries that have entered into trade agreements.

Production possibility curve

a simple representation of the maximum level of output that an economy can achieve when using its existing resources in full.

Scarcity

a situation in which wants and needs are in excess of the resources available.

Positive output gap

a situation where actual output is above potential output.

Paternalism

a situation where society knows best and has some right to make a value judgement.

Tariff

a tax imposed on imports or exports.

Regressive tax:

a tax that takes a greater percentage from those on lower incomes; one where the ratio of taxation to income falls as income increases.

Progressive tax

a tax that takes a higher percentage from those with higher incomes; one where the rate rises more than proportionately than the rise in income.

Regulations

a wide range of legal and other requirements that come from governments and other organisations.

Substitute

an alternative good.

Open economy

an economy that is involved in trade with other economies.

Specific tax

an indirect tax that is fixed per unit purchased.

Money

anything that is generally acceptable as a means of payment.

Non-rival

as more consume, the benefit to those already consuming is not diminished.

Taxes

charges imposed by governments on incomes, profits and some types of consumer goods and services to fund their expenditure.

Private goods

consumed by someone and not available to anyone else.

Shoe leather costs

costs of moving money around in search of the highest interest rate.

Menu costs

costs to firms of having to change prices due to inflation.

Net exports

exports minus imports.

Quasi-public good

goods that have some but not all of the characteristics of public goods.

Primary sector

industries involved in farming and extracting natural resources.

Quaternary sector

industries involved in providing knowledge-based services.

Secondary sector

industries that manufacture products.

Tertiary sector

industries that produce services.

Resources:

inputs available for the production of goods and services.

Supply-side policy

measures designed to increase aggregate supply.

Merit good

one that has positive side effects when consumed.

Positive statement

one that is based on empirical or actual evidence.

Public good

one that is non-excludable and non-rival and for which it is usually difficult to charge a direct price.

Normative statement

one that is subjective about what should happen.

Proportional tax

one that takes the same proportion or percentage from all who have to pay it.

Mixed economy

one where market forces and government, private and public sectors, are involved in resource allocation decisions.

Normal goods

one whose demand increases as income increases.

Reflationary fiscal or monetary policy measures

policy measures designed to increase aggregate demand.

Protectionism

protecting domestic producers from foreign competition.

Demand curve

represents the relationship between the quantity demanded and price of a product.

Supply curve

represents the relationship between the quantity supplied and the price of the product.

Exchange control

restrictions on the purchases of foreign currency.

Fundamental economic problem

scarce resources relative to unlimited wants.

Dumping

selling products in a foreign market at below their cost of production.

Transmission of preferences

the automatic way in which the market allows the preferences of consumers to be made known to producers.

Opportunity cost

the cost expressed in terms of the best alternative that is foregone.

Supply schedule

the data from which a supply curve is drawn.

Producer surplus

the difference between the price a producer is willing to accept and what is actually paid.

Price mechanism

the means of allocating resources in a market economy.

Trade weighted exchange rate

the price of one currency against a basket of currencies.

Specialisation

the process by which individuals, firms and economies concentrate on producing those goods and services where they have an advantage over others.

Production

the process of creating goods and services in an economy.

Supply

the quantity of a product that producers are willing and able to sell at different prices.

Marshall-Lerner condition

the requirement that for a fall in the exchange rate to be successful in reducing a current account deficit, the sum of the price elasticities of demand for exports and imports must be greater than 1. Maximum price: a price that is fixed; the market price must not exceed this price.

Privatisation

the sale of a state-owned public sector business to the private sector; where there is a change in ownership from the public to the private sector.

Unemployment

the state of being willing and able to work but without a job.

National debt

the total amount of government debt.

Short-run aggregate supply (SRAS)

the total output of an economy that will be supplied when there has not been enough time for the prices of factors of production to change.

Notional demand

this demand is speculative and not always backed up by the ability to pay.

Short run

time period when a firm can only change some and not all factor inputs.

Real GDP

total output measured in constant prices.

Real values

values adjusted for inflation.

Money values

values at the prices operating at the time.

Nationalisation

when governments take over a private sector business and transfer it to the public sector.

Perfectly inelastic

where a change in price has no effect on the quantity demanded.

Perfectly elastic

where all that is produced is sold at a given price.

Market

where buyers and sellers get together to trade.

Rivalry

where consumption by one person reduces availability for others.

Market mechanism

where decisions on price and quantity are made on the basis of demand and supply alone. Market structure: the way in which a market is organised in terms of the number of firms and the barriers to the entry of new firms.

Substitution effect

where following a price change, a consumer will substitute the cheaper product for one that is now relatively more expensive.

Trade creation

where high cost domestic production is replaced by more efficiently produced imports from within the customs union.

Non-excludable

where it is not possible to stop all benefitting from consumption.

Reallocation of resources

where resources are deliberately moved from one product to another.

Unit elasticity

where the change in price is relatively the same as the change in quantity demanded giving a numerical value of 1.

Market failure

where the free market does not make the best use of scarce resources.

Negative externality

where the side effects have a negative impact and impose costs to third parties.

Trade diversion

where trade with a low-cost country outside a customs union is influenced by higher cost products supplied from within.

Depreciation

a decrease in the international price of a currency caused by market forces.

J-curve effect

a fall in the exchange rate causing an increase in a current account deficit before it reduces it due to the time it takes for demand to respond.

Complement

a good consumed with another.

Income elasticity of demand (YED)

a numerical measure of the responsiveness of the quantity demanded following a change in income.

Cross elasticity of demand (XED)

a numerical measure of the responsiveness of the quantity demanded for one product following a change in the price of another related product.

Balance of payments

a record of a country's economic transactions with the rest of the world over a year.

Disequilibrium

a situation where demand and supply are not equal.

Equilibrium

a situation where there is no tendency for change.

Ad valorem tax

a tax that is charged as a given percentage of the price.

Indirect tax

a tax that is levied on goods and services.

Customs union

a trade bloc where there is free trade between member countries and a common external tariff on imports from non-members.

Emerging economies

economies with a rapid growth rate and that provide good investment opportunities. Entrepreneur: organises production and is willing to take risks.

Developed economies

economies with high GDP per head.

Hot money flows

flows of money moved around the world to take advantage of changes in interest rates and exchange rates.

Labour

human resources available in an economy.

Economic growth

in the short run an increase in a country's output and in the long run an increase in a country's productive potential; represented by a shift outwards of the production possibility curve.

Demand-pull inflation

inflation caused by increases in aggregate demand not matched by equivalent increases in aggregate supply.

Cost-push inflation

inflation caused by increases in costs of production.

Land

natural resources in an economy.

Infant industries

new industries that have a low output and a high average cost.

Demerit good

one that has adverse side effects when consumed.

Market economy

one where most decisions are taken through market forces.

Command or planned economy

one where resource allocation decisions are taken by a central body.

Inferior goods

one whose demand decreases as income increases.

ceteris paribus.

other things remaining equal

Labour productivity

output per worker hour.

Expenditure switching policy

policy measures designed to encourage people to switch from buying foreign- produced products to buying domestically produced products.

Expenditure dampening or reducing policy

policy measures designed to reduce imports and increase exports by reducing demand.

Free rider

someone who does not pay to use a public good.

Consumer surplus

the difference between the value a consumer places on units consumed and the payment needed to actually purchase that product.

Macro-economy

the economy as a whole.

Macroeconomic equilibrium

the output and price level achieved where AD equals AS.

Interest rate

the price of borrowing money and the reward for saving.

Market demand

the total amount demanded by consumers.

Aggregate supply (AS)

the total output (real GDP) that producers in an economy are willing and able to supply at a given price level in a given time period

Long-run aggregate supply (LRAS)

the total output of a country supplied in the period when prices of factors of production have fully adjusted.

Choice

underpins the concept that resources are scare so choices have to be made by consumers, firms and governments.

Comparative advantage

used in the context of international trade, a situation where a country can produce a product at a lower opportunity cost than another country.

Absolute advantage

used in the context of international trade, a situation where, for a given set of resources, one country can produce more of a particular product than another country.

Change in demand

when there is a shift in the demand curve due to a change in factors other than the price of the particular product.

Joint demand

when two goods are consumed together.

Joint supply

when two items are produced together.

Income effect

where following a price change, a consumer has higher real income and will purchase more of this product.

Government failure

where government intervention to correct market failure causes further inefficiencies. Government macroeconomic failure: government intervention reducing rather than increasing economic performance.

Excludability

where it is possible to exclude one from consumption.

Economic efficiency

where scarce resources are used in the most efficient way to produce maximum output.

Derived demand

where the demand for a good or service depends upon the use that can be made from it.

Managed float

where the exchange rate is influenced by state intervention.

Elastic

where the relative change in demand or supply is greater than the change in price.

Canons of taxation

Adam Smith's criteria for a 'good' tax.

Free trade area

a trade bloc where member governments agree to remove trade restrictions among themselves. Free Free trade: international trade not restricted by tariffs and other protectionist measures.

Economic union

a trade bloc where there is free trade between member countries, a common external tariff and some common economic policies, which may include a common currency.

Budget

an annual statement in which the government outlines plans for its spending and tax revenue.

Developing economy

an economy with a low GDP per head; one that has a low income per head.

Hyperinflation

an exceptionally high rate of inflation, which may result in people losing confidence in the currency.

Fixed exchange rate

an exchange rate set by the government and maintained by the central bank.

Floating exchange rate

an exchange rate that is determined by the market forces of demand and supply.

Appreciation

an increase in the international price of a currency caused by market forces.

Economic development

an increase in welfare and the quality of life.

Consumer price index

an index that shows the average change in the prices of a representative basket of products purchased by households.

Firm

any business that hires factors of production in order to produce goods and services.

Factors of production

anything that is useful in the production of goods and services.

Automatic stabilisers

changes in government spending and taxation that occur to reduce fluctuations in aggregate demand without any alteration in government policy.

Discretionary fiscal policy

deliberate changes in government spending and taxation.

Effective demand

demand that is supported by the ability to pay.


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