Definitions

Free trade area: A group of countries which removes tariff barriers between member countries but allows each member to decide on its own tariff policy towards non-members.

Discretionary policy: Deliberate Ds in govt expenditure &/or taxes.

Monetary policy: The use by govt of changes in the supply of money and interest rates to achieve desired economic policy objectives. They aim therefore to influence the level of economic activity. If they want to slow down the economy they may use contractionary (or deflationary) monetary policy. This is likely to mean: 1...increasing the level of interest rates 2...reducing the rate of growth of the money supply

GDP deflator: The index value used to eliminate the effect of inflation. Real national income is found by dividing money national income by the GDP deflator and multiplying by 100.

Purchasing Power Parity Theory: Suggests that the prices of goods in countries will tend to equate under floating exchange rates so that people would be able to purchase the same quantity of goods in any country for a given sum of money.

Protectionism: The practice of taking steps to protect what one sees as one's own interests & used to describe steps taken by countries to protect the domestic industries from foreign competition.

Fiscal drag: When people's money income rises, dragging them into higher tax brackets. Fiscal drag is therefore referring to the effect inflatn has on average tax rates. If tax allowances are not increased in line with inflation, and people's incomes increase with inflation then they will be moved up into higher tax bands and so their tax bill will go up. However, they are really worseoff because inflatn has cancelled out their pay rise & their tax bill is higher.

FDI: Overseas investment into a country by multinational enterprises. This investment is recorded as a credit in the balance of payments.

Barriers to entry: Obstacles to the entry of new firms into a market. May be technical barriers, legal barriers or barriers that arise from strong branding of the product.

Marshall Lerner condition

Definition: States that a devaluation (currency become weaker) will improve the current account balance (exports minus imports) if the combined price elasticities of demand for exports and imports are greater than 1

J curve effect

Definition: The tendency for a fall in the value of the currency to worsen the balance of trade before it improves the position.

Monetary transmission mechanism

Definition: The transmission mechanism of monetary policy is the way in which interest rate changes affect economic activity and inflation. The main impact is through the level of aggregate demand. Higher interest rates limit people's ability to spend and so reduce aggregate demand. However, there are a variety of other effects as well through expectations, asset prices and the exchange rate.

Keynesian

Definition: Believe that changes in government income and expenditure are the most effective instrument of government economic policy. Keynesians would argue for active intervention by the government to manage the level of aggregate demand to achieve full employment. They would argue that the economy can remain at equilibrium significantly below the level of full employment for some time.

Counter-cyclical demand management policies

Definition: Policies that are intended to manage the level of demand. The policy stance is opposite to the point in the economic cycle. In other words, if the economy is booming, then policy is fundamentally deflationary to prevent over-heating. If the economy, however, is in recession then the government's policy stance should be reflationary to kick-start the economy out of recession.

Measurable Economic Welfare

Definition: Adjusts GDP by adding the value of e.g. leisure time, D.I.Y. and unpaid housework and deducting expenditure on e.g. defence, police and road maintenance and negative externalities.

Human Development Index

Definition: Introduced by the UN in 1990, the index take into account not only the goods and services produced but also the ability of a population to use these and the time they have to enjoy them. It is a composite index based on real GDP per capita (PPP), life expectancy at birth and educational achievement that measures socio-economic development.

Automatic stabilisers

Definition: Changes in government expenditure and tax revenue which occur without any change in government policy as GDP increases or falls. Automatic stabilisers will help to dampen fluctuations in the trade cycle. An example would be that in a recession as unemployment rises, the government is forced to pay out more in benefits. This is an "automatic" increase in government expenditure. This increases aggregate demand and helps compensate for the lack of demand in the recession.