Economic Terms

By: KeithTimimi   Date: 8 April 2010

About The Author

KeithTimimi

The free-spirited family-man internet entrepreneur who fell in love with the study of economics. And

Keith Timimi, Editor-in-Chief

 

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A B C D E F G H I L M N O P Q R S T V W
Absolute advantage: A country has an absolute advantage if its output per unit of input of all goods and services produced is higher than that of another country.

Accelerator Principle - the growth in output that would induce a continuation in net investment.

Ad valorem tax:(in Latin: to the value added) - a tax based on the value (or assessed value) of property. Ad valorem tax can also be levied on imported items.

Aggregate demand is the sum of all demand in an economy. This can be computed by adding the expenditure on consumer goods and services, investment, and not exports (total exports minus total imports).

Aggregate supply is the total value of the goods and services produced in a country, plus the value of imported goods less the value of exports.

See further details on Aggregate demand and supply.

Alternative minimum tax: An IRS mechanism created to ensure that high-income individuals, corporations, trusts, and estates pay at least some minimum amount of tax, regardless of deductions, credits or exemptions. Alternative minimum tax operates by adding certain tax-preference items back into adjusted gross income. While it was once only important for a small number of high-income individuals who made extensive use of tax shelters and deductions, more and more people are being affected by it. The AMT is triggered when there are large numbers of personal exemptions on state and local taxes paid, large numbers of miscellaneous itemized deductions or medical expenses, or by Incentive Stock Option (ISO) plans.

Asset: Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on).

Average propensity to consume is the proportion of income the average family spends on goods and services.

Average propensity to save is the proportion of income the average family saves (does not spend on consumption).

More on Average Propensity to Consume and Save.

Average total cost is the sum of all the production costs divided by the number of units produced. See also average cost.

Asymmetric Information is where one party in a transaction has less information than the other.

Balance of Payment is the summation of imports and exports made between one countries and the other countries that it trades with.

Balance of trade: The difference in value over a period of time between a country's imports and exports.

Barter system: System where there is an exchange of goods without involving money.

Base year: In the construction of an index, the year from which the weights assigned to the different components of the index is drawn. It is conventional to set the value of an index in its base year equal to 100. Bear: An investor with a pessimistic market outlook; an investor who expects prices to fall and so sells now in order to buy later at a lower price. A Bear Market is one which is trending downwards or losing value.

Bid price: The highest price an investor is willing to pay for a stock.

Bill of exchange: A written, dated, and signed three-party instrument containing an unconditional order by a drawer that directs a drawee to pay a definite sum of money to a payee on demand or at a specified future date. Also known as a draft. It is the most commonly used financial instrument in international trade.

Birth rate: The number of births in a year per 1,000 population.

Bond: A certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money; the bond issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal. Bonds guide.

Boom: A state of economic prosperity, as in boom times.

Break even: This is a term used to describe a point at which revenues equal costs (fixed and variable).

Bretton Woods: An international monetary system operating from 1946-1973. The value of the dollar was fixed in terms of gold, and every other country held its currency at a fixed exchange rate against the dollar; when trade deficits occurred, the central bank of the deficit country financed the deficit with its reserves of international currencies. The Bretton Woods system collapsed in 1971 when the US abandoned the gold standard.

Budget: A summary of intended expenditures along with proposals for how to meet them. A budget can provide guidelines for managing future investments and expenses.

The budget deficit is the amount by which government spending exceeds government revenues during a specified period of time usually a year.

Bull: An investor with an optimistic market outlook; an investor who expects prices to rise and so buys now for resale later. A Bull Market is one in which prices are rising. c.i.f., abbrev: Cost, Insurance and Freight: Export term in which the price quoted by the exporter includes the costs of ocean transportation to the port of destination and insurance coverage.

Call money: Price paid by an investor for a call option. There is no fixed rate for call money. It depends on the type of stock, its performance prior to the purchase of the call option, and the period of the contract. It is an interest bearing band deposits that can be withdrawn on 24 hours notice.

Capital: Wealth in the form of money or property owned by a person or business and human resources of economic value. Capital is the contribution to productive activity made by investment is physical capital (machinery, factories, tools and equipments) and human capital (eg general education, health). Capital is one of the three main factors of production other two are labour and natural resources.

Capital account; Part of a nation's balance of payments that includes purchases and sales of assets, such as stocks, bonds, and land. A nation has a capital account surplus when receipts from asset sales exceed payments for the country's purchases of foreign assets. The sum of the capital and current accounts is the overall balance of payments.

Capital budget: A plan of proposed capital outlays and the means of financing them for the current fiscal period. It is usually a part of the current budget. If a Capital Program is in operation, it will be the first year thereof. A Capital Program is sometimes referred to as a Capital Budget.

Capital Asset Pricing Model: A way to show the prices of securities and other risk-free assets.

Capital gains tax: Tax paid on the gain realized upon the sale of an asset. See capital gains tax for examples of tax regimes in various countries. It is a tax on profits from the sale of capital assets, such as shares. A capital loss can be used to offset a capital gain, reducing any tax you would otherwise have to pay.

Cartel: An organization of producers seeking to limit or eliminate competition among its members, most often by agreeing to restrict output to keep prices higher than would occur under competitive conditions. Cartels are inherently unstable because of the potential for producers to defect from the agreement and capture larger markets by selling at lower prices.

Census: Official gathering of information about the population in a particular area. Government departments use the data collected in planning for the future in such areas as health, education, transport, and housing..

Central bank: Major financial institution responsible for issuing currency, managing foreign reserves, implementing monetary policy, and providing banking services to the government and commercial banks.

Centrally planned economy: A planned economic system in which the production, pricing, and distribution of goods and services are determined by the government rather than market forces. Also referred to as a "non market economy." Former Soviet Union, China, and most other communist nations are examples of centrally planed economy Classical economics: The economics of Adam Smith, David Ricardo, Thomas Malthus, and later followers such as John Stuart Mill. The theory concentrated on the functioning of a market economy, spelling out a rudimentary explanation of consumer and producer behaviour in particular markets and postulating that in the long term the economy would tend to operate at full employment because increases in supply would create corresponding increases in demand.

Closed economy: A closed economy is one in which there are no foreign trade transactions or any other form of economic contacts with the rest of the world.

Collateral security: Additional security a borrower supplies to obtain a loan.

Commercial Policy: encompassing instruments of trade protection employed by countries to foster industrial promotion, export diversification, employment creation, and other desired development-oriented strategies. They include tariffs, quotas, and subsidies.

Comparative advantage: The ability to produce a good at a lower cost, relative to other goods, compared to another country. With perfect competition and undistorted markets, countries tend to export goods in which they have a Comparative Advantage and hence make gains from trading

Compound interest: Interest paid on the original principal and on interest accrued from time it became due.

Consumer Surplus is the difference between the price a consumer pays and what they were prepared to pay.

Conditionality: The requirement imposed by the International Monetary Fund that a borrowing country undertake fiscal, monetary, and international commercial reforms as a condition to receiving a loan for balance of payments difficulties.

Copyright: A legal right (usually of the author or composer or publisher of a work) to exclusive publication production, sale, distribution of some work. What is protected by the copyright is the "expression," not the idea. Notice that taking another's idea is plagiarism, so copyrights are not the equivalent of legal prohibition of plagiarism.

Correlation coefficient: Denoted as "r", a measure of the linear relationship between two variables. The absolute value of "r" provides an indication of the strength of the relationship. The value of "r" varies between positive 1 and negative 1, with -1 or 1 indicating a perfect linear relationship, and r = 0 indicating no relationship. The sign of the correlation coefficient indicates whether the slope of the line is positive or negative when the two variables are plotted in a scatter plot.

Cost benefit analysis: A technique that assesses projects through a comparison between their costs and benefits, including social costs and benefits for an entire region or country. Depending on the project objectives and its the expected outputs, three types of CBA are generally recognised: financial; economic; and social. Generally cost-benefit analyses are comparative, i.e. they are used to compare alternative proposals. Cost-benefit analysis compares the costs and benefits of the situation with and without the project; the costs and benefits are considered over the life of the project.

Countervailing duties: duties (tariffs) that are imposed by a country to counteract subsidies provided to a foreign producer

Current account: Part of a nation's balance of payments which includes the value of all goods and services imported and exported, as well as the payment and receipt of dividends and interest. A nation has a current account surplus if exports exceed imports plus net transfers to foreigners. The sum of the current and capital accounts is the overall balance of payments.

Cross elasticity of demand: The change in the quantity demanded of one product or service impacting the change in demand for another product or service. E.g. percentage change in the quantity demanded of a good divided by the percentage change in the price of another good (a substitute or complement)

Crowding out: The possible tendency for government spending on goods and services to put upward pressure on interest rates, thereby discouraging private investment spending.

Currency appreciation: An increase in the value of one currency relative to another currency. Appreciation occurs when, because of a change in exchange rates; a unit of one currency buys more units of another currency. Opposite is the case with currency depreciation.

Currency board: Form of central bank that issues domestic currency for foreign exchange at fixed rates.

Currency substitution: The use of foreign currency (e.g., U.S. dollars) as a medium of exchange in place of or along with the local currency (e.g., Rupees).

Customs duty: Duty levied on the imports of certain goods. Includes excise equivalents Unlike tariffs customs duties are used mainly as a means to raise revenue for the government rather than protecting domestic producers from foreign competition.

Death rate: numbers of people dying per thousand population.

Deflation: Deflation is a reduction in the level of national income and output, usually accompanied by a fall in the general price level.

What is depreciation/ Developed country is an economically advanced country whose economy is characterized by a large industrial and service sector and high levels of income per head.

Developing country, less developed country, underdeveloped country or third world country: a country characterized by low levels of GDP and per capita income; typically dominated by agriculture and mineral products and majority of the population lives near subsistence levels.

Dumping occurs when goods are exported at a price less than their normal value, generally meaning they are exported for less than they are sold in the domestic market or third country markets, or at less than production cost.

Direct investment: Foreign capital inflow in the form of investment by foreign-based companies into domestic based companies. Portfolio investment is foreign capital inflow by foreign investors into shares and financial securities. It is the ownership and management of production and/or marketing facilities in a foreign country.

Direct tax: A tax that you pay directly, as opposed to indirect taxes, such as tariffs and business taxes. The income tax is a direct tax, as are property taxes. See also Indirect Tax.

Double taxation: Corporate earnings taxed at both the corporate level and again as a stockholder dividend

Economic growth: Quantitative measure of the change in size/volume of economic activity, usually calculated in terms of gross national product (GNP) or gross domestic product(GDP).

Duopoly: A market structure in which two producers of a commodity compete with each other.

Econometrics: The application of statistical and mathematical methods in the field of economics to test and quantify economic theories and the solutions to economic problems.

Economic development: The process of improving the quality of human life through increasing per capita income, reducing poverty, and enhancing individual economic opportunities. It is also sometimes defined to include better education, improved health and nutrition, conservation of natural resources, a cleaner environment, and a richer cultural life.

Economic growth: An increase in the nation's capacity to produce goods and services.

Economic infrastructure: The underlying amount of physical and financial capital embodied in roads, railways, waterways, airways, and other forms of transportation and communication plus water supplies, financial institutions, electricity, and public services such as health and education. The level of infrastructural development in a country is a crucial factor determining the pace and diversity of economic development.

Economic integration: The merging to various degrees of the economies and economic policies of two or more countries in a given region. See also common market, customs union, free-trade area, trade creation, and trade diversion.

Economic policy: A statement of objectives and the methods of achieving these objectives (policy instruments) by government, political party, business concern, etc. Some examples of government economic objectives are maintaining full employment, achieving a high rate of economic growth, reducing income inequalities and regional development inequalities, and maintaining price stability. Policy instruments include fiscal policy, monetary and financial policy, and legislative controls (e.g., price and wage control, rent control).

Economies of Scale.

Elasticity of demand: The degree to which consumer demand for a product or service responds to a change in price, wage or other independent variable. When there is no perceptible response, demand is said to be inelastic.

Excess capacity: Volume or capacity over and above that which is needed to meet peak planned or expected demand.

Excess demand: the situation in which the quantity demanded at a given price exceeds the quantity supplied. Opposite: excess supply

Exchange control: A governmental policy designed to restrict the outflow of domestic currency and prevent a worsened balance of payments position by controlling the amount of foreign exchange that can be obtained or held by domestic citizens. Often results from overvalued exchange rates

Exchange rate: The price of one currency stated in terms of another currency, when exchanged.

Export incentives: Public subsidies, tax rebates, and other kinds of financial and nonfinancial measures designed to promote a greater level of economic activity in export industries.

Exports: The value of all goods and nonfactor services sold to the rest of the world; they include merchandise, freight, insurance, travel, and other nonfactor services. The value of factor services (such as investment receipts and workers' remittances from abroad) is excluded from this measure. See also merchandise exports and imports.

Externalities: A cost or benefit not accounted for in the price of goods or services. Often "externality" refers to the cost of pollution and other environmental impacts.

Fiscal deficit is the gap between the government's total spending and the sum of its revenue receipts and non-debt capital receipts. The fiscal deficit represents the total amount of borrowed funds required by the government to completely meet its expenditure

Fiscal policy is the use of government expenditure and taxation to try to influence the level of economic activity. An expansionary (or reflationary) fiscal policy could mean: cutting levels of direct or indirect tax increasing government expenditure The effect of these policies would be to encourage more spending and boost the economy. A contractionary (or deflationary) fiscal policy could be: increasing taxation - either direct or indirect cutting government expenditure These policies would reduce the level of demand in the economy and help to reduce inflation

Fixed costs: A cost incurred in the general operations of the business that is not directly attributable to the costs of producing goods and services. These "Fixed" or "Indirect" costs of doing business will be incurred whether or not any sales are made during the period, thus the designation "Fixed", as opposed to "Variable".

Fixed exchange rate: The exchange value of a national currency fixed in relation to another (usually the U.S. dollar), not free to fluctuate on the international money market.

Foreign aid The international transfer of public funds in the form of loans or grants either directly from one government to another (bilateral assistance) or indirectly through the vehicle of a multilateral assistance agency like the World Bank. See also tied aid, private foreign investment, and nongovernmental organizations.

Foreign direct investment (FDI): Overseas investments by private multinational corporations.

Foreign exchange reserves: The stock of liquid assets denominated in foreign currencies held by a government's monetary authorities (typically, the finance ministry or central bank). Reserves enable the monetary authorities to intervene in foreign exchange markets to affect the exchange value of their domestic currency in the market. Reserves are invested in low-risk and liquid assets, often in foreign government securities.

Free trade: Free trade in which goods can be imported and exported without any barriers in the forms of tariffs, quotas, or other restrictions. Free trade has often been described as an engine of growth because it encourages countries to specialize in activities in which they have comparative advantages, thereby increasing their respective production efficiencies and hence their total output of goods and services.

Free-trade area A form of economic integration in which there exists free internal trade among member countries but each member is free to levy different external tariffs against non-member nations.

Free-market exchange rate Rate determined solely by international supply and demand for domestic currency expressed in terms of, say, U.S. dollars.

Fringe benefit: A benefit in addition to salary offered to employees such as use of company's car, house, lunch coupons, health care subscriptions etc.

Gains from trade The addition to output and consumption resulting from specialization in production and free trade with other economic units including persons, regions, or countries.

General Agreement on Tariffs and Trade (GATT) An international body set up in 1947 to probe into the ways and means of reducing tariffs on internationally traded goods and services. Between 1947 and 1962, GATT held seven conferences but met with only moderate success. Its major success was achieved in 1967 during the so-called Kennedy Round of talks when tariffs on primary commodities were drastically slashed and then in 1994 with the signing of the Uruguay Round agreement. Replaced in 1995 by World Trade Organization (WTO).

What are Giffen goods

Global warming Theory that world climate is slowly warming as a result of both MDC and LDC industrial and agricultural activities.

Gross domestic product (GDP): Gross Domestic Product: The total of goods and services produced by a nation over a given period, usually 1 year. Gross Domestic Product measures the total output from all the resources located in a country, wherever the owners of the resources live.

Gross national product (GNP) is the value of all final goods and services produced within a nation in a given year, plus income earned by its citizens abroad, minus income earned by foreigners from domestic production. The Fact book, following current practice, uses GDP rather than GNP to measure national production. However, the user must realize that in certain countries net remittances from citizens working abroad may be important to national well being. GNP equals GDP plus net property income from abroad.

Globalisation or Globalization: The process whereby trade is now being conducted on ever widening geographical boundaries. Countries now trade across continents and companies also trade all over the world.

Human capital Productive investments embodied in human persons. These include skills, abilities, ideals, and health resulting from expenditures on education, on-the-job training programs, and medical care.

Imperfect competition: A market situation or structure in which producers have some degree of control over the price of their product. Examples include monopoly and oligopoly. See also perfect competition.

Imperfect market A market where the theoretical assumptions of perfect competition are violated by the existence of, for example, a small number of buyers and sellers, barriers to entry, nonhomogeneity of products, and incomplete information. The three imperfect markets commonly analyzed in economic theory are monopoly, oligopoly, and monopolistic competition.

Import substitution A deliberate effort to replace major consumer imports by promoting the emergence and expansion of domestic industries such as textiles, shoes, and household appliances. Import substitution requires the imposition of protective tariffs and quotas to get the new industry started.

Income inequality The existence of disproportionate distribution of total national income among households whereby the share going to rich persons in a country is far greater than that going to poorer persons (a situation common to most LDCs). This is largely due to differences in the amount of income derived from ownership of property and to a lesser extent the result of differences in earned income. Inequality of personal incomes can be reduced by progressive income taxes and wealth taxes. This is measured by the Gini coefficient.

Index of industrial production: A quantity index that is designed to measure changes in the physical volume or production levels of industrial goods over time.

Inflation is the percentage increase in the prices of goods and services.

Indirect tax: A tax you do not pay directly, but which is passed on to you by an increase in your expenses. For instance, a company might have to pay a fuel tax. The company pays the tax but can increase the cost of its products so consumers are actually paying the tax indirectly by paying more for the merchandise.

Interdependence Interrelationship between economic and noneconomic variables. Also, in international affairs, the situation in which one nation's welfare depends to varying degrees on the decisions and policies of another nation, and vice versa. See also dependence.

International commodity agreement Formal agreement by sellers of a common internationally traded commodity (coffee, sugar) to coordinate supply to maintain price stability.

International Labor Organization (ILO) One of the functional organizations of the United Nations, based in Geneva, Switzerland, whose central task is to look into problems of world labor supply, its training, utilization, domestic and international distribution, etc. Its aim in this endeavor is to increase world output through maximum utilization of available human resources and thus improve levels of living.

International Monetary Fund (IMF) An autonomous international financial institution that originated in the Bretton Woods Conference of 1944. Its main purpose is to regulate the international monetary exchange system, which also stems from that conference but has since been modified. In particular, one of the central tasks of the IMF is to control fluctuations in exchange rates of world currencies in a bid to alleviate severe balance of payments problems.

International poverty line An arbitrary international real income measure, usually expressed in constant dollars (e.g., $270), used as a basis for estimating the proportion of the world's population that exists at bare levels of subsistence.

Land reform A deliberate attempt to reorganize and transform existing agrarian systems with the intention of improving the distribution of agricultural incomes and thus fostering rural development. Among its many forms, land reform may entail provision of secured tenure rights to the individual farmer, transfer of land ownership away from small classes of powerful landowners to tenants who actually till the land, appropriation of land estates for establishing small new settlement farms, or instituting land improvements and irrigation schemes.

Macroeconomic stabilization Policies designed to eliminate macroeconomic instability.

Macroeconomics: The branch of economics that considers the relationships among broad economic aggregates such as national income, total volumes of saving, investment, consumption expenditure, employment, and money supply. It is also concerned with determinants of the magnitudes of these aggregates and their rates of change over time.

What is a Market.

Market economy: A free private-enterprise economy governed by consumer sovereignty, a price system, and the forces of supply and demand.

Market failure: A phenomenon that results from the existence of market imperfections (e.g., monopoly power, lack of factor mobility, significant externalities, lack of knowledge) that weaken the functioning of a free-market economy--it fails to realize its theoretical beneficial results. Market failure often provides the justification for government interference with the working of the free market.

Market-friendly approach: World Bank notion that successful development policy requires governments to create an environment in which markets can operate efficiently and to intervene selectively in the economy in areas where the market is inefficient (e.g., social and economic infrastructure, investment coordination, economic "safety net").

Market mechanism: The system whereby prices of stocks & shares, commodities or services freely rise or fall when the buyer's demand for them rises or falls or the seller's supply of them decreases or increases.

Market prices: Prices established by demand and supply in a free-market economy.

Merchandise exports and imports: All international changes in ownership of merchandise passing across the customs borders of the trading countries. Exports are valued f.o.b. (free on board). Imports are valued c.i.f. (cost, insurance, and freight).

Merchandise trade balance: Balance on commodity exports and imports.

Microeconomics: The branch of economics concerned with individual decision units--firms and households--and the way in which their decisions interact to determine relative prices of goods and factors of production and how much of these will be bought and sold. The market is the central concept in microeconomics.

Middle-income countries (MICs): LDCs with per capita income above $785 and below $9,655 in 1997 according to World Bank measures.

Mixed economic systems: Economic systems that are a mixture of both capitalist and socialist economies. Most developing countries have mixed systems. Their essential feature is the coexistence of substantial private and public activity within a single economy.

Monetary policy: The regulation of the money supply and interest rates by a central bank in order to control inflation and stabilize currency. If the economy is heating up, the central bank (such as RBI in India) can withdraw money from the banking system, raise the reserve requirement or raise the discount rate to make it cool down. If growth is slowing, it can reverse the process - increase the money supply, lower the reserve requirement and decrease the discount rate. The monetary policy influences interest rates and money supply.

Money supply: the total stock of money in the economy; currency held by the public plus money in accounts in banks. It consists primarily currency in circulation and deposits in savings and checking accounts. Too much money in relation to the output of goods tends to push interest rates down and push inflation up; too little money tends to push rates up and prices down, causing unemployment and idle plant capacity. The central bank manages the money supply by raising and lowering the reserves banks are required to hold and the discount rate at which they can borrow money from the central bank. The central bank also trades government securities (called repurchase agreements) to take money out of the system or put it in. There are various measures of money supply, including M1, M2, M3 and L; these are referred to as monetary aggregates.

Monopoly: A market situation in which a product that does not have close substitutes is being produced and sold by a single seller. See also monopsony.

Multi-Fiber Arrangement (MFA) A set of nontariff bilateral quotas established by developed countries on imports of cotton, wool, and synthetic textiles and clothing from individual LDCs

Multinational corporation (MNC) An international or transnational corporation with headquarters in one country but branch offices in a wide range of both developed and developing countries. Examples include General Motors, Coca-Cola, Firestone, Philips, Volkswagen, British Petroleum, Exxon, and ITT. Firms become multinational corporations when they perceive advantages to establishing production and other activities in foreign locations. Firms globalize their activities both to supply their home-country market more cheaply and to serve foreign markets more directly. Keeping foreign activities within the corporate structure lets firms avoid the costs inherent in arm's-length dealings with separate entities while utilizing their own firm-specific knowledge such as advanced production techniques.

National debt: Treasury bills, notes, bonds, and other debt obligations that constitute the debt owed by the federal government. It represents the accumulation of each year's budget deficit

Public debt: Borrowing by the Government of India internally as well as externally. The total of the nation's debts: debts of local and state and national governments is an indicator of how much public spending is financed by borrowing instead of taxation

Newly industrializing countries (NICs) A small group of countries at a relatively advanced level of economic development with a substantial and dynamic industrial sector and with close links to the international trade, finance, and investment system (Argentina, Brazil, Greece, Mexico, Portugal, Singapore, South Korea, Spain, and Taiwan).

Nongovernmental organizations (NGOs) Privately owned and operated organizations involved in providing financial and technical assistance to LDCs. See foreign aid.

Nontariff trade barrier: A barrier to free trade that takes a form other than a tariff, such as quotas or sanitary requirements for imported meats and dairy products.

What is an Oligopoly

Official development assistance (ODA) Net disbursements of loans or grants made on concessional terms by official agencies of member countries of the Organization for Economic Cooperation and Development (OECD).

Official exchange rate: Rate at which the central bank will buy and sell the domestic currency in terms of a foreign currency such as the U.S. dollar.

An Open economy is an economy that encourages foreign trade and has extensive financial and nonfinancial contacts with the rest of the world in areas such as education, culture, and technology. See also closed economy.

The opportunity cost is the implied cost of not doing something that could have led to higher returns.

Organization for Economic Cooperation and Development (OECD):An organization of 20 countries from the Western world including all of those in Europe and North America. Its major objective is to assist the economic growth of its member nations by promoting cooperation and technical analysis of national and international economic trends.

Overvalued exchange rate An official exchange rate set at a level higher than its real or shadow value--for example, 7 Kenyan shillings per dollar instead of, say, 10 shillings per dollar. Overvalued rates cheapen the real cost of imports while raising the real cost of exports. They often lead to a need for exchange control.

Perfect competition: A market situation characterized by the existence of very many buyers and sellers of homogeneous goods or services with perfect knowledge and free entry so that no single buyer or seller can influence the price of the good or service.

Performance budget is a budget format that relates the input of resources and the output of services for each organizational unit individually. Sometimes used synonymously with program budget. It is a budget wherein expenditures are based primarily upon measurable performance of activities.

Political economy The attempt to merge economic analysis with practical politics--to view economic activity in its political context. Much of classical economics was political economy, and today political economy is increasingly being recognized as necessary for any realistic examination of development problems.

Portfolio investment Financial investments by private individuals, corporations, pension funds, and mutual funds in stocks, bonds, certificates of deposit, and notes issued by private companies and the public agencies of LDCs. See also private foreign investment.

Poverty gap: The sum of the difference between the poverty line and actual income levels of all people living below that line.

Poverty line: A level of income below, which people are deemed poor. A global poverty line of $1 per person per day was suggested in 1990 (World Bank 1990). This line facilitates comparison of how many poor people there are in different countries. But, it is only a crude estimate because the line does not recognize differences in the buying power of money in different countries, and, more significantly, because it does not recognize other aspects of poverty than the material, or income poverty.

Price: The monetary or real value of a resource, commodity, or service. The role of prices in a market economy is to ration or allocate resources in accordance with supply and demand; relative prices should reflect the relative scarcity of different resources, goods, or services.

Price elasticity of demand: The responsiveness of the quantity of a commodity demanded to a change in its price, expressed as the percentage change in quantity demanded divided by the percentage change in price.

Price elasticity of supply: The responsiveness of the quantity of a commodity supplied to a change in its price, expressed as the percentage change in quantity supplied divided by the percentage change in price.

Quota: A quota is a physical limitation on the quantity of any item that can be imported into a country, such as so many automobiles per year. Also a method for allocating limited school places by noncompetitive means--for example, by income or ethnicity.

Repo rate: This is one of the credit management tools used by the Reserve Bank to regulate liquidity in South Africa (customer spending). The bank borrows money from the Reserve Bank to cover its shortfall. The Reserve Bank only makes a certain amount of money available and this determines the repo rate. If the bank requires more money than what is available, this will increase the repo rate - and vice versa.

Revenue expenditure: This is expenditure on recurring items, including the running of services and financing capital spending that is paid for by borrowing. This is meant for normal running of governments' maintenance expenditures, interest payments, subsidies and transfers etc. It is current expenditure which does not result in the creation of assets. Grants given to State governments or other parties are also treated as revenue expenditure even if some of the grants may be meant for creating assets. Subsidy : Financial assistance (often from the government) to a specific group of producers or consumers.

Revenue receipts: Additions to assets that do not incur an obligation that must be met at some future date and do not represent exchanges of property for money. Assets must be available for expenditures. These include proceeds of taxes and duties levied by the government, interest and dividend on investments made by the government, fees and other receipts for services rendered by the government.

Stabilization policies: A coordinated set of mostly restrictive fiscal and monetary policies aimed at reducing inflation, cutting budget deficits, and improving the balance of payments. See conditionality and International Monetary Fund (IMF).

Subsidy: A payment by the government to producers or distributors in an industry to prevent the decline of that industry (e.g., as a result of continuous unprofitable operations) or an increase in the prices of its products or simply to encourage it to hire more labor (as in the case of a wage subsidy). Examples are export subsidies to encourage the sale of exports; subsidies on some foodstuffs to keep down the cost of living, especially in urban areas; and farm subsidies to encourage expansion of farm production and achieve self-reliance in food production.

Tax avoidance: A legal action designed to reduce or eliminate the taxes that one owes.

Tax base: the total property and resources subject to taxation. See also tariffs.

Tax evasion: An illegal strategy to decrease tax burden by underreporting income, overstating deductions, or using illegal tax shelters.

Terms of trade The ratio of a country's average export price to its average import price; also known as the commodity terms of trade. A country's terms of trade are said to improve when this ratio increases and to worsen when it decreases, that is, when import prices rise at a relatively faster rate than export prices (the experience of most LDCs in recent decades).

Treasury bill: A short-term debt issued by a national government with a maximum maturity of one year. Treasury bills are sold at discount, such that the difference between purchase price and the value at maturity is the amount of interest.

VAT: A form of indirect sales tax paid on products and services at each stage of production or distribution, based on the value added at that stage and included in the cost to the ultimate customer.

World Bank: An international financial institution owned by its 181 member countries and based in Washington, D.C. Its main objective is to provide development funds to the Third World nations in the form of interest-bearing loans and technical assistance. The World Bank operates with borrowed funds.

WTO: The World Trade Organization is a global international organization dealing with the rules of trade between nations. It was set up in 1995 at the conclusion of GATT negotiations for administering multilateral trade negotiations.

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