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 inter-dependence 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 balanceThe 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 ConditionA 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 GlossaryKey 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 flightThe 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 economyAn 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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