Capital account
The section of the balance of payments that records long-term flow of capital into and out of an economy. It records purchases and sales of assets and is split into two sections, long-term capital flows and short-term capital flows.
Accelerator
The theory of investment that states that the level of investment depends on the rate of change of national income.
Crowding out
When government borrowing reduces the funds available for private sector investment or raises the cost of investment by raising market interest rates.
Current account
Includes money flows due to trade (the trade balance - broken down to trade in goods and trade in services), transfers of interest, profit and dividends (the investment income balance) and transfers of money by governments and international organisations
Customs union
An agreement between two or more countries to abolish tariffs on trade between them and to place a common external tariff on trade with non-members.
Cyclical deficit
A budget deficit that arises because of the operation of automatic stabilisers.
Derived demand
Demand that depends upon the final output that is produced, or on the demand for another item.
Developed economies
Countries with a high income per capita and diversified industrial and tertiary sectors of the economy.
Disequilibrium unemployment
Unemployment caused by AS of labour exceeding the AD for labour.
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.
Economic development
The process of improving people's economic well-being and quality of life.
Economic integration
Refers to the process of blurring the boundaries that separate economic activity in one nation state from that in another.
Economic stability
The avoidance of volatility in economic growth rates, inflation, employment and unemployment and exchange rates, in order to reduce uncertainty and promote business and consumer confidence and investment.
Economic union
Deepens integration in a single market, centralising economic policy at the macroeconomic level.
Expenditure-reducing policies
Policies that reduce the overall of national income in order to reduce the demand for imports and correct a current account deficit on the balance of payments.
Factor endowments
The mix of land, labour and capital that a country possesses. Factor endowments can be determined by, among other things, geography, historical legacy, and economic and social development.
Foreign currency reserves
Foreign currencies held by central banks in order to enable intervention in the FOREX markets to affect the country's exchange rate.
FDI
Investment made by a multinational corporation in a country other than where its operations originate; the establishment of branches and productive processes abroad, or the purchase of foreign firms; investment by multinational companies in physical capit
Futures market
Markets where people and businesses can buy and sell contracts to buy commodities or currencies at a fixed price at a fixed date in the future.
Gini coefficient
Used to make international comparisons of income inequality. It is found by using a Lorenz curve.
Globalisation
The processes that have resulted in ever-closer links between the world's economies.
Golden rule
A commitment by the UK government that, over the economic cycle, it will borrow only to invest and not for current expenditure.
Human Development Index (HDI)
A measure that, recognising limitations of GDP per capita as a measure, combines outcomes that might be valued in the development process: life expectancy at birth; adult literacy rate and percentage of the relevant population enrolled in primary, seconda
Hypothecation
A situation where revenue from a tax is directly allocated to some other purpose.
Index of Sustainable Economic Welfare (ISEW)
An index that adds to national expenditure things that raise the quality of life (or well-being) and deducts things that reduce well-being. Added to and refined the measure to produce a 'Genuine Progress Indicator' (GPI).
International Monetary Fund (IMF)
A global organisation that aims to promote international monetary co-operation and international trade.
J-curve effect
Shows the trend in a country's balance of trade following a depreciation of the exchange rate. A fall in the exchange rate causes an initial worsening of the balance of trade, as higher import prices raise the value of imports and lower export prices redu
Liberalisation
Reductions in the barriers to international trade, in order to allow foreign firms to gain access to the market for goods and services that are traded internationally.
Long-run economic growth
The rate at which the economy's potential output could grow as a result of changes in the economy's capacity to produce goods and services, sometimes referred to as potential economic growth.
Long-term capital flows
Flows of money used for investment in assets (for example direct investment by a company in setting up production facilities or portfolio investment through buying shares in companies).
Long-term capital transactions
Flows of money related to the buying and selling of assets such as land, or property, or productions facilities (direct investment), or shares in companies (portfolio investment).
Lorenz curve
A diagram commonly used to illustrate income or wealth distribution.
Marshall-Lerner condition
States that for a depreciation of the currency to improve the balance of trade the sum of the price elasticities of demand (PEDs) for imports and exports must be greater than 1.
Prebisch-singer hypothesis
The argument that countries exporting primary commodities will face declining terms of trade in the long run, which will trap them in a low level of development as more and more exports will need to be sold to 'pay for' the same volume of imports of secon
Public sector net cash requirement (PSNCR)
The difference between the spending of general government (central and local government) and their revenue.
Purchasing power parity (PPP)
The exchange rate that equalises the price of a basket of identical traded goods and services in two different countries. PPP is an attempt to measure the true value of a currency in terms of the goods and services it will buy.
Semi-fixed/semi-floating exchange rate
An exchange rate system that allows a currency's value to fluctuate within a permitted band of fluctuation.
Short-term capital flows
Flows of money that occur to take advantages of differences in countries' interest rates and changes in exchange rates; sometimes referred to as 'hot money'; highly volatile and exist to take advantage of changes in relative interest rates.
Stability and Growth Pact (SGP)
An agreement by members of the EU about the way in which fiscal policy should be conducted to support Europe's single currency. It requires those countries adopting Europe's single currency (the eurozone states) to abide by the following rules: a) budget
Terms of trade
The price of a country's exports relative to the price of its imports. The terms of trade can be measured using the formula: TofT = index of average export prices/index of average import prices x 100.
Trade creation
Where economic integration results in high-cost domestic production being replaced by imports from a more efficienct source within the economically integrated area.
Trade deflection
Where one country in a FTA imposes high tariffs on another to reduce imports by the imports come in from elsewhere in the FTA.
Trade diversion
Where economic integration results in trade switching from a low-cost supplier outside the economically integrated area to a less efficient source within the area.
World Bank
A global organisation that provides development funding.
World Trade Organisation (WTO)
An international body responsible for negotiating trade agreements and 'policing' the rules of trade to which its members sign up. Trade disputes between members are settled by the WTO.
Aid
Financial assistance donated from one country to another to improve economic development.