Glossary of key terms for the Edexcel Unit 4 macro paper

1. Economic Development and Growth Glossary – A2 Macro
Term Glossary Description
AAA Credit Rating The best credit rating that can be given to a corporation's bonds, effectively indicating that
the risk of default is negligible
Absolute poverty Those people who do not have adequate nutritional intake per day, or do not have adequate
shelter or clothing in order to survive. The World Bank reports the number of people in
countries below a $1.25 or $2 a day
Accelerator effect Where planned capital investment is linked positively to the past and expected growth of
consumer demand
Accession Countries Countries in the process of joining the European Union
Accommodatory policy A neutral policy stance in the face of an economic shock. For fiscal policy, generally
means keeping tax and government expenditure rates unchanged. For monetary policy,
generally means keeping (real) interest rates unchanged.
Adjusted net savings (or The true rate of savings in an economy after taking into account investments in human
genuine savings) capital, depletion of natural resources and damage caused by pollution
Advanced economies According to the IMF, 35 economies are ‗advanced economies‘. 24 in Europe + USA,
Canada, Australia, New Zealand, Israel, Japan and South Korea
Age dependency ratio The ratio of the nonworking population- people under 15 or over 65-to the working
population- people 15-64
Ageing population A change in the age structure of the population within a country, a rising average age and a
growing number of people living beyond the standard working ages. By 2035 almost 30%
of Chinese will be 60 or over
Aggregate supply shock Either an inflation shock or a shock to potential national output; adverse aggregate supply
shocks of both types reduce output and increase inflation
Aid effectiveness A measure of the quality of aid delivery and maximizing the impact of aid on poverty
reduction and development
Appropriate technology A technology that complements the factor endowments of the country
ASEAN Association of Southeast Asian Nations – a regional trade bloc
Asymmetric bargaining power When the bargaining power in trade between one or more countries is imbalanced – this
can lead to shifts in the measured terms of trade
Balanced growth In macroeconomics, balanced growth occurs when output and the capital stock grow at the
same rate
Balassa-Samuelson Effect This effect refers to the fact that countries with higher per capita real incomes have a higher
real exchange rate. There tends to be more investment and productivity in industries that
are producing goods for export. However, a rise in productivity in the tradable goods sector
will drive up wages in this sector and, as labour is assumed to be mobile across sectors,
push up wages in the non-tradable sector. As the latter increase is not matched by a
productivity increase, it will raise costs and prices in the non-tradable goods sector and
thereby lead to a rise in inflation
Beggar my Neighbour A policy that seeks to promote a country's economy at the expense of another country. An
obvious example is the use of tariff barriers. A country may place tariff on imports to help
promote local domestic industry. This may help local unemployment, but, be at the expense
of the other country's export sector
Birth rate The number of live births in a year expressed as a percentage of the population or per 1,000
people.
Brain drain The movement of highly skilled or professional people from their own country to another
country where they can earn more money

2. BRIC economies The BRIC grouping – Brazil, Russia, India and China – has become short hand for the rise
of emerging markets in the global economy. The BRICs already have a bigger share of
world trade than the USA.
Capacity building Growing the capacity of businesses, organizations and communities to produce, invest and
consume – includes a broader definition of capital
Capital accumulation Using investment to build capital assets such as roads, ports, buildings
Capital deepening A development process involving a transition from traditional agriculture, which is labour-
intensive, to more capital-intensive modern manufacturing. It leads to an increase in the
capital stock per worker employed
Capital flight The rapid movement of large sums of money out of a country. There could be several
possible reasons - lack of confidence in a country's economy and/or its currency and
political turmoil. Capital flight occurs when owners of liquid assets move them to other
countries perceived as safe havens or as offering better returns. It can be legal or illegal
Capital flows Movements of capital between countries. Outward capital flows are movements of
domestically-owned capital abroad; inward capital flows are movement of foreign-owned
capital to the domestic economy
Capital output ratio The value of a nation‘s capital stock relative to the size of national output (GDP). Capital-
output ratios are usually around 2 or 3—that is, the capital stock is about 2 to 3 times
annual economic output. Poor countries have lower capital-output ratios because they have
less capital-intensive economies.
Capital stock The total amount of physical capital available in the economy
Carbon tax A carbon tax is a tax on the consumption or production of goods and services, which cause
carbon emissions
Carbon trading Pollution control that uses the market mechanism to change relative prices and the
incentives of producers and consumers
Carry trade A strategy in which an investor borrows money at a low interest rate in order to invest in an
asset that is likely to provide a higher return.
Cash crops A crop produced for its commercial revenue and profit rather than for use by the grower
Catch-up effect This occurs when countries that start off poor tend to grow more rapidly than countries that
start off rich. The result is some convergence in the standard of living as measured by per
capita GDP
Child mortality rate The probability that a new-born baby will die before reaching age five. Expressed as a
number per 1,000 live births
Chronic hunger The chronically hungry are undernourished. They don‘t eat enough to get the energy they
need to lead active lives. Their undernourishment makes it hard to study, work or otherwise
perform physical activities
Chronic poverty Those who never get out of absolute poverty
CIVETS A group of high growth emerging countries comprising - Columbia – Indonesia – Vietnam
– Egypt – Turkey – South Africa
Clean float A currency that floats according to market forces, free from government intervention
Comparative advantage Comparative advantage refers to the relative advantage that one country or producer has
over another. Countries can benefit from specializing in and exporting the product(s) for
which it has the lowest opportunity cost of supply
Competitive devaluation When a country tries to devalue its currency to increase its international competitiveness.
However, this often encourages other countries to also devalue leading to only temporary
increases in the competitiveness of exports
Concessional lending Loans that are given by through the International Development Association (IDA). IDA
provides long-term loans at zero interest to the poorest of the developing countries.

3. Conditional cash transfers Attempts to cut poverty by giving cash transfers to households in need; and by tying these
transfers to certain conditions, such as sending children to school
Conditionality When donors require their developing country partners to do something in order to receive
aid.
Convergence A coming together of economic indicators i.e. a narrowing of the gap in per capita incomes
between the poorest and the richest nations of the world
Corruption The abuse of entrusted power for private gain, government failure
Corruption Perceptions Index This index ranks countries/territories based on how corrupt their public sector is perceived
to be. It is a composite index, a combination of polls, drawing on corruption-related data
collected by a variety of reputable institutions
Cost benefit analysis Technique to determine the feasibility of a project by quantifying costs and benefits
Countervailing tariffs Tariffs imposed by a country to counteract subsidies provided to a foreign producer
Creditor nations Those nations that have a balance of payments surplus
Creeping protectionism A period of time where import tariff rates rise and where countries introduce quotas and
barriers to the mobility of labour and capital
Currency union A group of countries (or regions) using a common currency
Current account deficit The amount by which money relating to trade, investment etc. going out of a country is
more than the amount coming in
Debt burden Debt that a business or country has normally expressed as a share of GDP
Debt deflation High levels of debt leading to falling asset prices
Debt forgiveness The cancelling by a creditor of a debt to a country or a company
Debt relief Cancellation, rescheduling, refinancing of a nation‘s external debts
Debt servicing The repayment of interest and principle to external creditors
Debt sustainability Debt sustainability is the ability to manage debts so they do not grow and impede economic
stability and growth.
Debtor nations Those nations that have a balance of payments deficit
De-coupling Where output rises and environmental impacts fall
Demographic dividend The demographic dividend happens when most of a country‘s population is in the 15-to-64
working-age range. This increases productivity if supported by policies that promote
health, family, labour and financial and human capital
Demographic transition Changes in population growth rates over time due to changes in birth and death rates
Dependency ratio Ratio of dependent population (young and the elderly) to working age population
Deprivation Deprivation takes into account whether people have access to things essential for a basic
standard of living. These include: clean drinking water, electricity, clean fuel for cooking,
education, toilet facilities, basic transport with a bicycle, basic communication with a radio
and basic income and wealth
Development diamonds Development diamonds show four key indicators in a country compared with its income-
group average i.e. gross primary enrolment, access to safe water, GNP per capita and
average life expectancy
Disguised unemployment Hidden unemployment, where part of the labour force is either left without work or is
working in a redundant manner where worker productivity is essentially zero
Domestic remittances Money received from family or friends living in a different city of their own country
Domestic savings Savings accumulated by domestic households, businesses and government

4. Dual exchange rate A system where there is a fixed official exchange rate and an illegal market determined
parallel exchange rate
Dumping When a producer in one country exports a product to another at a price which is below the
price it charges in its home market or is below its costs of production
Eco-innovation Products and processes that contribute to sustainable development
Ecological deficit Depleting natural assets faster than these can be replenished
Economic Freedom Index 1 Size of Government: Expenditures, Taxes, and Enterprises;
2 Legal Structure and Security of Property Rights;
3 Access to Sound Money;
4 Freedom to Trade Internationally;
5 Regulations of Credit, Labour, and Business.
Economic growth An increase in real GDP or increase in the productive potential of an economy
Economic nationalism The idea that a country's economy will perform best if its industries are protected from
competition, for example by taxes on imported goods
Economic structure: The balance of output, incomes and employment drawn from different sectors – ranging
from primary (farming, fishing, mining) to secondary (manufacturing and construction) to
tertiary and quaternary (tourism, banking, software industries)
Emerging markets The financial markets of developing countries
Environmental tax An environmental tax is a tax on a good or service or a factor input, which is judged to be
detrimental to the environment.
Export quota A restriction on the volume of exports that can be sold overseas – this acts as a supply
constraint in international markets
Export revenue Sales from selling goods and services overseas
External debt External debt is money owed by a government to international creditors
External demand Net change in demand for goods and services from international trade. Net trade = the
value of exports (X) minus the value of imports (M). Net trade is positive when a country
runs a trade surplus and negative when a country runs a trade deficit.
Externalities Action of one agent affects the action of another agent. Too little or too much of the good
is produced or consumed than would be socially optimal
FDI Foreign direct investment - long term participation by country A into country B. such as
participation in management, joint-venture, transfers of technology
Fertility Rate The average number of children a woman will have during her lifetime
Fixed exchange rate An exchange rate that is fixed against other major currencies through action by
governments or central banks
Foreign direct investment Acquisition of a controlling interest in productive operations abroad by companies resident
in the home economy. May involve the creation of new productive capacity such as a new
factory
Foreign exchange gap When a country's balance of payments on current account deficit is greater than the value
of capital inflows
Foreign exchange reserves The reserves of gold or foreign currencies (e.g. US dollars or Euros) typically held by
central banks on behalf of their national government
Foreign savings Foreign savings can flow into countries and provide a supplement to domestic savings.
They include overseas aid, private FDI and capital flows
Fragile states Those states where the government cannot or will not deliver core functions to the majority
of its people, including the poor

5. Free trade When trade is allowed to occur without any form of import restriction
Genuine progress indicator GPI is an attempt to measure whether a country's growth, increased production of goods,
and expanding services have actually resulted in improved well-being. GPI advocates claim
that it can more reliably measure economic progress, as it distinguishes between
worthwhile growth and uneconomic growth
Globalisation Deepening of relationships between countries of the world reflected in an increasing level
of overseas trade and investment.
Government debt Government debt is also known as public debt, national debt, sovereign debt is money (or
credit) owed by a central government to creditors within the country (domestic, or internal
debt) as well as to international creditors
Green development A pattern of development that decouples growth from heavy dependence on resource use,
carbon emissions and environmental damage, and promotes growth through the creation of
new green product markets, technologies, investments, and changes in consumption and
conservation behaviour
GDP per capita: National income per head of population
Gross Domestic Product: The total value of an economy's domestic output of goods and services
Gross National Income (GNI): This is broadly the same as GDP except that it adds what a country earns from overseas
investments and subtracts what foreigners earn in a country and send back home. GNI is
affected for example by profits from businesses owned overseas and also remittances sent
home by migrant workers.
Gross saving rate Gross saving = GDP minus consumption by government and the private sector, expressed
as a percentage of GDP. A high gross domestic saving rate usually indicates a country's
high potential to invest in capital
Hard commodities Commodities which can be mined, such as metals, minerals and oil
Hard infrastructure Examples include power, transport, and telecommunications systems
Harrod-Domar Model An idea that aggregate output (GDP) is proportional to the stock of physical capital.
Heavily Indebted Poor An initiative to provide debt relief to heavily indebted low income countries
Countries Initiative
HIPC Abbreviation for a highly indebted poor country
Hot Money Money that flows freely and quickly around the world looking to earn the best rate of
return. It might be invested in any asset whose value is expected to rise or simply be placed
in an account offering the best real rate of interest.
Human Assets Index (HAI) HAI includes data on (i) nutrition (percentage of the population that is undernourished); (ii)
health (child mortality rate); (iii) school enrolment (gross secondary school enrolment
rate); and (iv) literacy (adult literacy rate)
Human capital flight Another name for a brain drain – when a country suffers net outward migration of skilled /
younger workers which causes their labour force to contract and may have a damaging
effect on the level of labour productivity
Human Development Index The HDI, published annually by the UNDP, has become the most widely used measure for
communicating a country‘s development status. HDI captures not only the level of income
but also incorporates measures of health (life expectancy) and education (school enrolment
and literacy rate).
Humanitarian Aid Emergency disaster relief, food aid, refugee relief and disaster preparedness
Import substitution Replacing imports with domestic production, perhaps using import tariffs

6. Inclusive growth Growth where the benefits are spread across all sections of society - broad based growth,
shared growth, and pro-poor growth
Inclusive Wealth Index Assesses changes in a country‘s productive base, including produced, human, and natural
capital. By taking a more holistic approach, the IWI shows governments the true state of
their nation‘s wealth and the sustainability of its growth.
Income convergence Income convergence happens when a nation‘s per capita income moves closer to that of
another i.e. the gap in relative income per head decreases
Income distribution Income distribution is how income is divided up among all the citizens in a country. The
most common measure of income distribution is the Gini Coefficient.
Inequality-adjusted HDI IHDI takes into account not the average achievements of a country on health, education
and income, and how those achievements are distributed among its citizens by
―discounting‖ each dimension‘s average value according to its level of inequality. The
average world loss in HDI due to inequality is about 23%—ranging from 5% (Czech
Republic) to 43.5% (Namibia).
Infant industry Fledgling industry that requires government protection from overseas competition (for
instance through import tariffs) in order to develop
Informal sector The sector of the economy, normally comprising of small businesses, which is unregistered
with the tax authorities
Infrastructure Transport links, communications networks, sewage systems, energy plants and other
facilities essential for the efficient functioning of a country and its economy
Intellectual Property (IP) Private property rights over ideas and inventions including copyrights, patents, trademarks
and industrial designs.
International Monetary Fund Oversees the global financial system by following the macroeconomic policies of its
(IMF) member countries, in particular those with an impact on exchange rate and the balance of
payments
Inward oriented development Government policy that attempts to achieve development by stimulating domestic industry
and import substitution behind trade barriers
J Curve Effect The effect of currency depreciation on the trade deficit depends on price elasticity of
demand for exports and imports. The J Curve effect says a trade deficit can worsen after
depreciation, but get better in the medium term.
Knowledge capital The scientific and technological know-how that raises productivity in business output and
the promotion of physical and natural capital
Least Developed Countries A group of countries that have been classified by the United Nations as least developed in
terms of their low gross domestic product (GDP) per capita, weak human assets and high
degree of economic vulnerability
Lewis Turning Point Occurs when a country‘s surplus labour evaporates, pushing up wages, consumption and
inflation rates. Within a country the supply of migrants from the countryside might dry up
causing urban wages to surge
Managed floating currency A floating exchange rate but subject to intervention by the monetary authorities, in order to
resist fluctuations that they consider to be undesirable
Market liberalization Removing state controls, for example, lifting price and wage controls and import quotas or
lowering taxes and import tariffs.
Marshall-Lerner Condition Predicts the circumstances in which a fall in the exchange rate improves the BoP. A
devaluation of a currency improves the BoP only if the combined (or sum of) price
elasticity‘s of demand for imports & exports are greater than one.
Mercantilism The notion that the wealth of a nation was based on how much it could export in excess of
its imports, and thereby accumulate precious metals. Applied in the modern context to
countries accumulating huge trade surpluses in goods or services and focusing on export-
led growth
Micro-credit Credit services offered to low-income individuals not traditionally serviced by the formal
banking sector

7. Middle income trap Occurs when a country's growth stagnates after reaching middle income levels. The
problem arises when developing economies find themselves stuck in the middle, with
rising wages and declining cost competitiveness, unable to compete with advanced
economies in high-skill innovations, or with low income, low wage economies in the cheap
production of manufactured goods
Millennium Development MDGs are eight internationally-agreed targets which aim to reduce poverty, hunger,
Goals (MDG) maternal and child deaths, disease, inadequate shelter, gender inequality and environmental
degradation by 2015
Multidimensional Poverty An international measure of acute poverty covering 109 developing countries.
Index
N-11 Countries with fast-growth potential - Bangladesh, Egypt, Iran, Nigeria, Pakistan,
Philippines, Vietnam, Mexico, Korea, Turkey, Indonesia
NAFTA North American Free Trade Agreement - a free trade area agreement signed by the US,
Canada and Mexico
National savings Total public and private sector saving measured as a share of GDP. In countries such as
China, the national savings rate is high in contrast to developed economies. Gross national
saving measured as a percentage of GDP in 2008 for China was 54%
Natural assets Assets of the natural environment - biological assets (produced or wild), land and water
areas with their ecosystems, subsoil assets and air, see also natural capital
Natural capital The stock of natural ecosystems that yields a flow of valuable ecosystem goods or services
into the future. Natural capital may also provide services like recycling wastes or water
catchment and erosion control
NGOs Private non-profit making bodies which are active in development work
Nominal exchange rate The price of the domestic currency in another foreign currency e.g. £1 buys $1.60
Nominal interest rate The price of borrowing money unadjusted for the effects of inflation
OECD Organisation of Economic Co-operation and Development
Official Development Loans, grants, and technical assistance provided to developing countries
Assistance (ODA)
Off-shore banking Banks based abroad in a country where you pay less tax
Outward oriented development Government policy that attempts to achieve development by encouraging free trade and the
unrestricted movement of labour and capital
Overseas assets Assets such as businesses, shares, property which are owned in overseas countries and
which might generate a flow of investment income which is a credit item on the current
account of the balance of payments.
Penn-Balassa-Samuelson effect The Penn-Balassa-Samuelson effect states that, even if accounting for PPPs, the price level
is higher in richer countries. Some evidence finds that for the poorest countries, the
relationship is downward sloping
Potential output The economy's maximum productive capacity in a physical sense. The largest output that
could be produced, given the prevailing state of technology
Potential productivity Estimates of the productivity of the labour force i.e. output per person employed or output
per person hour. Improvements in productivity have an important effect on long run
aggregate supply and trend growth
Poverty line The income level below which a person or household is deemed poor. Can also be used to
measure the % of a population living in extreme poverty
PPP Exchange Rate The rate at which the currency of one country is converted into that of another to purchase
the same amount of goods and services in each country

8. Prebisch-Singer Hypothesis States that the terms of trade between primary goods and manufactured products deteriorate
over time
Primary sector An industry involved in the production of raw materials including agriculture
Property rights These are the rights to ownership of an asset such as land or ideas (intellectual property
rights)
Protectionism The use of tariff and non-tariff restrictions on imports
Public Goods Goods that are non-rival (consumption by one person does not reduce the supply available
for others) and non-excludable
Public sector Central government, local government and state-owned/nationalized industries
Purchasing Power Parity The current exchange rate is adjusted so that a basket of goods and services can be bought
for the same amount of dollars
Quota A quota imposes a physical limit on the quantity of a good that can be imported into a
country in a given period of time.
Randomized controlled trial Studies that use one randomly selected test group and one randomly selected control group
to create a fair comparison – these can be used to evaluate the effectiveness of a specific
government intervention or project
Real exchange rate The product of the nominal exchange rate (the dollar cost of a euro, for example) and the
ratio of prices between the two countries
Real interest rate Real rate of interest = nominal rate of interest – rate of inflation E.g. if the inflation rate is
2% and nominal interest rate is 6% then real interest rate is 4%
Rebalancing Changing the nature of economic growth and development. For example a country might
try to increase reliance on domestic demand, achieve a more equal income distribution and
introduce incentives for environmental sustainability
Regional Development Banks Development Banks which serve particular regions e.g. the African Development Bank or
European Bank for Reconstruction and Development
Regrettables Output which might be necessary but does not add to (and might detract from) the quality
of life, e.g. expenditure on armaments and commuting
Relative poverty The relative position of some economic unit (e.g. individual, household, racial group)
compared to another economic unit. A person can be relatively poor but not absolutely
poor – is really to do with distribution of income in a country
Remittances When migrants send home part of their earnings in the form of either cash or goods to
support their families.
Rent-seeking behaviour Behaviour by producers in a market that improves the welfare of one but at the expense of
another. A feature of monopoly and oligopoly
Reserve currency A foreign currency that is held in countries' official reserves because of its global
importance as a medium of exchange and its inherent stability
Resource efficiency Achieving more with less, i.e. producing more goods and services but with a lower
environmental footprint
Resource rent A measure of the financial return from operating in a natural resource industry – for
example in the fishing sector, it is what remains after fishing costs and subsidies are
deducted from revenue
Revealed comparative Calculated (for example) as the share of footwear in the economy‘s exports divided by the
advantage share of footwear in global exports. The comparative advantage of a particular economy is
‗revealed‘ when this ratio is greater than 1
Rural urban migration Migration of people from rural areas to urban areas
Savings surplus Excess of aggregate savings over domestic investment, where investment is in fixed capital
and inventories by both the public and the private sectors.

9. Social cohesion How united, trustful, cooperative and tolerant of cultural diversity society is
Social enterprises Businesses run on commercial lines but where profits are reinvested for the social good /
community benefit
Social exclusion When people are denied access to opportunities considered ‗normal‘ in a society
Soft commodities Commodities which can be grown, such as coffee, sugar, tea or maize
Soft infrastructure The financial system and regulation, education system, the legal framework, social
networks, values and other intangible structures in an economy
Soft loan A loan made to a country on a concessionary basis with a lower rate of interest
Sovereign debt crisis Widespread problem of high fiscal deficits and rising national debts in many developed
countries
Sovereign wealth fund (SWF) A government or state run fund usually created by profits from natural resources
Special drawing rights A unit of money created by the IMF. Each member country can borrow SDRs at favourable
interest rates from the IMF's reserves when they are needed
Specialisation When individuals, regions or countries concentrate on making one or just a few products to
create a surplus to trade, linked to comparative advantage
Subsistence farming Farming where output is produced for consumption of the farmer and its family members
and not for cash sale
Sustainable development To leave future generations the option or capacity to be as well off as we are
Sustainable growth Growth which meets the needs of the present without compromising the ability of future
generations to meet changing needs and wants. Each generation should bequeath as large a
productive base as it inherited from its predecessor
Terms of Trade The terms of trade (also known as the real exchange rate) is the real value of countries
exports in terms of their imports. Thus it is a function of the price levels in the domestic
and foreign country and the nominal exchange rate
Trading bloc A group of countries co-operating to liberalize trade between each other
Trend growth Trend growth is the long term non-inflationary increase in output (GDP) caused by an
increase in productive capacity i.e. LRAS
Trickle down The process whereby the economic gains from economic growth pass down throughout the
entire society eventually giving rise to development
Unbalanced economy Imbalances are a common feature of most modern economies.
For example imbalances between: (i) savings and investment (ii) domestic and external
demand (iii) public and private sectors (iv) formal and informal economic activity (v)
balance of payments deficits and surpluses
Under-employment When people want to work full time but find that they can only get part-time work – the
result is a loss of hours that the economy can use
Under-nourished people People whose food intake is chronically insufficient to meet their minimum energy
requirements.
Urbanization Economic and demographic processes involved in the growth of towns and cities
World Bank The World Bank promotes the institutional, structural and social development of Less
Developed Countries (LDCs) providing low interest loans for domestic investment projects
and technical assistance
World Trade Organisation Polices free trade agreements, and decides on trade disputes between countries. It arranges
trade negotiations to liberalize trade by mutually agreed reductions in tariffs & quotas and
opening domestic markets up to foreign competition