OCR F585 June 2016 – Global Economy Paper – Key Definitions
Extract 1: Key Term Glossary
Key term
Brief definition
Globalisation
Globalisation is a process of deeper economic integration and interdependence between countries shown by a rise in the ratio of trade to GDP
Capital markets
These are markets for bonds (debt) and equities (shares)
Foreign direct investment
Inflows of capital from foreign multinationals (TNCs) including takeovers and
investment in new factories
Specialisation
Specializing factor inputs in a certain task in order to increase productivity
Trade barriers
Trade barriers are ways in which international trade is controlled for example
an import tariff, quota or embargo
Division of labour
Breaking down production into smaller individual tasks
Comparative advantage
Comparative advantage refers to the relative cost advantage that one
country has over another, trade is often based on comparative advantage
Economic efficiency
Efficiency means making optimum use of scarce factor inputs
Import tariffs
Ad valorem taxes on the value of imported products
Absolute advantage
Absolute advantage is the ability to produce a product (good or service) at a
lower absolute unit cost than in another country.
Extract 2: Key Term Glossary
Key term
Brief definition
Balance of Payments imbalances
Persistent deficits or surpluses mainly on the current account
Current account balance
The current account measures the difference between money
and credit going in and out of an economy (through exports,
imports and income paid on assets both home and abroad)
Current account surplus
When net external trade and income is positive
Current account deficit
When net external trade and income is negative leading to a net
outflow of demand from the circular flow
Effective exchange rate index
The trade-weighted external value of a currency
Financial flows
Flows of capital across national borders including debt and equity
Excess savings
When gross national savings > gross capital investment
Capital (financial) account (BoP)
Balance of investment flows into and out of a country
Depreciation
Fall in the external value of one currency against another
Marshall Lerner Condition
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.
F585 Extract 3: Key Term Glossary
Key Term
Brief Definition
Human Development Index (HDI)
Human Development Index captures the level of income and measures
of health (life expectancy) and education (school enrolment and literacy
rate) to show progress in people’s well-being and basic quality of life
Terms of Trade (ToT)
The terms of trade is the ratio of prices that a country receives for its
exports of goods and services compared to prices it pays for its imports
Capital accumulation
Using investment to build capital assets such as roads, ports, buildings
Creeping protectionism
Where import tariffs rise + there is more use of import quotas and
barriers to the mobility (free movement) of labour and capital
Deindustrialization
A decline in the share of national income and jobs from manufacturing
industries
Purchasing Power Parity (PPP)
Purchasing Power Parity (PPP) is the exchange rate needed for say $100
to buy the same quantity of products in each country.
Prebisch Singer Hypothesis
States that the terms of trade between primary and manufactured
products deteriorate over time threatening growth for poorer countries
External economic shocks
Unpredictable outside events such as volatile prices for commodities
which have a significant effect on economic growth, jobs & real incomes
Extract 4: Key Term Glossary
Key Term
Brief Definition
Remittances
Money sent by people living and working overseas back to their
country of origin – usually sent back to their families
Foreign savings
Foreign savings can flow into countries and provide a supplement to
domestic savings. They include aid, private FDI and capital flows
Overseas development assistance
Development aid from one government to another for example in
the form of humanitarian assistance
Portfolio investment
Financial capital flowing from one country into another into bonds
and equities (shares)
Brain drain
The movement of highly skilled or professional people from their
own country to another country where they can earn more money
Human capital
The value of the human input into production
Foreign Direct Investment (FDI)
Cross-border investments made by multinational businesses from
one country into another, with the aim of a establishing a lasting
interest in the company receiving the investment
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.
Extract 5: Key Term Glossary
Key Term
Brief Definition
Foreign direct investment
(FDI)
Long term participation by country A into country B. such as
participation in management, joint-venture, transfers of technology
Financial inclusion
The ability of a household to access credit, insurance and savings
facilities for example to allow them borrow and save at different times
Harrod-Domar Model
An idea that GDP is directly linked to the stock of physical capital but
that there are diminishing returns from additions to the capital stock
Inclusive growth
Growth where the benefits are spread across all sections of society – i.e.
broad based growth, shared growth, and pro-poor growth
Inward oriented development
Policy that attempts to achieve development by stimulating domestic
industry and import substitution behind trade barriers
Revealed comparative
advantage
Calculated as the share of industry X in the economy’s exports divided by
the share of industry X in global exports. The comparative advantage of
a particular economy is ‘revealed’ when this ratio is greater than 1
Unbalanced economy
An increasingly 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) Balance of payments deficits and surpluses (current account)
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