OCR F 585 June 2016 Global Economy Paper

OCR F 585 June 2016 – Global Economy Paper – Key Definitions

Extract 1: Key Term Glossary Key term Brief definition 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 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 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 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 (Bo. P) 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 Bo. P only if the combined (or sum of) price elasticities of demand for imports & exports are greater than one.

F 585 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 (To. T) 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) 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 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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