Economics Revision

Unit 4


Absolute Advantage

Where one country can produce a greater number of goods or services with the same amount of resources, such that the unit cost of production is lower.

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Absolute Poverty

Inability to purchase the basic necessities of life

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

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Allocative Efficiency

Where price is equal to marginal cost

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Asymmetric Inflation Target

When deviations below the inflation target are seen to be less important than deviations above the target.

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Automatic Stabilisers

Changes in government expenditure and taxation that take place automatically in response to the economic cycle. For example expenditure on unemployment benefits rises during the recession phase of the cycle.

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Average Cost

Total cost divided by output; also called unit cost of production or unit cost

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Average Fixed Cost

total fixed cost divided by output

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Average Revenue

total revenue divided by output sold

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Average Variable Cost

total variable cost divided by output

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Balance of Payments

records money flows into and out of a country over a period of time

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Bilateral Exchange Rate

the exchange rate of one currency against another

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Capital accounts of the balance of payments

The section of the balance of payments that records long term flows of capital into and out of an economy. Recording purchases and sales of assets and is split into two sections, long term and short term flows.

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Capital Output Ratio

The amount of capital needed to generate each unit of output

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Comparative Advantage

Where one country produces a good or service at a lower relative opportunity cost than others.

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Current Account

Includes money flows due to trade (the trade balance - broken down into trade of goods and services), transfers of interest, profits and dividends (the investment income balance) and transfers of money by governments and international organisations (the transfers balance)

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Customs Union

An agreement between two or more countries to abolish tariffs on trade between them and to place a common external tarrif on trade with non-members

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Cyclical Deficit

A budget deficit that arises because of the operation of automatic stabilisers

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Deadweight Loss

Loss to society of the firm producing where price exceeds marginal cost.

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Derived Demand

Demand that depends upon the final output that is produced, or on the demand for another item.

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Developed Economies

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

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Developing Economies

Countries with relatively low income per capita, and economy in which the industrial sector is small or underdeveloped and where primary sector production is a relatively large part of total GDP.

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Economic Convergence

The process by which economic conditions in different countries become similar. Economists distinguish between monetary convergence (for example, similarities in inflation and interest rates) and real convergence (for example, similarities in the structure of the economies).

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Economic Cycle

Fluctuations in the level of economic activity as measured by GDP. Typically, there are four stages in the cycle: recession, recovery, boom and slowdown.

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Economic Integration

Refers to the process of blurring the boundaries that seperate economic activity in one nation state from that in another.

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Effective Exchange Rate

The exchange rate of one currency against a basket of currencies of other countries, often weighted according to the amount of trade done with each country.

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