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A2 MACRO: GROWTH AND DEVELOPMENT ECONOMICS / MACROECONOMICS GLOSSARY
Term Glossary Description
AAA Credit Rating The best credit rating that can be given to a corporation's or a government’s bonds
(loans), effectively indicating that the risk of loan default is negligible
Absolute advantage The ability to produce a product (good or service) at a lower unit cost
Absolute 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 day
Accelerator effect When planned investment is linked positively to past & expected growth of demand
Accession Countries Countries in the process of joining the European Union
Accommodatory 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 The true rate of savings in an economy after taking into account investments in human
capital, depletion of natural resources and damage caused by pollution
Advanced economies According to the IMF, 35 economies are ‘advanced economies’. 24 in Europe + USA,
Canada, Australia, New Zealand, Israel, Japan and South Korea
Age dependency ratio The ratio of the nonworking population- people under 15 or over 65-to the working
population- people 15-64
Ageing population A rising average age and a growing number of people living beyond the standard working
ages
Aggregate supply shock Either an inflation shock or a shock to potential national output; adverse aggregate supply
shocks of both types reduce output and increase inflation
Aid A voluntary transfer of money and/or resources from one country to another
Aid effectiveness Quality of aid delivery and impact on poverty reduction and development
Appreciation An increase in the external value of a currency in a floating exchange rate system
Appropriate technology A technology that complements the factor endowments of the country
ASEAN Association of Southeast Asian Nations – a regional trade bloc
Asymmetric 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 trade
Austerity Economic policy aimed at reducing a government's deficit (or borrowing)
Bail out Financial rescue of a struggling borrower
Balanced growth Balanced growth occurs when output and the capital stock grow at the same rate
Balassa-Samuelson Effect Where countries with higher per capita real incomes have a higher real exchange rate. A
rise in productivity in the tradable goods sector will drive up wages in this sector and the
non-tradable sector and thereby lead to a rise in inflation
Basic needs Access to safe water, sufficient living space, adequate health care, and education
Beggar my Neighbour A policy that seeks to promote a country's economy at the expense of another country. An
obvious example is the use of tariff barriers.
Birth rate The number of live births in a year as % of the population or per 1,000 people.
Bond Debt issued by companies and government and traded in bond (capital) markets
Brain drain The movement of highly skilled or professional people from their own country to another
country where they can earn more money
BRIC economies The BRIC grouping – Brazil, Russia, India and China – has become short hand for the
rise of emerging markets in the global economy
Budget deficit Known as a fiscal deficit, the annual excess of state spending over tax revenue
Capacity building Growing the capacity of businesses, organizations and communities to produce, invest
and consume – includes a broader definition of capital
Capital accumulation Using investment to build capital assets such as roads, ports, buildings
Capital deepening Development process involving a transition from traditional agriculture, which is labour-
intensive, to more capital-intensive modern manufacturing. Leads to an increase in the
capital stock per worker employed
Capital flight The rapid movement of large sums of money out of a country. Reasons include a lack of
confidence in a country's 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 illegal
Capital flows Movements of capital between countries – important part of balance of payments
Capital output ratio The value of a nation’s capital stock relative to the size of GDP. Capital-output ratios are
usually around 2 or 3. 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 economy
Carbon tax Tax on the consumption or production of products which cause carbon emissions
Carbon trading Pollution control that uses the market mechanism to change relative prices and the
incentives of producers and consumers
Carry 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 commercial revenue & profit rather than for use by the grower
Catch-up effect Countries that start off poor tend to grow more rapidly. The result is some convergence in
the standard of living as measured by per capita GDP
Child mortality rate The probability that a newborn baby will die before reaching age five. Expressed as a
number per 1,000 live births
Chronic hunger The chronically hungry are undernourished. Their undernourishment makes it hard to
study, work or otherwise perform physical activities
CIVETS Group of high growth emerging countries comprising - Columbia – Indonesia – Vietnam –
Egypt – Turkey – South Africa
Clean float Currency that floats according to market forces, free from government intervention
Common external tariff Import tariff on a product applied equally by all countries inside a customs union
Comparative 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 supply
Competitive 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 exports
Concessional lending Loans given through the International Development Association. IDA provides long-term
loans at zero interest to the poorest of the developing countries.
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 school
Conditionality When donors require their 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 world
Corruption The abuse of entrusted power for private gain, government failure
Cost benefit analysis Technique to determine the feasibility of a project by quantifying costs and benefits
Countervailing tariffs Tariffs imposed by a country to counteract subsidies provided to a foreign producer
Creditor nations Those nations that have a balance of payments surplus
Creeping protectionism Where import tariffs rise + quotas and barriers to the mobility of labour and capital
Currency union A group of countries (or regions) using a common currency
Currency war Competitive devaluation of currencies, a scenario where various nations try to devalue
their currencies in an attempt to gain an advantage over each other
Current account deficit The amount by which money relating to trade, investment income and transfers going out
of a country is more than the amount coming in
Debt burden Debt that a business or country has normally expressed as a share of GDP
Debt deflation High levels of debt leading to falling asset prices
Debt forgiveness The cancelling by a creditor of a debt to a country or a company
Debt relief Cancellation, rescheduling, refinancing of a nation’s external debts
Debt rescheduling Increasing the length of time over which a loan has to be repaid
Debt servicing The repayment of interest and principle to external creditors
Debt 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 deficit
De-coupling Where output rises and environmental impacts fall
De-development When a range of development indicators start to worsen, linked to a depression
De-industrialization A decline in the share of national income and jobs from manufacturing industries
De-leveraging Reducing long-term debt as a % of shareholder equity, seen recently in banks
Demographic 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 capital
Demographic transition Changes in population growth rates due to changes in birth and death rates
Dependency ratio Ratio of dependent population (young and the elderly) to working age population
Deprivation 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 wealth
Development Assistance Loans, grants, and technical assistance provided to developing countries
Development Banks Development Banks which serve particular regions e.g. the African Development Bank or
European Bank for Reconstruction and Development
Development 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 expectancy
Development Goals Targets which aim to reduce poverty, hunger, maternal and child deaths, disease,
inadequate shelter, gender inequality and environmental degradation by 2015
Disguised 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 zero
Domestic remittances Money received from family or friends living in a different city of their own country
Domestic savings Savings accumulated by domestic households, businesses and government
Dual exchange rate A system where there is a fixed official exchange rate and an illegal market-determined
parallel exchange rate
Dumping 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 production
Eco-innovation Products and processes that contribute to sustainable development
Ecological deficit Depleting natural assets faster than these can be replenished
Economic 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 economy
Economic nationalism Protection for industries from competition e.g. through tariffs or capital controls
Economic shocks Unpredictable outside events such as volatile prices for commodities
Economic 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)
Embargo An import ban, an import quota of zero
Emerging markets Financial markets of developing countries
Environmental 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.
Euro Area Member nations of the single European currency bloc
Expenditure-reducing Measures to curb the demand for imports by cutting real income / spending power
Expenditure-switching Attempts to improve trade balance through a depreciation of the exchange rate or through
a fall in the relative prices of a country’s products against other nations
Export quota A restriction on the volume of exports that can be sold overseas – this acts as a supply
constraint in international markets
Export revenue Sales from selling goods and services overseas
External debt External debt is money owed by a government to international creditors
External demand Net change in demand for goods and services from international trade. Net trade is
positive when a country runs a trade surplus and negative with 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 optimal
Fair trade Movement dedicated to raising prices and incomes for producers in lower-income
countries, also focused on linking premium prices to environmental standards
FDI Foreign direct investment - long term participation by country A into country B. such as
participation in management, joint-venture, transfers of technology
Fertility Rate The average number of children a woman will have during her lifetime
Financial inclusion The ability of a household to access credit, insurance and savings facilities
Fiscal austerity Measures designed to cut the size of a nation’s annual fiscal deficit
Fiscal stimulus Changes in tax and government spending aimed at boosting demand and output
Fixed exchange rate An exchange rate that is fixed against other major currencies through action by
governments or central banks
Foreign direct investment Acquisition of a controlling interest in productive operations abroad by companies resident
in the home economy. May involve creation of new productive capacity
Foreign exchange gap When a country's balance of payments on current account deficit is greater than the value
of capital inflows, a shortfall of money from engaging in overseas trade
Foreign 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 government
Foreign savings Foreign savings can flow into countries and provide a supplement to domestic savings.
They include overseas aid, private FDI and capital flows
Fragile states Those states where the government cannot or will not deliver core functions to the
majority of its people, including the poor
Free trade When trade is allowed to occur without any form of import restriction
GDP per capita: National income per head of population
Genuine progress indicator GPI is an attempt to measure whether a country's 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 growth
Globalisation 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 creditors
Green 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 behaviour
Gross Domestic Product: The total value of an economy's domestic output of goods and services
Gross National Income 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
country's high potential to invest in capital
Hard commodities Commodities which can be mined, such as metals, minerals and oil
Hard infrastructure Examples include power, transport, and telecommunications systems
Harrod-Domar Model An idea that aggregate output (GDP) is proportional to the stock of physical capital.
Heavily Indebted Poor
Countries Initiative
An initiative to provide debt relief to heavily indebted low income countries
HIPC Abbreviation for a highly indebted poor country
Hot 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 When a country suffers net outward migration of skilled / younger workers which causes
their labour force to contract and may cause lower labour productivity
Human Development Index 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 preparedness
Import substitution Replacing imports with domestic production, perhaps using import tariffs
Inclusive growth Growth where the benefits are spread across all sections of society - broad based growth,
shared growth, and pro-poor growth
Inclusive 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 decreases
Income 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 achievements of a country on health, education and income, and
how those achievements are distributed among citizens by “discounting” each
dimension’s average value according to its level of inequality.
Infant (fledgling) industry Fledgling industry that requires government protection from overseas competition (for
instance through import tariffs) in order to develop
Informal sector The sector of the economy, normally comprising of small businesses, which is
unregistered with the tax authorities
Infrastructure Transport links, communications networks, sewage systems, energy plants and other
facilities essential for the efficient functioning of a country and its economy
Intellectual 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 macro policies of member countries
including those with impact on exchange rates and balance of payments
Interventionist policies Government intervention in markets to affect the allocation of scarce resources
Inward oriented development Government policy that attempts to achieve development by stimulating domestic industry
and import substitution behind trade barriers
J Curve Effect When a trade deficit can worsen after depreciation, but get better in medium term.
Knowledge capital The scientific and technological know-how that raises productivity in business output and
the promotion of physical and natural capital
Land grab Investments in agricultural land by foreign investors
Least 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 vulnerability
Lewis 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 surge
Liberalisation Opening up markets and industries to greater trade and competition
Managed floating currency A floating exchange rate but subject to intervention by the monetary authorities, in order to
resist fluctuations that they consider to be undesirable
Market 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
elasticities 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. Applied in
the modern context to countries accumulating huge trade surpluses in goods or services
and focusing on export-led growth
Micro-credit Credit services offered to low-income individuals not traditionally serviced by the formal
banking sector
Middle income trap Occurs when a country's growth stagnates after reaching middle income levels
Money illusion When people confuse nominal and real values when making economic decisions
Moral hazard When asymmetric rewards to losses encourages risk-taking e.g. riskier behaviour
because of having insurance or the belief that losses will be bailed out
Multi-dimensional Poverty An international measure of acute poverty covering 109 developing countries
N-11 Countries with fast-growth potential - Bangladesh, Egypt, Iran, Nigeria, Pakistan,
Philippines, Vietnam, Mexico, Korea, Turkey, Indonesia
NAFTA North American Free Trade Agreement - a free trade area agreement signed by the US,
Canada and Mexico
NAIRU Non-accelerating inflation rate of unemployment, the rate of unemployment consistent
with a country experiencing a stable rate of cost & price inflation
National debt Total amount of debt owed by a government usually measured as % of GDP
National savings Total public and private sector saving measured as a share of GDP. Saving is the
difference between income and consumption. 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 capital
Natural 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 control
Net inward migration When number of migrants coming into a country than those who leave each year
NGOs Private non-profit making bodies which are active in development work
Nominal exchange rate The price of the domestic currency in another foreign currency e.g. £1 buys $1.60
Nominal interest rate The price of borrowing money unadjusted for the effects of inflation
OECD Organisation of Economic Co-operation and Development
Off-shore banking Banks based abroad in a country where you pay less tax
Output Gap Difference between actual and (estimated) potential GDP
Outward-oriented development Government policy that attempts to achieve development by encouraging free trade and
the unrestricted movement of labour and capital
Overseas 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.
Paradox of thrift Higher saving in a recession may cause lower consumption, incomes and saving
Potential output The economy's maximum productive capacity in a physical sense. The largest output that
could be produced, given the prevailing state of technology
Potential productivity Estimates of the productivity of the labour force. Improvements in productivity have an
important effect on long run aggregate supply and trend growth
Poverty 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 poverty
PPP 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
Prebisch-Singer Hypothesis States that the terms of trade between primary and manufactured products deteriorate
over time threatening slower economic growth for poorer countries
Primary sector An industry involved in the production of raw materials including agriculture
Property 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 imports
Public Goods Goods that are non-rival (consumption by one person does not reduce the supply
available for others) and non-excludable
Public sector Central government, local government and state-owned/nationalized industries
Purchasing Power Parity The current exchange rate is adjusted so that a basket of goods and services can be
bought for the same amount of dollars
Quantitative easing (QE) Central banks injecting extra cash into banking system through buying bonds
Quota 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 project
Real 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 countries
Real 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 sustainability
Recovery The term typically refers to a phase of above average growth after a downturn
Regrettables Output which might be necessary but does not add to (and might detract from) the quality
of life, e.g. expenditure on armaments and commuting
Relative 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 country
Remittances 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 oligopoly
Reserve currency A foreign currency that is held in countries' official reserves because of its global
importance as a medium of exchange and its inherent stability
Resource efficiency Producing more goods and services but with a lower environmental footprint
Resource 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 revenue
Revealed comparative
advantage
Calculated (for example) as the share of footwear in the economy’s exports divided by the
share of footwear in global exports. The comparative advantage of a particular economy
is ‘revealed’ when this ratio is greater than 1
Rural urban migration Migration of people from rural areas to urban areas
Savings surplus Excess of aggregate savings over domestic investment, where investment is in fixed
capital and inventories by both the public and the private sectors.
SEZ Abbreviation for special economic zones used extensively in China
Social cohesion How united, trustful, cooperative and tolerant of cultural diversity society is
Social enterprises Businesses run on commercial lines but where profits are reinvested for the social good /
community benefit
Social exclusion When people are denied access to opportunities considered ‘normal’ in a society
Soft commodities Commodities which can be grown, such as coffee, sugar, tea or maize
Soft infrastructure The financial system and regulation, education system, the legal framework, social
networks, values and other intangible structures in an economy
Soft loan A loan made to a country on a concessionary basis with a lower rate of interest
Sovereign debt crisis Widespread problem of high fiscal deficits and rising national debts in many developed
countries
Sovereign wealth fund A government or state run fund usually created by profits from natural resources
Special drawing rights A unit of money created by the IMF. Each member country can borrow SDRs at
favourable interest rates from the IMF's reserves when they are needed
Specialisation When individuals, regions or countries concentrate on making one or just a few products
to create a surplus to trade, linked to comparative advantage
Stability and Growth Pact EU’s fiscal rules intended to control government borrowing
Stagflation A combination of slowing economic growth and rising cost and price inflation
Subsistence farming Farming where output is for consumption of the farmer/family, not for cash sale
Sustainable development To leave future generations the option or capacity to be as well off as we are
Sustainable 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 predecessor
Technology spillover Transfer of production technologies, ideas arising from trade and FDI
Terms 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 rate
Trading bloc A group of countries co-operating to liberalize trade between each other
Transition economies Former countries of the Eastern Bloc that have been engaged in a transition from being
largely command economies to market systems with a greater role for private enterprise
and resource allocation via the price mechanism
Trend growth Long term non-inflationary increase in GDP caused by an increase in LRAS
Trickle down The process whereby the economic gains from economic growth pass down throughout
the entire society eventually giving rise to development
Unbalanced economy A common feature of most modern economies. E.g. imbalances between: (i) savings &
investment (ii) domestic & external demand (iii) public & private sectors (iv) formal &
informal economic activity (v) BoP deficits and surpluses
Under-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 use
Under-nourishment When food intake is chronically insufficient to meet minimum energy requirements.
Unit wage costs Wage costs per unit of output – determined by wage and productivity levels
Urbanization Economic and demographic processes involved in the growth of towns and cities
World Bank Promotes the institutional, structural and social development, providing low interest loans
for domestic investment projects and technical assistance
World 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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A2 Macro Growth and Development Economics Glossary

  • 1. A2 MACRO: GROWTH AND DEVELOPMENT ECONOMICS / MACROECONOMICS GLOSSARY Term Glossary Description AAA Credit Rating The best credit rating that can be given to a corporation's or a government’s bonds (loans), effectively indicating that the risk of loan default is negligible Absolute advantage The ability to produce a product (good or service) at a lower unit cost Absolute 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 day Accelerator effect When planned investment is linked positively to past & expected growth of demand Accession Countries Countries in the process of joining the European Union Accommodatory 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 The true rate of savings in an economy after taking into account investments in human capital, depletion of natural resources and damage caused by pollution Advanced economies According to the IMF, 35 economies are ‘advanced economies’. 24 in Europe + USA, Canada, Australia, New Zealand, Israel, Japan and South Korea Age dependency ratio The ratio of the nonworking population- people under 15 or over 65-to the working population- people 15-64 Ageing population A rising average age and a growing number of people living beyond the standard working ages Aggregate supply shock Either an inflation shock or a shock to potential national output; adverse aggregate supply shocks of both types reduce output and increase inflation Aid A voluntary transfer of money and/or resources from one country to another Aid effectiveness Quality of aid delivery and impact on poverty reduction and development Appreciation An increase in the external value of a currency in a floating exchange rate system Appropriate technology A technology that complements the factor endowments of the country ASEAN Association of Southeast Asian Nations – a regional trade bloc Asymmetric 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 trade Austerity Economic policy aimed at reducing a government's deficit (or borrowing) Bail out Financial rescue of a struggling borrower Balanced growth Balanced growth occurs when output and the capital stock grow at the same rate Balassa-Samuelson Effect Where countries with higher per capita real incomes have a higher real exchange rate. A rise in productivity in the tradable goods sector will drive up wages in this sector and the non-tradable sector and thereby lead to a rise in inflation Basic needs Access to safe water, sufficient living space, adequate health care, and education Beggar my Neighbour A policy that seeks to promote a country's economy at the expense of another country. An obvious example is the use of tariff barriers. Birth rate The number of live births in a year as % of the population or per 1,000 people. Bond Debt issued by companies and government and traded in bond (capital) markets Brain drain The movement of highly skilled or professional people from their own country to another country where they can earn more money BRIC economies The BRIC grouping – Brazil, Russia, India and China – has become short hand for the rise of emerging markets in the global economy Budget deficit Known as a fiscal deficit, the annual excess of state spending over tax revenue
  • 2. Capacity building Growing the capacity of businesses, organizations and communities to produce, invest and consume – includes a broader definition of capital Capital accumulation Using investment to build capital assets such as roads, ports, buildings Capital deepening Development process involving a transition from traditional agriculture, which is labour- intensive, to more capital-intensive modern manufacturing. Leads to an increase in the capital stock per worker employed Capital flight The rapid movement of large sums of money out of a country. Reasons include a lack of confidence in a country's 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 illegal Capital flows Movements of capital between countries – important part of balance of payments Capital output ratio The value of a nation’s capital stock relative to the size of GDP. Capital-output ratios are usually around 2 or 3. 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 economy Carbon tax Tax on the consumption or production of products which cause carbon emissions Carbon trading Pollution control that uses the market mechanism to change relative prices and the incentives of producers and consumers Carry 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 commercial revenue & profit rather than for use by the grower Catch-up effect Countries that start off poor tend to grow more rapidly. The result is some convergence in the standard of living as measured by per capita GDP Child mortality rate The probability that a newborn baby will die before reaching age five. Expressed as a number per 1,000 live births Chronic hunger The chronically hungry are undernourished. Their undernourishment makes it hard to study, work or otherwise perform physical activities CIVETS Group of high growth emerging countries comprising - Columbia – Indonesia – Vietnam – Egypt – Turkey – South Africa Clean float Currency that floats according to market forces, free from government intervention Common external tariff Import tariff on a product applied equally by all countries inside a customs union Comparative 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 supply Competitive 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 exports Concessional lending Loans given through the International Development Association. IDA provides long-term loans at zero interest to the poorest of the developing countries. 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 school Conditionality When donors require their 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 world Corruption The abuse of entrusted power for private gain, government failure Cost benefit analysis Technique to determine the feasibility of a project by quantifying costs and benefits Countervailing tariffs Tariffs imposed by a country to counteract subsidies provided to a foreign producer Creditor nations Those nations that have a balance of payments surplus Creeping protectionism Where import tariffs rise + quotas and barriers to the mobility of labour and capital
  • 3. Currency union A group of countries (or regions) using a common currency Currency war Competitive devaluation of currencies, a scenario where various nations try to devalue their currencies in an attempt to gain an advantage over each other Current account deficit The amount by which money relating to trade, investment income and transfers going out of a country is more than the amount coming in Debt burden Debt that a business or country has normally expressed as a share of GDP Debt deflation High levels of debt leading to falling asset prices Debt forgiveness The cancelling by a creditor of a debt to a country or a company Debt relief Cancellation, rescheduling, refinancing of a nation’s external debts Debt rescheduling Increasing the length of time over which a loan has to be repaid Debt servicing The repayment of interest and principle to external creditors Debt 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 deficit De-coupling Where output rises and environmental impacts fall De-development When a range of development indicators start to worsen, linked to a depression De-industrialization A decline in the share of national income and jobs from manufacturing industries De-leveraging Reducing long-term debt as a % of shareholder equity, seen recently in banks Demographic 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 capital Demographic transition Changes in population growth rates due to changes in birth and death rates Dependency ratio Ratio of dependent population (young and the elderly) to working age population Deprivation 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 wealth Development Assistance Loans, grants, and technical assistance provided to developing countries Development Banks Development Banks which serve particular regions e.g. the African Development Bank or European Bank for Reconstruction and Development Development 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 expectancy Development Goals Targets which aim to reduce poverty, hunger, maternal and child deaths, disease, inadequate shelter, gender inequality and environmental degradation by 2015 Disguised 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 zero Domestic remittances Money received from family or friends living in a different city of their own country Domestic savings Savings accumulated by domestic households, businesses and government Dual exchange rate A system where there is a fixed official exchange rate and an illegal market-determined parallel exchange rate Dumping 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 production Eco-innovation Products and processes that contribute to sustainable development Ecological deficit Depleting natural assets faster than these can be replenished Economic Freedom Index 1 Size of Government: Expenditures, Taxes, and Enterprises 2 Legal Structure and Security of Property Rights
  • 4. 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 economy Economic nationalism Protection for industries from competition e.g. through tariffs or capital controls Economic shocks Unpredictable outside events such as volatile prices for commodities Economic 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) Embargo An import ban, an import quota of zero Emerging markets Financial markets of developing countries Environmental 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. Euro Area Member nations of the single European currency bloc Expenditure-reducing Measures to curb the demand for imports by cutting real income / spending power Expenditure-switching Attempts to improve trade balance through a depreciation of the exchange rate or through a fall in the relative prices of a country’s products against other nations Export quota A restriction on the volume of exports that can be sold overseas – this acts as a supply constraint in international markets Export revenue Sales from selling goods and services overseas External debt External debt is money owed by a government to international creditors External demand Net change in demand for goods and services from international trade. Net trade is positive when a country runs a trade surplus and negative with 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 optimal Fair trade Movement dedicated to raising prices and incomes for producers in lower-income countries, also focused on linking premium prices to environmental standards FDI Foreign direct investment - long term participation by country A into country B. such as participation in management, joint-venture, transfers of technology Fertility Rate The average number of children a woman will have during her lifetime Financial inclusion The ability of a household to access credit, insurance and savings facilities Fiscal austerity Measures designed to cut the size of a nation’s annual fiscal deficit Fiscal stimulus Changes in tax and government spending aimed at boosting demand and output Fixed exchange rate An exchange rate that is fixed against other major currencies through action by governments or central banks Foreign direct investment Acquisition of a controlling interest in productive operations abroad by companies resident in the home economy. May involve creation of new productive capacity Foreign exchange gap When a country's balance of payments on current account deficit is greater than the value of capital inflows, a shortfall of money from engaging in overseas trade Foreign 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 government Foreign savings Foreign savings can flow into countries and provide a supplement to domestic savings. They include overseas aid, private FDI and capital flows Fragile states Those states where the government cannot or will not deliver core functions to the majority of its people, including the poor Free trade When trade is allowed to occur without any form of import restriction
  • 5. GDP per capita: National income per head of population Genuine progress indicator GPI is an attempt to measure whether a country's 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 growth Globalisation 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 creditors Green 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 behaviour Gross Domestic Product: The total value of an economy's domestic output of goods and services Gross National Income 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 country's high potential to invest in capital Hard commodities Commodities which can be mined, such as metals, minerals and oil Hard infrastructure Examples include power, transport, and telecommunications systems Harrod-Domar Model An idea that aggregate output (GDP) is proportional to the stock of physical capital. Heavily Indebted Poor Countries Initiative An initiative to provide debt relief to heavily indebted low income countries HIPC Abbreviation for a highly indebted poor country Hot 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 When a country suffers net outward migration of skilled / younger workers which causes their labour force to contract and may cause lower labour productivity Human Development Index 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 preparedness Import substitution Replacing imports with domestic production, perhaps using import tariffs Inclusive growth Growth where the benefits are spread across all sections of society - broad based growth, shared growth, and pro-poor growth Inclusive 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 decreases Income 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.
  • 6. Inequality-adjusted HDI IHDI takes into account achievements of a country on health, education and income, and how those achievements are distributed among citizens by “discounting” each dimension’s average value according to its level of inequality. Infant (fledgling) industry Fledgling industry that requires government protection from overseas competition (for instance through import tariffs) in order to develop Informal sector The sector of the economy, normally comprising of small businesses, which is unregistered with the tax authorities Infrastructure Transport links, communications networks, sewage systems, energy plants and other facilities essential for the efficient functioning of a country and its economy Intellectual 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 macro policies of member countries including those with impact on exchange rates and balance of payments Interventionist policies Government intervention in markets to affect the allocation of scarce resources Inward oriented development Government policy that attempts to achieve development by stimulating domestic industry and import substitution behind trade barriers J Curve Effect When a trade deficit can worsen after depreciation, but get better in medium term. Knowledge capital The scientific and technological know-how that raises productivity in business output and the promotion of physical and natural capital Land grab Investments in agricultural land by foreign investors Least 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 vulnerability Lewis 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 surge Liberalisation Opening up markets and industries to greater trade and competition Managed floating currency A floating exchange rate but subject to intervention by the monetary authorities, in order to resist fluctuations that they consider to be undesirable Market 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 elasticities 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. Applied in the modern context to countries accumulating huge trade surpluses in goods or services and focusing on export-led growth Micro-credit Credit services offered to low-income individuals not traditionally serviced by the formal banking sector Middle income trap Occurs when a country's growth stagnates after reaching middle income levels Money illusion When people confuse nominal and real values when making economic decisions Moral hazard When asymmetric rewards to losses encourages risk-taking e.g. riskier behaviour because of having insurance or the belief that losses will be bailed out Multi-dimensional Poverty An international measure of acute poverty covering 109 developing countries N-11 Countries with fast-growth potential - Bangladesh, Egypt, Iran, Nigeria, Pakistan, Philippines, Vietnam, Mexico, Korea, Turkey, Indonesia NAFTA North American Free Trade Agreement - a free trade area agreement signed by the US, Canada and Mexico NAIRU Non-accelerating inflation rate of unemployment, the rate of unemployment consistent with a country experiencing a stable rate of cost & price inflation
  • 7. National debt Total amount of debt owed by a government usually measured as % of GDP National savings Total public and private sector saving measured as a share of GDP. Saving is the difference between income and consumption. 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 capital Natural 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 control Net inward migration When number of migrants coming into a country than those who leave each year NGOs Private non-profit making bodies which are active in development work Nominal exchange rate The price of the domestic currency in another foreign currency e.g. £1 buys $1.60 Nominal interest rate The price of borrowing money unadjusted for the effects of inflation OECD Organisation of Economic Co-operation and Development Off-shore banking Banks based abroad in a country where you pay less tax Output Gap Difference between actual and (estimated) potential GDP Outward-oriented development Government policy that attempts to achieve development by encouraging free trade and the unrestricted movement of labour and capital Overseas 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. Paradox of thrift Higher saving in a recession may cause lower consumption, incomes and saving Potential output The economy's maximum productive capacity in a physical sense. The largest output that could be produced, given the prevailing state of technology Potential productivity Estimates of the productivity of the labour force. Improvements in productivity have an important effect on long run aggregate supply and trend growth Poverty 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 poverty PPP 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 Prebisch-Singer Hypothesis States that the terms of trade between primary and manufactured products deteriorate over time threatening slower economic growth for poorer countries Primary sector An industry involved in the production of raw materials including agriculture Property 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 imports Public Goods Goods that are non-rival (consumption by one person does not reduce the supply available for others) and non-excludable Public sector Central government, local government and state-owned/nationalized industries Purchasing Power Parity The current exchange rate is adjusted so that a basket of goods and services can be bought for the same amount of dollars Quantitative easing (QE) Central banks injecting extra cash into banking system through buying bonds Quota 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
  • 8. specific government intervention or project Real 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 countries Real 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 sustainability Recovery The term typically refers to a phase of above average growth after a downturn Regrettables Output which might be necessary but does not add to (and might detract from) the quality of life, e.g. expenditure on armaments and commuting Relative 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 country Remittances 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 oligopoly Reserve currency A foreign currency that is held in countries' official reserves because of its global importance as a medium of exchange and its inherent stability Resource efficiency Producing more goods and services but with a lower environmental footprint Resource 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 revenue Revealed comparative advantage Calculated (for example) as the share of footwear in the economy’s exports divided by the share of footwear in global exports. The comparative advantage of a particular economy is ‘revealed’ when this ratio is greater than 1 Rural urban migration Migration of people from rural areas to urban areas Savings surplus Excess of aggregate savings over domestic investment, where investment is in fixed capital and inventories by both the public and the private sectors. SEZ Abbreviation for special economic zones used extensively in China Social cohesion How united, trustful, cooperative and tolerant of cultural diversity society is Social enterprises Businesses run on commercial lines but where profits are reinvested for the social good / community benefit Social exclusion When people are denied access to opportunities considered ‘normal’ in a society Soft commodities Commodities which can be grown, such as coffee, sugar, tea or maize Soft infrastructure The financial system and regulation, education system, the legal framework, social networks, values and other intangible structures in an economy Soft loan A loan made to a country on a concessionary basis with a lower rate of interest Sovereign debt crisis Widespread problem of high fiscal deficits and rising national debts in many developed countries Sovereign wealth fund A government or state run fund usually created by profits from natural resources Special drawing rights A unit of money created by the IMF. Each member country can borrow SDRs at favourable interest rates from the IMF's reserves when they are needed Specialisation When individuals, regions or countries concentrate on making one or just a few products to create a surplus to trade, linked to comparative advantage Stability and Growth Pact EU’s fiscal rules intended to control government borrowing Stagflation A combination of slowing economic growth and rising cost and price inflation Subsistence farming Farming where output is for consumption of the farmer/family, not for cash sale
  • 9. Sustainable development To leave future generations the option or capacity to be as well off as we are Sustainable 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 predecessor Technology spillover Transfer of production technologies, ideas arising from trade and FDI Terms 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 rate Trading bloc A group of countries co-operating to liberalize trade between each other Transition economies Former countries of the Eastern Bloc that have been engaged in a transition from being largely command economies to market systems with a greater role for private enterprise and resource allocation via the price mechanism Trend growth Long term non-inflationary increase in GDP caused by an increase in LRAS Trickle down The process whereby the economic gains from economic growth pass down throughout the entire society eventually giving rise to development Unbalanced economy A common feature of most modern economies. E.g. imbalances between: (i) savings & investment (ii) domestic & external demand (iii) public & private sectors (iv) formal & informal economic activity (v) BoP deficits and surpluses Under-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 use Under-nourishment When food intake is chronically insufficient to meet minimum energy requirements. Unit wage costs Wage costs per unit of output – determined by wage and productivity levels Urbanization Economic and demographic processes involved in the growth of towns and cities World Bank Promotes the institutional, structural and social development, providing low interest loans for domestic investment projects and technical assistance World 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