ECONOMICS:

THE GLOBAL ECONOMY

ESSENTIAL VOCABULARY

Economics Vocabulary
Purchasing Power Parity: The exchange rate that equalizes the price of a basket of goods and services in two countries. PPP is an attempt to measure the true value of a currency in terms of the goods and services it will buy. E.g 1= $2, then 1 of goods will buy the same goods bought for $2. Reserve Currency: A reserve currency is sometimes called an anchor currency and is a currency that national governments and other institutions are happy to hold as a key part of their foreign exchange reserves. It also acts as a global pricing currency for many commodities such as gold, oil, wheat and copper. Economic Integration: Refers to the process of blurring the boundaries that separate that separate economic activity in one nation state and another.

There are many different types of economic integration between countries and these are summarised below. A free trade area is a fairly loose form of integration where countries simply agree to remove tariff and non-tariff barriers between them to promote free trade in goods and services. The North American Free Trade Area (NAFTA) is a good example of this as is the European Free Trade Area (EFTA). ASEAN (Association of South East Nations), the Andean Pact, and Mercosur are other examples.
Stage of Economic N o I n t e r n a l C o m m o n Factor and Asset C o m m o n C o m m o n Integration Trade Barriers External Tariff Mobility Currency Economic Policy Free Trade Area X Customs Union Single Market Monetary Union Economic Union X X X X X X X X X X X X X X

Economic Monetary Union: The deepest form on integration in which countries share the same currency and have a common monetary policy as a result. Monetary policy sovereignty: The loss of monetary control a country faces when it gives up its own currency and adopts a single currency eg the Euro, where centralised monetary decisions are made. Economic cycle: A natural cycle in uctuations of GDP- icluding boom, slowdown, recession, recovery. Automatic stabalisers of government spending and tax occur at the boom and recession periods and trend growth is the overall trend of the cycle. Convergence criteria: Countries wishing to join the single currency must meet four convergence criteria. Stable prices: Ination must not be more than 1.5 percentage points higher than the average in the three member countries with best price stability, i.e. lowest ination. 1. Stable exchange rate: The national currency must have been stable relative to other EU currencies for a period of two years prior to entry into the monetary union (ERMII entry). 0. Sound government nances: Gross government debt must not exceed 60 per cent of GDP. The annual government budget decit must not be greater than 3 per cent of GDP. 2. Low interest rates: The 5-year government bond rate must not be more than 2 percentage points higher than in the three member countries where ination is lowest. 0.

Economic Performance Indicators

Real GDP, Ination Rate, Unemployment Levels and Balance of Payments; they all provide a way of gauging the health and performance of an economy and give an indication of what part of the economic cycle it is in Real GDP Gross Domestic Product adjusted for ination Competitiveness How competitive a countrys economy is with anothers, this can be affected by things such as relative labour unit costs, price of exports and quality of exported goods Labour Productivity The productiveness of the labour force (i.e. how many units of a good is produced per worker in a given period of time) Output Prices The prices of goods that a country exports Eurozone/ Euro area The collective term for those countries that have adopted the Euro as their currency Monetary Union The most extensive form of economic integration, countries share a common currency and all operate under the same monetary policy which is often controlled by a governing bank Ination Rate the change in general price level of goods and services over a given period of time as a percentage Monetary Policy Government controls over the interest rates, exchange rates and money supply in an economy Fixed Exchange Rate An exchange rate whereby the value of one currency expressed in terms of another does not change between the two currencies Floating Exchange Rate An exchange rate whereby the value of one currency expressed in terms of another varies with the forces of supply and demand for the currency Single Currency When an economically integrated area adopts a single common currency for use between its member states

Depreciation The decrease in the value of capital or a currency Foreign Direct Investment (FDI) Investment made by a business or multinational corporation into a country other than where its operations originate Supply Side Policy Government policy aimed at improving the supply-side of the economy by shifting out the LRAS

Output Gaps The difference between actual growth and the potential output of the economy Welfare System the system put in place and maintained by the government to support those who are unemployed or have been employed but are retired Economic/Trade/Business Cycle phases (recovery, recession) Fluctuations in the level of economic activity as measured by GDP; a recovery is the upward sloping portion of the actual rate of growth line while a recession is the downwards sloping part Budget Decit The debt which occurs when government spending exceeds tax revenue National Debt Accumulated debt of all budget decits that a government has run each year Unemployment Rate The level of unemployment as a percentage of the labour force Fiscal Policy Government controls over taxes and government spending Discretionary Fiscal Policy Otherwise known as a deationary or loose scal policy, taxes are lowered and/or government spending is increased Fiscal Rules Stability and Growth Pact The Stability and Growth Pact of the EU is the set of criteria designed to maintain economic convergence within the EU monetary union, it states that a governments budget decit must not exceed 3% of GDP and National Debt must not exceed 60% of GDP, if these criteria are not met then the country in question will be penalised and levied with a ne Long Run Growth Represented by a shift outwards in the LRAS, it shows an increase in the maximum possible output of the economy International Monetary Fund (IMF) A global organisation that aims to promote international monetary co-operation and international trade European Central Bank (ECB)

The central bank of the European Monetary Union which controls and implements the monetary policy, it sets the short term interest rates and issues Euro bank rates Structural Unemployment A type of unemployment which occurs when the demand for labour is less than the supply of labour in an individual labour market, it is perpetuated through a lack of mobility of factors of production (e.g. occupational and geographical) or can also be caused by a decline in a sector of the economy.

World Trade Organisation (WTO) A global organisation that regulates world trade. Has 150 members. Based in Switzerland. Mission is to help trade ow freely , smoothly, fairly and predictably. This should create a trading system with the following characteristics: Non discriminatory Free trade Predictability Promoting fair competition Special provision for developing countries Doha Round of Negotiations Happened in 2001. Aimed at increasing the fairness towards trade with developing countries to help them increase their on economic development. Achievements: countries agreed to phase out al export subsidies by 2013. Also tariff-free access to goods for least developed countries for 97% of all goods that are traded. International Trade International trade is exchange of capital, goods, and services across international borders or territories Protectionism Protectionism represents any attempt by a government to impose restrictions on trade in goods and services between countries:
Tariffs - import taxes. Quotas - quantitative limits on the level of imports allowed. Voluntary Export Restraint Arrangements where two countries make an agreement to limit the volume of their exports to one another over an agreed period of time. Embargoes - a total ban on imported goods. Intellectual property laws (patents and copyrights). Export subsidies - a payment to encourage domestic production by lowering their costs. Import licensing - governments grants importers the license to import goods. Exchange controls - limiting the amount of foreign exchange that can move between countries.

Tariffs A tariff is a tax that raises the price of imported products and causes a contraction in domestic demand and an expansion in domestic supply. The net effect is that the volume of imports is reduced and the government received some tax revenue from the tariff. Domestic Subsidies

Any act, practice, or measure other than an export subsidy by which a government confers a benet upon a product and/or enterprise Non-Tariff Barriers Economic, political, administrative or legal impediments to trade other than duties, taxes and import quotas.

Anti-Dumping Dumping is a type of predatory pricing behavior and is also a form of price discrimination. The concept is used most frequently in the context of trade disputes between nations, where businesses in one or more countries may seek to produce evidence that manufacturers in another country are exporting products at a price below the true cost of production. Anti Dumping is designed to allow countries to take action against dumped imports that cause or threaten to cause material injury to the domestic industry. Goods are said to be dumped when they are sold for export at less than their normal value. The normal value is usually dened as the price for the like goods in the exporters home market. Stimulus Packages When policy-makers deliberately seek to stimulate one or more of the components of aggregate demand to boost output, jobs and incomes during an economic recession. Can take the form of reduction in taces or increased government expenditure. Agricultural Trade Trade between countries of agricultural goods such as wheat, corn, rice and coffee. Often trade will occur between trading blocks or between MEDC and LEDC who produce low value added cash crops that can then be processed by the MEDC for a mark up. Trade in Primary Non-Oil Commodities Agricultural and minerals such as tobacco, lamb, beef, cotton, tin, copper Access to Markets How easily a rm can export goods and services. It is made easier with the reduction of tariff and non tariff barriers. Global GDP

Gross world product (GWP) is the total gross national product of all the countries in the world. Form this a Global GDP Per Capita can be calculated. Global Unemployment The percentage of the global population who are of working age but are unemployed Agricultural Protection The use of tariffs and trade controls on agricultural products to keep prices at certain level, and protect the incomes of the producers. The protection of agricultural production in developed countries hinders economic growth in less developed countries, who are often net exporters of agricultural products.

Price and costs P2

Consumer surplus
Added consumer surplus

S (MC) AC

P1

D (AR) D (AR)
Q1 Q2

output

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