Economic Development and Growth Glossary

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Glossary of key terms for the Edexcel Unit 4 macro paper

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Economic Development and Growth Glossary

  1. 1. Economic Development and Growth Glossary – A2 Macro Term Glossary DescriptionAAA Credit Rating The best credit rating that can be given to a corporations bonds, effectively indicating that the risk of default is negligibleAbsolute poverty Those people who do not have adequate nutritional intake per day, or do not have adequate shelter or clothing in order to survive. The World Bank reports the number of people in countries below a $1.25 or $2 a dayAccelerator effect Where planned capital investment is linked positively to the past and expected growth of consumer demandAccession Countries Countries in the process of joining the European UnionAccommodatory policy A neutral policy stance in the face of an economic shock. For fiscal policy, generally means keeping tax and government expenditure rates unchanged. For monetary policy, generally means keeping (real) interest rates unchanged.Adjusted net savings (or The true rate of savings in an economy after taking into account investments in humangenuine savings) capital, depletion of natural resources and damage caused by pollutionAdvanced economies According to the IMF, 35 economies are ‗advanced economies‘. 24 in Europe + USA, Canada, Australia, New Zealand, Israel, Japan and South KoreaAge dependency ratio The ratio of the nonworking population- people under 15 or over 65-to the working population- people 15-64Ageing population A change in the age structure of the population within a country, a rising average age and a growing number of people living beyond the standard working ages. By 2035 almost 30% of Chinese will be 60 or overAggregate supply shock Either an inflation shock or a shock to potential national output; adverse aggregate supply shocks of both types reduce output and increase inflationAid effectiveness A measure of the quality of aid delivery and maximizing the impact of aid on poverty reduction and developmentAppropriate technology A technology that complements the factor endowments of the countryASEAN Association of Southeast Asian Nations – a regional trade blocAsymmetric bargaining power When the bargaining power in trade between one or more countries is imbalanced – this can lead to shifts in the measured terms of tradeBalanced growth In macroeconomics, balanced growth occurs when output and the capital stock grow at the same rateBalassa-Samuelson Effect This effect refers to the fact that countries with higher per capita real incomes have a higher real exchange rate. There tends to be more investment and productivity in industries that are producing goods for export. However, a rise in productivity in the tradable goods sector will drive up wages in this sector and, as labour is assumed to be mobile across sectors, push up wages in the non-tradable sector. As the latter increase is not matched by a productivity increase, it will raise costs and prices in the non-tradable goods sector and thereby lead to a rise in inflationBeggar my Neighbour A policy that seeks to promote a countrys economy at the expense of another country. An obvious example is the use of tariff barriers. A country may place tariff on imports to help promote local domestic industry. This may help local unemployment, but, be at the expense of the other countrys export sectorBirth rate The number of live births in a year expressed as a percentage of the population or per 1,000 people.Brain drain The movement of highly skilled or professional people from their own country to another country where they can earn more money
  2. 2. BRIC economies The BRIC grouping – Brazil, Russia, India and China – has become short hand for the rise of emerging markets in the global economy. The BRICs already have a bigger share of world trade than the USA.Capacity building Growing the capacity of businesses, organizations and communities to produce, invest and consume – includes a broader definition of capitalCapital accumulation Using investment to build capital assets such as roads, ports, buildingsCapital deepening A development process involving a transition from traditional agriculture, which is labour- intensive, to more capital-intensive modern manufacturing. It leads to an increase in the capital stock per worker employedCapital flight The rapid movement of large sums of money out of a country. There could be several possible reasons - lack of confidence in a countrys economy and/or its currency and political turmoil. Capital flight occurs when owners of liquid assets move them to other countries perceived as safe havens or as offering better returns. It can be legal or illegalCapital flows Movements of capital between countries. Outward capital flows are movements of domestically-owned capital abroad; inward capital flows are movement of foreign-owned capital to the domestic economyCapital output ratio The value of a nation‘s capital stock relative to the size of national output (GDP). Capital- output ratios are usually around 2 or 3—that is, the capital stock is about 2 to 3 times annual economic output. Poor countries have lower capital-output ratios because they have less capital-intensive economies.Capital stock The total amount of physical capital available in the economyCarbon tax A carbon tax is a tax on the consumption or production of goods and services, which cause carbon emissionsCarbon trading Pollution control that uses the market mechanism to change relative prices and the incentives of producers and consumersCarry trade A strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return.Cash crops A crop produced for its commercial revenue and profit rather than for use by the growerCatch-up effect This occurs when countries that start off poor tend to grow more rapidly than countries that start off rich. The result is some convergence in the standard of living as measured by per capita GDPChild mortality rate The probability that a new-born baby will die before reaching age five. Expressed as a number per 1,000 live birthsChronic hunger The chronically hungry are undernourished. They don‘t eat enough to get the energy they need to lead active lives. Their undernourishment makes it hard to study, work or otherwise perform physical activitiesChronic poverty Those who never get out of absolute povertyCIVETS A group of high growth emerging countries comprising - Columbia – Indonesia – Vietnam – Egypt – Turkey – South AfricaClean float A currency that floats according to market forces, free from government interventionComparative advantage Comparative advantage refers to the relative advantage that one country or producer has over another. Countries can benefit from specializing in and exporting the product(s) for which it has the lowest opportunity cost of supplyCompetitive devaluation When a country tries to devalue its currency to increase its international competitiveness. However, this often encourages other countries to also devalue leading to only temporary increases in the competitiveness of exportsConcessional lending Loans that are given by through the International Development Association (IDA). IDA provides long-term loans at zero interest to the poorest of the developing countries.
  3. 3. Conditional cash transfers Attempts to cut poverty by giving cash transfers to households in need; and by tying these transfers to certain conditions, such as sending children to schoolConditionality When donors require their developing country partners to do something in order to receive aid.Convergence A coming together of economic indicators i.e. a narrowing of the gap in per capita incomes between the poorest and the richest nations of the worldCorruption The abuse of entrusted power for private gain, government failureCorruption Perceptions Index This index ranks countries/territories based on how corrupt their public sector is perceived to be. It is a composite index, a combination of polls, drawing on corruption-related data collected by a variety of reputable institutionsCost benefit analysis Technique to determine the feasibility of a project by quantifying costs and benefitsCountervailing tariffs Tariffs imposed by a country to counteract subsidies provided to a foreign producerCreditor nations Those nations that have a balance of payments surplusCreeping protectionism A period of time where import tariff rates rise and where countries introduce quotas and barriers to the mobility of labour and capitalCurrency union A group of countries (or regions) using a common currencyCurrent account deficit The amount by which money relating to trade, investment etc. going out of a country is more than the amount coming inDebt burden Debt that a business or country has normally expressed as a share of GDPDebt deflation High levels of debt leading to falling asset pricesDebt forgiveness The cancelling by a creditor of a debt to a country or a companyDebt relief Cancellation, rescheduling, refinancing of a nation‘s external debtsDebt servicing The repayment of interest and principle to external creditorsDebt sustainability Debt sustainability is the ability to manage debts so they do not grow and impede economic stability and growth.Debtor nations Those nations that have a balance of payments deficitDe-coupling Where output rises and environmental impacts fallDemographic dividend The demographic dividend happens when most of a country‘s population is in the 15-to-64 working-age range. This increases productivity if supported by policies that promote health, family, labour and financial and human capitalDemographic transition Changes in population growth rates over time due to changes in birth and death ratesDependency ratio Ratio of dependent population (young and the elderly) to working age populationDeprivation Deprivation takes into account whether people have access to things essential for a basic standard of living. These include: clean drinking water, electricity, clean fuel for cooking, education, toilet facilities, basic transport with a bicycle, basic communication with a radio and basic income and wealthDevelopment diamonds Development diamonds show four key indicators in a country compared with its income- group average i.e. gross primary enrolment, access to safe water, GNP per capita and average life expectancyDisguised unemployment Hidden unemployment, where part of the labour force is either left without work or is working in a redundant manner where worker productivity is essentially zeroDomestic remittances Money received from family or friends living in a different city of their own countryDomestic savings Savings accumulated by domestic households, businesses and government
  4. 4. Dual exchange rate A system where there is a fixed official exchange rate and an illegal market determined parallel exchange rateDumping When a producer in one country exports a product to another at a price which is below the price it charges in its home market or is below its costs of productionEco-innovation Products and processes that contribute to sustainable developmentEcological deficit Depleting natural assets faster than these can be replenishedEconomic Freedom Index 1 Size of Government: Expenditures, Taxes, and Enterprises; 2 Legal Structure and Security of Property Rights; 3 Access to Sound Money; 4 Freedom to Trade Internationally; 5 Regulations of Credit, Labour, and Business.Economic growth An increase in real GDP or increase in the productive potential of an economyEconomic nationalism The idea that a countrys economy will perform best if its industries are protected from competition, for example by taxes on imported goodsEconomic structure: The balance of output, incomes and employment drawn from different sectors – ranging from primary (farming, fishing, mining) to secondary (manufacturing and construction) to tertiary and quaternary (tourism, banking, software industries)Emerging markets The financial markets of developing countriesEnvironmental tax An environmental tax is a tax on a good or service or a factor input, which is judged to be detrimental to the environment.Export quota A restriction on the volume of exports that can be sold overseas – this acts as a supply constraint in international marketsExport revenue Sales from selling goods and services overseasExternal debt External debt is money owed by a government to international creditorsExternal demand Net change in demand for goods and services from international trade. Net trade = the value of exports (X) minus the value of imports (M). Net trade is positive when a country runs a trade surplus and negative when a country runs a trade deficit.Externalities Action of one agent affects the action of another agent. Too little or too much of the good is produced or consumed than would be socially optimalFDI Foreign direct investment - long term participation by country A into country B. such as participation in management, joint-venture, transfers of technologyFertility Rate The average number of children a woman will have during her lifetimeFixed exchange rate An exchange rate that is fixed against other major currencies through action by governments or central banksForeign direct investment Acquisition of a controlling interest in productive operations abroad by companies resident in the home economy. May involve the creation of new productive capacity such as a new factoryForeign exchange gap When a countrys balance of payments on current account deficit is greater than the value of capital inflowsForeign exchange reserves The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by central banks on behalf of their national governmentForeign savings Foreign savings can flow into countries and provide a supplement to domestic savings. They include overseas aid, private FDI and capital flowsFragile states Those states where the government cannot or will not deliver core functions to the majority of its people, including the poor
  5. 5. Free trade When trade is allowed to occur without any form of import restrictionGenuine progress indicator GPI is an attempt to measure whether a countrys growth, increased production of goods, and expanding services have actually resulted in improved well-being. GPI advocates claim that it can more reliably measure economic progress, as it distinguishes between worthwhile growth and uneconomic growthGlobalisation Deepening of relationships between countries of the world reflected in an increasing level of overseas trade and investment.Government debt Government debt is also known as public debt, national debt, sovereign debt is money (or credit) owed by a central government to creditors within the country (domestic, or internal debt) as well as to international creditorsGreen development A pattern of development that decouples growth from heavy dependence on resource use, carbon emissions and environmental damage, and promotes growth through the creation of new green product markets, technologies, investments, and changes in consumption and conservation behaviourGDP per capita: National income per head of populationGross Domestic Product: The total value of an economys domestic output of goods and servicesGross National Income (GNI): This is broadly the same as GDP except that it adds what a country earns from overseas investments and subtracts what foreigners earn in a country and send back home. GNI is affected for example by profits from businesses owned overseas and also remittances sent home by migrant workers.Gross saving rate Gross saving = GDP minus consumption by government and the private sector, expressed as a percentage of GDP. A high gross domestic saving rate usually indicates a countrys high potential to invest in capitalHard commodities Commodities which can be mined, such as metals, minerals and oilHard infrastructure Examples include power, transport, and telecommunications systemsHarrod-Domar Model An idea that aggregate output (GDP) is proportional to the stock of physical capital.Heavily Indebted Poor An initiative to provide debt relief to heavily indebted low income countriesCountries InitiativeHIPC Abbreviation for a highly indebted poor countryHot Money Money that flows freely and quickly around the world looking to earn the best rate of return. It might be invested in any asset whose value is expected to rise or simply be placed in an account offering the best real rate of interest.Human Assets Index (HAI) HAI includes data on (i) nutrition (percentage of the population that is undernourished); (ii) health (child mortality rate); (iii) school enrolment (gross secondary school enrolment rate); and (iv) literacy (adult literacy rate)Human capital flight Another name for a brain drain – when a country suffers net outward migration of skilled / younger workers which causes their labour force to contract and may have a damaging effect on the level of labour productivityHuman Development Index The HDI, published annually by the UNDP, has become the most widely used measure for communicating a country‘s development status. HDI captures not only the level of income but also incorporates measures of health (life expectancy) and education (school enrolment and literacy rate).Humanitarian Aid Emergency disaster relief, food aid, refugee relief and disaster preparednessImport substitution Replacing imports with domestic production, perhaps using import tariffs
  6. 6. Inclusive growth Growth where the benefits are spread across all sections of society - broad based growth, shared growth, and pro-poor growthInclusive Wealth Index Assesses changes in a country‘s productive base, including produced, human, and natural capital. By taking a more holistic approach, the IWI shows governments the true state of their nation‘s wealth and the sustainability of its growth.Income convergence Income convergence happens when a nation‘s per capita income moves closer to that of another i.e. the gap in relative income per head decreasesIncome distribution Income distribution is how income is divided up among all the citizens in a country. The most common measure of income distribution is the Gini Coefficient.Inequality-adjusted HDI IHDI takes into account not the average achievements of a country on health, education and income, and how those achievements are distributed among its citizens by ―discounting‖ each dimension‘s average value according to its level of inequality. The average world loss in HDI due to inequality is about 23%—ranging from 5% (Czech Republic) to 43.5% (Namibia).Infant industry Fledgling industry that requires government protection from overseas competition (for instance through import tariffs) in order to developInformal sector The sector of the economy, normally comprising of small businesses, which is unregistered with the tax authoritiesInfrastructure Transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economyIntellectual Property (IP) Private property rights over ideas and inventions including copyrights, patents, trademarks and industrial designs.International Monetary Fund Oversees the global financial system by following the macroeconomic policies of its(IMF) member countries, in particular those with an impact on exchange rate and the balance of paymentsInward oriented development Government policy that attempts to achieve development by stimulating domestic industry and import substitution behind trade barriersJ Curve Effect The effect of currency depreciation on the trade deficit depends on price elasticity of demand for exports and imports. The J Curve effect says a trade deficit can worsen after depreciation, but get better in the medium term.Knowledge capital The scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capitalLeast Developed Countries A group of countries that have been classified by the United Nations as least developed in terms of their low gross domestic product (GDP) per capita, weak human assets and high degree of economic vulnerabilityLewis Turning Point Occurs when a country‘s surplus labour evaporates, pushing up wages, consumption and inflation rates. Within a country the supply of migrants from the countryside might dry up causing urban wages to surgeManaged floating currency A floating exchange rate but subject to intervention by the monetary authorities, in order to resist fluctuations that they consider to be undesirableMarket liberalization Removing state controls, for example, lifting price and wage controls and import quotas or lowering taxes and import tariffs.Marshall-Lerner Condition Predicts the circumstances in which a fall in the exchange rate improves the BoP. A devaluation of a currency improves the BoP only if the combined (or sum of) price elasticity‘s of demand for imports & exports are greater than one.Mercantilism The notion that the wealth of a nation was based on how much it could export in excess of its imports, and thereby accumulate precious metals. Applied in the modern context to countries accumulating huge trade surpluses in goods or services and focusing on export- led growthMicro-credit Credit services offered to low-income individuals not traditionally serviced by the formal banking sector
  7. 7. Middle income trap Occurs when a countrys growth stagnates after reaching middle income levels. The problem arises when developing economies find themselves stuck in the middle, with rising wages and declining cost competitiveness, unable to compete with advanced economies in high-skill innovations, or with low income, low wage economies in the cheap production of manufactured goodsMillennium Development MDGs are eight internationally-agreed targets which aim to reduce poverty, hunger,Goals (MDG) maternal and child deaths, disease, inadequate shelter, gender inequality and environmental degradation by 2015Multidimensional Poverty An international measure of acute poverty covering 109 developing countries.IndexN-11 Countries with fast-growth potential - Bangladesh, Egypt, Iran, Nigeria, Pakistan, Philippines, Vietnam, Mexico, Korea, Turkey, IndonesiaNAFTA North American Free Trade Agreement - a free trade area agreement signed by the US, Canada and MexicoNational savings Total public and private sector saving measured as a share of GDP. In countries such as China, the national savings rate is high in contrast to developed economies. Gross national saving measured as a percentage of GDP in 2008 for China was 54%Natural assets Assets of the natural environment - biological assets (produced or wild), land and water areas with their ecosystems, subsoil assets and air, see also natural capitalNatural capital The stock of natural ecosystems that yields a flow of valuable ecosystem goods or services into the future. Natural capital may also provide services like recycling wastes or water catchment and erosion controlNGOs Private non-profit making bodies which are active in development workNominal exchange rate The price of the domestic currency in another foreign currency e.g. £1 buys $1.60Nominal interest rate The price of borrowing money unadjusted for the effects of inflationOECD Organisation of Economic Co-operation and DevelopmentOfficial Development Loans, grants, and technical assistance provided to developing countriesAssistance (ODA)Off-shore banking Banks based abroad in a country where you pay less taxOutward oriented development Government policy that attempts to achieve development by encouraging free trade and the unrestricted movement of labour and capitalOverseas assets Assets such as businesses, shares, property which are owned in overseas countries and which might generate a flow of investment income which is a credit item on the current account of the balance of payments.Penn-Balassa-Samuelson effect The Penn-Balassa-Samuelson effect states that, even if accounting for PPPs, the price level is higher in richer countries. Some evidence finds that for the poorest countries, the relationship is downward slopingPotential output The economys maximum productive capacity in a physical sense. The largest output that could be produced, given the prevailing state of technologyPotential productivity Estimates of the productivity of the labour force i.e. output per person employed or output per person hour. Improvements in productivity have an important effect on long run aggregate supply and trend growthPoverty line The income level below which a person or household is deemed poor. Can also be used to measure the % of a population living in extreme povertyPPP Exchange Rate The rate at which the currency of one country is converted into that of another to purchase the same amount of goods and services in each country
  8. 8. Prebisch-Singer Hypothesis States that the terms of trade between primary goods and manufactured products deteriorate over timePrimary sector An industry involved in the production of raw materials including agricultureProperty rights These are the rights to ownership of an asset such as land or ideas (intellectual property rights)Protectionism The use of tariff and non-tariff restrictions on importsPublic Goods Goods that are non-rival (consumption by one person does not reduce the supply available for others) and non-excludablePublic sector Central government, local government and state-owned/nationalized industriesPurchasing Power Parity The current exchange rate is adjusted so that a basket of goods and services can be bought for the same amount of dollarsQuota A quota imposes a physical limit on the quantity of a good that can be imported into a country in a given period of time.Randomized controlled trial Studies that use one randomly selected test group and one randomly selected control group to create a fair comparison – these can be used to evaluate the effectiveness of a specific government intervention or projectReal exchange rate The product of the nominal exchange rate (the dollar cost of a euro, for example) and the ratio of prices between the two countriesReal interest rate Real rate of interest = nominal rate of interest – rate of inflation E.g. if the inflation rate is 2% and nominal interest rate is 6% then real interest rate is 4%Rebalancing Changing the nature of economic growth and development. For example a country might try to increase reliance on domestic demand, achieve a more equal income distribution and introduce incentives for environmental sustainabilityRegional Development Banks Development Banks which serve particular regions e.g. the African Development Bank or European Bank for Reconstruction and DevelopmentRegrettables Output which might be necessary but does not add to (and might detract from) the quality of life, e.g. expenditure on armaments and commutingRelative poverty The relative position of some economic unit (e.g. individual, household, racial group) compared to another economic unit. A person can be relatively poor but not absolutely poor – is really to do with distribution of income in a countryRemittances When migrants send home part of their earnings in the form of either cash or goods to support their families.Rent-seeking behaviour Behaviour by producers in a market that improves the welfare of one but at the expense of another. A feature of monopoly and oligopolyReserve currency A foreign currency that is held in countries official reserves because of its global importance as a medium of exchange and its inherent stabilityResource efficiency Achieving more with less, i.e. producing more goods and services but with a lower environmental footprintResource rent A measure of the financial return from operating in a natural resource industry – for example in the fishing sector, it is what remains after fishing costs and subsidies are deducted from revenueRevealed comparative Calculated (for example) as the share of footwear in the economy‘s exports divided by theadvantage share of footwear in global exports. The comparative advantage of a particular economy is ‗revealed‘ when this ratio is greater than 1Rural urban migration Migration of people from rural areas to urban areasSavings surplus Excess of aggregate savings over domestic investment, where investment is in fixed capital and inventories by both the public and the private sectors.
  9. 9. Social cohesion How united, trustful, cooperative and tolerant of cultural diversity society isSocial enterprises Businesses run on commercial lines but where profits are reinvested for the social good / community benefitSocial exclusion When people are denied access to opportunities considered ‗normal‘ in a societySoft commodities Commodities which can be grown, such as coffee, sugar, tea or maizeSoft infrastructure The financial system and regulation, education system, the legal framework, social networks, values and other intangible structures in an economySoft loan A loan made to a country on a concessionary basis with a lower rate of interestSovereign debt crisis Widespread problem of high fiscal deficits and rising national debts in many developed countriesSovereign wealth fund (SWF) A government or state run fund usually created by profits from natural resourcesSpecial drawing rights A unit of money created by the IMF. Each member country can borrow SDRs at favourable interest rates from the IMFs reserves when they are neededSpecialisation When individuals, regions or countries concentrate on making one or just a few products to create a surplus to trade, linked to comparative advantageSubsistence farming Farming where output is produced for consumption of the farmer and its family members and not for cash saleSustainable development To leave future generations the option or capacity to be as well off as we areSustainable growth Growth which meets the needs of the present without compromising the ability of future generations to meet changing needs and wants. Each generation should bequeath as large a productive base as it inherited from its predecessorTerms of Trade The terms of trade (also known as the real exchange rate) is the real value of countries exports in terms of their imports. Thus it is a function of the price levels in the domestic and foreign country and the nominal exchange rateTrading bloc A group of countries co-operating to liberalize trade between each otherTrend growth Trend growth is the long term non-inflationary increase in output (GDP) caused by an increase in productive capacity i.e. LRASTrickle down The process whereby the economic gains from economic growth pass down throughout the entire society eventually giving rise to developmentUnbalanced economy Imbalances are a common feature of most modern economies. For example imbalances between: (i) savings and investment (ii) domestic and external demand (iii) public and private sectors (iv) formal and informal economic activity (v) balance of payments deficits and surplusesUnder-employment When people want to work full time but find that they can only get part-time work – the result is a loss of hours that the economy can useUnder-nourished people People whose food intake is chronically insufficient to meet their minimum energy requirements.Urbanization Economic and demographic processes involved in the growth of towns and citiesWorld Bank The World Bank promotes the institutional, structural and social development of Less Developed Countries (LDCs) providing low interest loans for domestic investment projects and technical assistanceWorld Trade Organisation Polices free trade agreements, and decides on trade disputes between countries. It arranges trade negotiations to liberalize trade by mutually agreed reductions in tariffs & quotas and opening domestic markets up to foreign competition

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