GLOSSARY - MACROECONOMICS
ACCELERATOR PRINCIPLE BALANCE OF PAYMENTS ACCOUNTS
BALANCE OF TRADE CAPITAL CONSUMPTION (DEPRECIATION)
CAPITAL STOCK CAPITAL
CAPITAL GOODS/CONSUMPTION GOODS CIRCULAR FLOW OF INCOME
CONSUMPTION COST-PUSH INFLATION
DEMAND FOR AND SUPPLY OF MONEY DEMAND-PULL INFLATION
DEVALUATION ECONOMIC GROWTH
EQUILIBRIUM LEVEL OF NATIONAL INCOME EXCHANGE RATE
EXPECTATION ANALYSIS (New classical economics)
EXPORTS FACTORS OF PRODUCTION
FISCAL POLICY FREE TRADE
GOVERNMENT SPENDING GROSS DOMESTIC FIXED CAPITAL FORMATION
GROSS DOMESTIC PRODUCT GROSS NATIONAL PRODUCT
IMPORTS
INCOMES POLICIES INTEREST RATE
INTERMEDIATE GOODS INVESTMENT
MONETARY POLICY MONEY MULTIPLIER
MONEY SUPPLY MULTIPLIER PRINCIPLE
PROPERTY INCOME FROM ABROAD/FACTOR PAYMENTS FROM ABROAD/FACTOR SEVICES
PHILLIPS CURVE ANALYSIS POTENTIAL GDP/OUTPUT GAP
PRICES POLICIES PROFITS
PROPERTY INCOME PROTECTIONISM
RECESSION REVALUATION
SAVINGS STOCKS (INVENTORIES)
STOCK APPRECIATION SUBSIDIES
SUPPLY SIDE ECONOMICS TAXES
THE NATURAL RATE OF UNEMPLOYMENT FULL EMPLOYMENT
UNEMPLOYMENT RATE CYCLICAL UNEMPLOYMENT
STRUCTURAL UNEMPLOYMENT FRICTIONAL UNEMPLOYMENT
TRANSFER INCOMES (EARNINGS)
VALUE ADDED WORK IN PROGRESS
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1.-ACCELERATOR PRINCIPLE TOP OF PAGE
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It is also possible for changes in the level of income to exert
a powerful effect on the level of investment, independently of
the rate of interest. In other words, changes in the level of income
might "induce" substantial changes in investment. This is usually
referred to as the ACCELERATOR PRINCIPLE, and it is most clearly
understood by reference to the table below which shows how an
individual firm's investment decisions are influenced by changes in
demand for its product:
We assume:
a capital/output ratio of 2:1,
each unit of capital has an economic life of five years, and
the firm has built up its capital stock by regular additions
of 2,000 units each year.
TABLE 1
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Existing Required Replacement Net Gross
Year Sales Capital Capital Investment Investment Investment
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1 5,000 10,000 10,000 2,000 0 2,000
2 6,000 10,000 12,000 2,000 2,000 4,000
3 7,500 12,000 15,000 2,000 3,000 5,000
4 8,000 15,000 16,000 2,000 1,000 3,000
5 7,750 16,000 15,500 2,000 -500 1,500
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TABLE 1 clearly shows the impact of changes in demand on investment.
During year 2 sales rise by 20 per cent, but this induces a rise
in gross investment (i.e. net investment + replacement investment)
of 100 per cent. The proportionate change in investment is not
so spectacular in Year 3, with gross investment rising by only
25 per cent despite the greater (25 per cent) increase in sales.
However, during year 4 there is a smaller proportionate increase
in sales than in previous years, and this causes a decline in the
ABSOLUTE level of investment. The level of investment will only
go on rising when sales are rising at an INCREASING RATE.
The table also shows the effect of a reduction in sales on
investment.
From the table we can see than IN = a times dY, where
IN is net investment, 'a' is the capital/output ratio (2), and
dY is the absolute change in sales. In practice it is unlikely
that investment will vary with sales as precisely as implied in
the table:
1. Firms might meet increased demand out of stocks or might
choose to lengthen waiting list rather than increase
investment.
2. Firms might consider the increase in demand is only
temporary, and will not therefore raise their investment.
3. Rather than increasing investment to meet the extra
demand it is more likely that firms will, initially at
least, introduce overtime working, and so on.
4. There are likely to be technological advances which will
raise the productivity of capital and hence reduce the
need for additional investment to meet increased demand
for output.
Despite these qualifications there is no doubt that changes in
income can exert a powerful influence on investment decisions.
While the accelerator is not a precise model, it may, nevertheless,
help to explain the instability of investment demand.
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B. Harrison, "Economics", Longman, 1986
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2.-BALANCE OF PAYMENTS ACCOUNTS TOP OF PAGE
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Balance of payments is a record of all transactions between residents
of a country (both the private and public sectors) and the rest of
the world. It is divided into current and capital accounts.
The CURRENT ACCOUNT represents national income and national
expenditure. It is composed of visible trade (.e. trade in
tangible goods and merchandise including re-exports) and
invisible trade (e.g. transportation, insurance and other
services, interest payments, expenditure by tourists, and certain
classes of government expenditure). Unrequited receipts, i.e.
those receipts for which no consideration is given, may be
included under "invisibles" or kept separate. These include
payments made by migrant workers to their families at home and
other gifts.
The CAPITAL ACCOUNT consists of capital inflows and outflows,
both long term and short term, and includes intergovernmental
loans. If current and capital accounts together are in deficit,
there will be an outflow from the foreign exchange reserves.
If there is a persistent inflow or outflow of foreign exchange,
there will be strong pressures on the exchange rate of the
currency.
It is possible that deficits and surpluses in the balance of
payments may be cyclical or of a short-term nature. For example,
a primarily agricultural country may export its crops after one
harvest and be importing throughout the rest of the year; if its
capital and exchange markets do not adequately smooth out the
fluctuations it will have recurrent short-term deficits. The
ultimate result of a chronic deficit or surplus in the balance
of payments, which indicates a FUNDAMENTAL DISEQUILIBRIUM in the
foreign exchange market, must be either a "devaluation" or
"revaluation" of the currency.
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from "A Dictionary of Economics and Business", Pan Books, 1985
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2a.-BALANCE OF TRADE TOP OF PAGE
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Balance of Trade (visible balance) is the difference between the
total value of a country's exports and imports of visible items.
The balance of trade is an important part of the balance of
payments, which also takes account of invisible items and of
capital transfers.
The nature of the U.K.'s trading pattern usually results in an
unfavourable balance of trade (i.e. the value of imports exceed
that of exports) and a favourable invisible balance (i.e. receipts
from services exceed payments) and thus it has been possible to run
a deficit on the balance of trade when this was offset by the
invisible balance. Since the terms favourable and unfavourable
(or adverse) do not necessarily mean desirable and undesirable
the terms TRADE SURPLUS and DEFICIT are now commonly used.
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from Pan Books, 1985, op. cit.
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3.-CAPITAL CONSUMPTION (DEPRECIATION) TOP OF PAGE
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Depreciation is the reduction in the value of assets, generally
arising from wear and tear.
The consumption of capital is recognized as a cost of production
and an allowance for this is made before net profit is arrived at.
Conventional accounting seeks to allocate the decline in value of
the asset over its projected economic life. Annual provisions are
conventionally calculated by on of two methods:
1. The 'straight-line method' where the cost of the asset
minus the residual disposal value is divided by the
number of years of its expected life to give the annual
figure.
2. The 'declining balance method' where the figure employed
is a constant proportion of the value of the asset and
so an annually diminishing amount.
Generally historic values of capital have been employed.
At times of high inflation, replacement cost values could become
much greater than historic costs and historic depreciation
provisions will not ensure that capital costs are recovered in
real terms. The problem could be dealt with by periodically
revaluing assets by an index of capital costs and adjusting the
depreciation charges accordingly. This is termed replacement-cost
depreciation.
Depreciation is generally permitted as an allowance against
profits for corporation tax purposes but the allowances have to
be calculated according to rules set down by the tax authorities
and these need not correspond to the depreciation charged by a
firm in its accounts.
The term 'depreciation' is also used in economics to refer to a
situation where a currency falls in value against other currencies
through changes in the forces of supply and/or demand.
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Macmillan, 1989, op. cit.
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4.-CAPITAL STOCK TOP OF PAGE
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Capital stock is the accumulated stock of past purchases of capital
goods after deducting depreciation and the amount scrapped because
of 'obsolescence'.
It is the total capital available to a firm industry, or economy,
and it is the relevant quantity to enter into the production
function.
The contents of the capital stock may be of different ages and
so of different efficiencies, but an asset of whatever age will
be kept in use until the net present value of its future earnings
becomes zero.
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Pan Books, 1986, op. cit.
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5.-CIRCULAR FLOW OF INCOME TOP OF PAGE
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The circular flow model shows the flow of products from businesses
to households and the flow of resources from households to
businesses. In exchange for these resources, money payments
flow between businesses and households.
Households provide:
factors of production (land, labour, capital)
Businesses provide:
factors payments (wages, rents, interest, profits)
Business provide: goods and services
Households provide: demand for goods and services
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6.-CONSUMPTION TOP OF PAGE
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Consumption is the expenditure of a nation or individual on
consumer goods and services. It does not include expenditure on
capital goods.
Private consumption is regarded as being expenditure by consumers
on goods and services such as food, drink, and entertainment.
Public consumption is the current expenditure of the government
on such items as health, education, and defence.
In general, total consumption accounts for approximately 80 per
cent of national income (the remaining 20 per cent being spent
on investment).
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7.-COST-PUSH INFLATION TOP OF PAGE
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Cost-push inflation is a theory of inflation that attributes the
cause to rising costs in the economy. Unions or businessmen (or
both) are assumed to be able to increase the price paid for their
services or goods in the absence of excess demand for them.
This implicitly assumes some form of administered or monopolistic
pricing on the part of producers. Faced with increased prices for
goods, consumers try to increase their income to maintain
previous consumption by demanding higher wages and profits, which
in turn increases costs.
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8.-DEMAND FOR AND SUPPLY OF MONEY TOP OF PAGE
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THE LOANABLE FUNDS THEORY. This is the classical theory of
interest rate determination. It suggests that the rate of interest
is determined by market forces, that is, by the demand for
loanable funds and the supply of loanable funds.
The classical economists argued that the demand for loanable funds
varied directly with the demand for capital. In other words, funds
were required to purchase capital assets. Because of this the rate
of interest represented the 'price of capital' in the sense that
it was the price that had to be paid to obtain funds with which to
buy items of capital. The demand for capital, like the demand for
labour, depends on its marginal revenue product (MRP), i.e. the
addition to total revenue from using the last unit of capital.
Because MRP falls as increasing amounts of capital are employed,
businessmen will only purchase more capital if the rate of
interest falls. Hence the demand for capital will be inversely
related to the rate of interest. This implies a similar 'inverse'
relationship between the demand for loanable funds and the rate
of interest.
In practice, funds are demanded for a variety of purposes other
than simply investment in capital assets. However, this does not
invalidate the loanable funds theory. Although it is unlikely
that a reduction in the rate of interest will persuade the
'government' to demand more funds, the same is not true in
other markets. For example, a reduction in the mortgage rate
leads to an expansion in the demand for mortgage finance, while
a reduction in hire purchase rates leads to an increase in demand
for consumer durables and a consequent expansion in the demand
for funds from hire purchase companies.
The classical economists argued that the supply of loanable
funds varied 'directly' with the rate of interest. The justification
for this was simple. At higher rates of interest, more people would
be persuaded to postpone 'current' consumption for the prospective
'reward' of higher 'future' consumption.
In the modern world there is no doubt that this view is rather
simplistic. A great deal of saving in modern societies is
'contractual', such as contributions to insurance companies and
pension funds. As such it is unrelated to changes in the rate
of interest. However, recent evidence does suggest that a rise
in the rate of interest still exerts a positive influence on
savings.
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Keynes' liquidity preference theory suggests that the rate of
interest is determined by the demand for, and supply of, money.
However, it differs radically from the classical theory in its
approach to the determinants of money demand and supply.
Keynes analysed the demand for money in terms of the reasons why
the public might wish to hold money. He grouped these into three
distinct motives:
1. TRANSACTION DEMAND. Cash is demanded in order to engage in
day-to-day transactions, such as the purchase of foodstuffs,
bus fares, and so on. The extent to which the public hold
transactions balances depends on many factors. For most
people the major determinant is the frequency with which
income is received. In general, people who are paid weekly
will hold smaller average transactions balances than people
who are paid monthly. For example, a person earning £56 per
week who spends £8 each day will, on average, hold £28 per
day. However, a person earning £224 every four weeks who
spends £8 per day will, on average, hold £112 per day. The
main suggestion here is that transactions demand for cash is
unlikely to be affected by changes in the rate of interest.
2. PRECAUTIONARY DEMAND. Another motive for holding money is as
a precaution against unforeseen events which might require
additional expenditure. Many people hold cash to meet
unanticipated bills such as those arising because the family
car or some household durable requires repair, or to take
advantage of 'bargain offers'. The main determinant of
precautionary demand for cash appears to be the 'level of
income'. Those on higher incomes tend to hold larger
precautionary balances. Here again the precautionary demand
for cash is unlikely to be affected by changes in the rate
of interest.
3. SPECULATIVE DEMAND. Finally, Keynes identified the speculative
motive for holding cash. The crux of the matter is that while
money has a constant face value, 'security prices' might
change from day-to-day. When security prices rise, their
holders make capital gains. Because of this when security
prices are 'expected to rise', securities are a more attractive
asset than cash, and in these circumstances the speculative
demand for cash will be relatively low. Conversely, when
security prices are 'expected to fall', cash is the more
attractive asset since its constant face value removes the
possibility of any capital loss. In these circumstances the
speculative demand for cash will be relatively high.
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B. Harrison, 1986, op. cit.
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9.-DEMAND-PULL INFLATION TOP OF PAGE
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Demand-pull inflation is a theory of inflation that attributes
price rises to increases in aggregate demand over and above
available supply at full employment level.
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9a.-DEVALUATION TOP OF PAGE
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Devaluation is a fall in the fixed exchange rate between one
currency and others. When the relative value of two currencies
have been fixed at an offcially agreed level, any reduction in
the value of one currency against the agreed fixed is a devaluation.
Devaluation is used to correct a balance of payments deficit but
only as a last resort as it has major repercussions on the domestic
economy. For example, holders of foreign currency will then pay a
lower price for home-produced goods and the price of imports on the
home market will rise. If there is no increase in the production of
export goods, they will then earn less foreign exchange, which will
exarcebate the balance of payments problem.
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from "Macmillan Dictionary of Modern Economics", Macmillan, 1989
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10.-ECONOMIC GROWTH TOP OF PAGE
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The ability of an economy to produce greater levels of output,
represented by an outward shift of its production possibility
curve.
Economic growth is measured by the annual percentage increase
in a nation's real GDP
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11.-EQUILIBRIUM LEVEL OF NATIONAL INCOME TOP OF PAGE
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Equilibrium: a market condition that occurs at any price and
quantity for which the quantity demanded and the
quantity supplied are equal.
From above, for the national economy, the equilibrium level is
reached at any level of national output, and therefore any level of
national employment, when
savings + taxation + imports are EQUAL to
investment + government expenditure + exports
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12.-EXCHANGE RATE TOP OF PAGE
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Exchange rate is the price of a currency in terms of another
currency. Exchange rates are regularly quoted between all major
currencies, but frequently one important currency (e.g. the
dollar) is used as a standard in which to express and compare all
rates.
The exchange rate of all fully convertible currencies is determined,
like any price, by supply and demand conditions in the market in
which it is traded (i.e. the foreign exchange market). More
fundamentally, such supply and demand conditions are determined by
whether the country's basic balance of payments position is in
surplus or deficit.
An alternative view of the exchange rate deriving from a monetarist
perspective sees the exchange not as a price equating the flow
supply and demand for a currency but as the relative price of two
currencies, so that any factor which influences the value of a
currency will influence its international exchange rate. The most
important factor is held to be changes in domestic Money Supplies,
and since people begin to form expectations about the likelihood
of such changes and of their effects, expectations are given a
considerable role in determining the exchange rate and help to
explain the observed volatility of exchange rates since 1973.
When there is no official intervention in the foreign exchange
market, the rate is freely floating and will rise or fall to
equilibrate the supply of and demand for that currency.
"Intervention" may take a number of forms, from exchange control,
to action which does not interfere with the operation of the
market, but aims to stabilize or control the movement of the
exchange rate.
Under the Bretton Woods system in force from the late 1940s to
the early 1970s, exchange rates were stabilized at agreed PAR
VALUES, though changes in these values by revaluation and
devaluation were permitted. The STABILIZATION was affected by
the CENTRAL BANK operating as a buyer or seller of its currency
when it was tending to move outside a permitted range of movement.
Since the abandonment of this 'adjustable peg' system in 1971,
exchange rates have generally been subject to a system of managed
flexibility, with central banks intervening to smooth out what
were considered to be inappropriate fluctuations, although (in
theory) not opposing movements considered to reflect longer-term,
underlying forces. In the case of some groups of currencies, the
exchange rate have been linked so as to limit the range of
movement between them, as in the European "Snake". The situation
of managed flexibility of exchange rates is sometimes referred to
as "dirty floating" implying that the influences exerted by
countries over their own rates is dictated by self-interested
motives.
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Macmillan, 1989, op. cit.
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13.-EXPECTATION ANALYSIS TOP OF PAGE
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Based on "rational expectation", which is a theory of expectation
formation based on the idea that people are forward looking, use
all available information, and make no consistent mistakes.
From the above:
ADAPTIVE EXPECTATIONS. This model rejects 'rational
expectations' notion and suggest that people are backward
looking and make mistakes, which resultas in slow adjustment.
NEW CLASSICAL ECONOMICS. Is a modified classical theory whose
major tenets include the basic belief in self-correcting markets.
The theory supports what is call "the policy ineffectiveness rule",
a theory arguing that aggregate demand policies affect only
inflation and have no lasting effect on real output or employment.
Therefore, extreme 'laissez faire' is the best approach to
macroeconomic policy. Also, central to new classical economics is
the LUCAS CRITIQUE, critique developed by Robert Lucas; it
suggests that economic forecasts tend to be incorrect because
forecasts cause people to change their behaviour.
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14.-EXPORTS TOP OF PAGE
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Exports are good and services that are sold to residents in
foreign countries. Goods are classified as visible exports,
whilst services, such as banking, insurance, tourism, etc. are
invisible exports.
Exports and imports together form the foreign sector of an
economy.
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15.-FACTORS OF PRODUCTION TOP OF PAGE
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Factors of production are the basic categories (resources) of
inputs used to produce goods and services. Economists divide
resources (factors of production) into three categories:
land
labour
capital
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16.-FISCAL POLICY TOP OF PAGE
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Fiscal policy is the use of government spending and taxes to
influence the nation's output, employment, and price level
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17.-FREE TRADE TOP OF PAGE
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Free trade refers to the flow of goods between countries without
restrictions or special taxes.
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18.-GOVERNMENT SPENDING TOP OF PAGE
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Government spending is equal to government demand for goods and
services, which includes the real goods and services that are
necessary for the functioning of services such as the education
system, the health service, the civil service, and so on.
In simple models of the aggregate economy, it is conventional to
assume that government plans are given: in other words, it is
assumed that government p,ans are dependent on factors lying
outside the economic model.
Government spending as defined above does not include transfer
payments, because they do not add to real demand for goods and
services in the aggregate economy.
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19.-GROSS DOMESTIC FIXED CAPITAL FORMATION TOP OF PAGE
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Expenditure on fixed capital, such as plant and machinery is
called gross domestic fixed capital formation, and is a component
part of gross investment in the national expenditure.
The other components are additions to stock and work in progress.
The factors of production which have produced this, as yet,
unsold output, will still have received factor payments. To
ignore additions to stock and work in progress would therefore
create an imbalance between the three aggregates: output, income
and expenditure. Additions to stock and work in progress are
therefore treated as though they have been purchased by firms.
Gross domestic fixed investment plus additions to stock and
work in progress equals GROSS INVESTMENT
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20.-GROSS DOMESTIC PRODUCT TOP OF PAGE
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Gross domestic product (GDP) is the market value of all final
goods and services produced in a nation during a period of
time, usually a year.
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21.-GROSS NATIONAL PRODUCT TOP OF PAGE
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Gross national product (GNP) is the market value of all final
goods and services produced by national residents, no matter
where they are located. Thus, is equal to GDP plus net of factor
payments to abroad
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22.-IMPORTS TOP OF PAGE
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Imports are goods and services purchased from residents in
foreign countries. In order to control its balance of payments,
a country must sometimes restrict imports. It may also wish to
restrict imports to protect its own producers from foreign
competition, or to prevent goods that are illegal to use or
possess from entering the country.
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23.-INCOMES POLICIES TOP OF PAGE
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Incomes policy is a government attempt to control wage inflation
by some form of intervention in the pay bargaining process.
Governments seeking to restrain wage-push inflation may do so
either indirectly by the use of monetary policy or by acting
directly on the level of pay settlements via incomes policies.
In fact, modern governments can hardly avoid some form of incomes
policy for they will be concerned to place some limits to the
rate of growth of the pay of their own employees.
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Macmillan, 1989, op. cit.
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24.-INTEREST RATE TOP OF PAGE
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Interest rate or rate of interest is the price of money services.
While financial markets exhibit a range of rates of interest the
theory of the rate interest explains the determinants of the
'pure' rate of interest which is the price that would have to be
paid to borrow money in order to undertake a completely riskless
enterprise.
Keynes argued that the rate of interest was a monetary phenomenon
reflecting the supply and demand fo2 money.
In contrast to Keynes, classical economists had regarded the rate
of interest as a real phenomenon. The rate of interest was
determined by the forces of productivity -the demand for funds
for investment purposes- and thrift, the supply of savings.
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Macmillan, 1989, op. cit.
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25.-INTERMEDIATE GOODS TOP OF PAGE
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Intermediate good are goods and services used as inputs for the
production of final goods. Stated differently, intermediate
goods are not produced for consumption by the ultimate user.
FINAL GOODS are finished goods and services produced for the
ultimate user
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26.-INVESTMENT TOP OF PAGE
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The term investment is most commonly used to describe the flows
of expenditures devoted to increasing or maintaining the real
capital stock.
In fact a more accurate definition, which clearly encompasses the
above, is that investment is the flow of expenditures devoted to
projects producing goods which are not intended for immediate
consumption.
These investment projects may take the form of adding to both
physical and human capital as well as inventories.
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27.-MONETARY POLICY TOP OF PAGE
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Monetary policy is the control of the supply of money and liquidity
by the central bank through open market operations and changes in
interest rates to achieve the government's objectives of general
economic policy
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28.-MONEY MULTIPLIER TOP OF PAGE
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As CREDIT MULTIPLIER, is the ratio of the change in the volume of
lending by a group of deposit-taking financial intermediaries (and
especially banks) to the change in reserve assets which initiated
the change (this may be an increase or decrease).
More commonly, in the traditional theory of credit creation by the
banks, it denotes the ratio of change in bank deposit liabilities,
caused by the increased extension of credit, to the initiating
change in reserve assets.
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Macmillan, 1989, op. cit.
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29.-MONEY SUPPLY TOP OF PAGE
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There are several ways of defining the money supply. The most common
are:
M1.- is the narrowed definition, it includes currency, traveller's
checks and checkable deposits ( the latter are the total of
checking account balances in financial institutions
convertible to currency "on demand" by writing a check
without advance notice)
M2.- is equal to M1 plus saving accounts, money market mutual
funds, bonds, etc. (In general, interest-bearing deposits
easily converted into spendable funds)
M3.- M2 plus large time deposits (in the U.S. deposits of
$100,000 or more)
M1 is more liquid than the other definitions, and is commonly
used in economic theory
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I. B. Tucker,III, "Survey of Economics", West Publishing Co.,1995
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30.-MULTIPLIER PRINCIPLE TOP OF PAGE
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One of the most important features of the Keynesian model is that it
shows how any change in injections or leakages (withdrawals) can
lead to a more than proportional change in national income. This is
known as the 'multiplier' effect.
It arises because an initial change in injections or leakages leads
to a series of changes in national income, the cummulative effect of
which exceeds the initial change which brought it about.
For example, if firms increase their investment in plant and
equipment, and all other things remain equal, national income will
initially rise by the same amount as the increase in investment. If
we assume an absence of taxation, the increased expenditure on plant
and equipment will in turn be received as rewards by the factors
which have produced this output. Part of this (depending on the size
of the marginal propensity to consume (MPC)) will be spent,
generating a further increase in income, part of which also be
spent, and so on. However, this process does not go on indefinitely.
With each rise in income, a smaller amount will be passed on, and
this will generate successively smaller changes in income.
From elementary algebra, the value of the multiplier can be
calculated for any economy if we know the MPC. The formula
will be:
1
multiplier = ----------
(1 - MPC)
or, if we use marginal propensity to save (MPS), marginal rate
of taxation (MRT), and marginal propensity to import (MPM),
1
multiplier = -------------------
MPS + MRT + MPM
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B. Harrison, 1986, op. cit.
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31.-NET PROPERTY INCOME FROM ABROAD TOP OF PAGE
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Net property income from abroad is the difference between PROFITS,
DIVIDENDS and INTEREST received on assets held overseas by domestic
residents and profits, dividends and interest paid abroad on assets
held in the domestic economy by overseas residents.
Another analytical tool is NET FACTOR PAYMENTS FROM ABROAD or
FACTOR SERVICES, as defined by the World Bank:
"Comprises services of labour and capital, thus covering income from
direct investment abroad, interest, dividends, and property and
labour income."
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32.-PHILLIPS CURVE ANALYSIS TOP OF PAGE
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The relationship between unemployment and inflation is generalized
in the Phillips Curve. In its original form this curve indicated a
negative correlation between the rate of change of 'wages' and the
level of unemployment.
The impressive feature of the Phillips Curve was that the
relationship it identified had been remarkably stable for a
continuous period of almost a hundred years.
Soon after the original Phillips curve was identified it was quickly
discovered that there was also a significant, and stable, negative
correlation between the rate of change of 'prices' and the level of
unemployment.
Moreover, it was widely believed by policy makers that because the
relationship had been stable for almost a hundred years, it would
remain stable in the future. It therefore appeared to offer policy
makers a range of policy choices. A 'particular' level of
unemployment could be traded off against a 'particular' rate of
inflation. For example, a lower level of unemployment implied a
higher rate of inflation, and vice versa.
However, the appeal of the Phillips Curve was not just in its
apparent stability. The Phillips Curve also played a role in
identifying the 'causes' of inflation. High rates of inflation at
low levels of unemployment supported 'both' the demand-pull and
cost-push explanations of inflation.
At 'low' levels of unemployment buoyant demand would pull up prices,
while trade unions would be in a strong bargaining position from
which they could negotiate relatively high pay awards. Buoyant
demand in the economy would lower employers' resistance to pay
demands since rising costs could more easily be passed on as
higher prices. In contrast, at high levels of unemployment, demand
in the economy would be less buoyant and the bargaining position
of unions weaker.
However, it became apparent in the late 1960s that the relationship
identified by Phillips was not as stable as at first believed.
It was clear that a higher rate of inflation than previously was
now consistent with any given level of unemployment. Various reasons
have been advanced to account for this. Some economists claim that
the Phillips Curve has simply moved outwards from the origin.
However, an alternative explanation is provided by the monetarists
who claim that the Phillips Curve was never more than a short-run
phenomenon that had no long-run validity.
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from B. Harrison, "Economics", Longman, 1986
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33.-PRICES POLICIES TOP OF PAGE
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Price policies are associated with price control, a means of
controlling inflation in which prices are allowed to change only
within statutory limits.
Direct price controls tend to be used only in short-term emergency
situations.
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34.-PROFITS TOP OF PAGE
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Profits (economic profit) is defined as the difference between the
revenue generated from the sale of output and the full opportunity
costs of the factors used in the production of the output. Included
within costs are the premium charged for risk taking and the cost of
using the owner's capital. These are not included as costs in the
accountant's measure of profit which therefore does not correspond to
this economic definition of profits.
Opportunity costs here are
1.- Explicit costs: wages and salaries, materials,
interest paid, and other payments;
2.- Implicit costs: foregone salary for the owner,
foregone rent on capital, and foregone
interest on capital.
Thus PROFIT = Total Revenue - Explict Costs - Implicit Costs
The above is called ECONOMIC PROFIT, as different from
ACCOUNTING PROFIT which does not deduce implicit costs.
Related concepts:
NORMAL PROFIT: is the minimum profit necessary to keep a firm
in operation. Zero economic profit signifies
that there is just enough total revenue to pay
the owners for all explicit and implicit costs.
Stated differently, there is no benefit from
reallocating resources to another use. Thus,
zero economic profit is NORMAL PROFIT.
ABNORMAL PROFITS: when economic profit is larger than zero.
Normal profits are assumed to occur in a perfect competitive
market. Abnormal profits occur in imperfect markets.
In every textbook on economics the word PROFIT always mean
economic profit.
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35.-PROPERTY INCOME TOP OF PAGE
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In macroeconomics, property income refers to interest, rent and
profits on capital.
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36.-PROTECTIONISM TOP OF PAGE
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Protectionism is an economic policy aimed to restrict trade.
Governments sometimes adopt measures to restrict international trade.
There are various types of restriction including the following:
Tariffs: these are simply taxes placed on imported commodities.
Where a tariff is levied on a commodity its price is
increased in the demoestic economy. Tariffs may be
'specific', i.e. lump sum, in nature, or 'ad valorem',
i.e. proportional to the value of the article. They
can be applied individually to particular products or
accross the board.
Quotas: these are a volume restriction on imports. Specific
limits are placed on the quantity of particular
products that can be imported.
Subsidies: by subsidising exported commodities their
competitiveness can be increased in foreign markets.
Subsidising domestic products lowers their price and
hence reduces competition from imports.
Exchange controls: by restricting the supply of foreign currency
to particular purchases, governments are able to
exercise a great deal of control over which commodities
are imported, and in what quantities.
Non-tariff barriers: trade restriccions other than taxes on
imports. Quotas as often classified as non-tariff
barriers. Other non-tariff barriers include procurement
programs, licensing fees, local content legislation,
and lately human rights-working conditions-child labour
considerations.
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37.-RECESSION TOP OF PAGE
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Recession is a general downturn in aggregate economic activity. A
rule of thumb -not a generally accepted definition - is that two
quarters of negative GDP growth constitute a recession.
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37a.-REVALUATION TOP OF PAGE
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Revaluation is an upward change in the parity for a currency under
a fixed exchange rate system. Imports will become cheaper and
exports dearer.
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Macmillan, 1989, op.cit.
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38.-SAVINGS TOP OF PAGE
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An individual or business may either consume or save its disposable
income. Saving does not necessarily imply making deposits at banks
or building societies; it is sufficient to increase one's cash
holding by refraining from consumption.
In a simple income-expenditure model, the economy is in equilibrium
when investment is equal to saving. In a more complex model,
however, the only requirement is that withdrawals from the circular
flow of income match injections into it.
(Withdrawals = savings, taxes, and imports.
Injections = investments, government spending, and exports)
There are two theoretical approaches to savings:
The first, due to Keynes, assumes that savings is simultaneously
determined with consumption in the consumption function.
The second, known as the 'permanent income theory' or the
'life-cycle hypothesis', postulates that every individual spends
in relation to what he conceives his normal income to be. In any
particular year he may regard his income as high, in others he will
regard it as low; in the good years he will save the excess and in
the bad years he will run down his accumulated savings. According
to this theory, saving is an incidental consequence of a consumption
decision, which has, as monetarits have pointed out, interesting
implications for government policies. If an individual believes that
a change in taxation is temporary, he will not adjust his
consumption plans; this makes fine tuning of the economy virtually
impossible.
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Pan Books, 1986, op. cit.
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39.-STOCKS (INVENTORIES) TOP OF PAGE
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Two main meanings:
1.- The issued capital of a company, or a particular issue of
securities (e.g. by a government), which is in a consolidated form
so that it can be held or transferred in any amounts. The
distinction is with 'shares' in a company which must be for fixed
nominal amounts, and held or transferred in such units.
2.- A variable the value of which has no time dimension (e.g. the
stock of capital). The opposite is 'flow'.
The above concepts are related to the economic notion of
INVENTORIES, which are stocks; holdings of goods by firms to enable
them to meet temporary unexpected fluctuations in production or
sales. They are, therefore, a form of 'investment' and may be either
intended or unintended.
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Macmillan, 1989, op. cit.
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40.-STOCK APPRECIATION TOP OF PAGE
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Stock appreciation is an increase in the nominal value of
inventories as a result of a rise in prices during the period in
question
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41.-SUBSIDIES TOP OF PAGE
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Governments provide transfer payments and subsidies. Transfer
payments include welfare and other programs that are designed to
aid certain groups. SUBSIDIES are payments intended to increase
various kinds of activities. For example, in recent years in some
countries, subsidies have been given to firms engaged in alternative
energy programs, the argument being that without the government
subsidies, the research would be t/o costly or risky to undertake.
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42.-SUPPLY SIDE ECONOMICS TOP OF PAGE
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Name given to economic policies pursued by economists in the Reagan
administrationin the US, the Thatcher et al governments in the UK,
Pinochet dictatorship in Chile, and others. Instead of using
Keynesian aggregate demand stimuli, supply-side policies attempted
to increase work and production incentives via tax cuts and
deregulation.
Classical examples of supply-side economics are structural adjustment
programs as imposed by the World Bank and the International
Monetary Fund, especially since the 1980s.
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43.-TAXES TOP OF PAGE
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Taxation are transfer payments to the government from the private
sector, which constitute the principal source of revenue to finance
government expenditure, and also act as an instrument of fiscal
policy.
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44.-THE NATURAL RATE OF UNEMPLOYMENT TOP OF PAGE
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The natural rate of unemployment, as defined by monetarist theory
is the rate of unemployment implied by the present structure of
the economy. That rate of unemployment determined by the structural
and frictional forces in the economy which cannot be reduced by
raising aggregate demand.
Also, can be defined as follows:
The natural rate of unemployment is the rate of unemployment when
the labour market clears. Thus, this concept assumes that in the
capitalist system ALL UNEMPLOYMENT IS VOLUNTARY.
In simplified terms it may be regarded as that level of
unemployment which nonetheless remains at full employment.
It has also been described as the 'warranted unemployment rate',
the 'normal unemployment rate' and the 'full-employment
unemployment rate'.
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45.-TRANSFER INCOMES (EARNINGS) TOP OF PAGE
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Transfer incomes are incomes which cannot be regarded as payment for
current services to production and which therefore do not enter
national income. Examples of transfer incomes are retirement
pensions or the receipt of private gifts.
Corresponding to transfer incomes ar transfer payments which are
payments out of factor incomes for which no goods or services are
received in return. Examples of such payments are national
insurance contributions or private gifts.
Transfer incomes and payments should not be confused with transfer
earnings.
TRANSFER EARNINGS AND ECONOMIC RENT:
Economic rent is any payment made to a factorbof production which
is in 'excess' of the amount necessary to keep that factor in its
present occupation. For example, if a worker requires a weekly wage
of £200 to keep him in his present occupation, £200 per week is
referred to as the worker's TRANSFER EARNINGS, because if his wage
falls below this he will transfer to an alternative occupation.
If he currently receives a wage of £250 per week, then £50 of this
is in excess of his transfer earnings, i.e. it is ECONOMIC RENT.
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B. Harrison, 1986, op. cit.
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46.-VALUE ADDED TOP OF PAGE
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Value added is the value of the firm's output minus the value of the
inputs it purchases from other firms. Essentially it is the sum of
the factor incomes, the wages and profits of the firm.
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47.-WORK IN PROGRESS TOP OF PAGE
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Work in progress is production that remains uncompleted at the end
of the accounting period.
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48.-CAPITAL/CONSUMPTION GOODS TOP OF PAGE
Capital goods are produced goods which are used as factor INPUTS for
further production. Consumer goods and services are tangible and
intangible commodities which are consumed for their own sake to
satisfy current wants.
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49.-CAPITAL TOP OF PAGE
Capital is a term used to refer to a factor of production produced
by the economic system. Capital can be distinguished from LAND and
LABOUR which are not conventionally thought of as being themselves
produced by the economic system. As a consequence of its
heterogenous nature, the measurement of capital has become the source
of much controversy in economic theory. The word is also used as a
term for financial assets. (from "Macmillan Dictionary of Modern
Economics", Macmillan Reference Books, 1989)
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50.-UNEMPLOYMENT RATE TOP OF PAGE
Unemployment rate is the ratio of job seekers to the total labour
force (workers at work plus job seekers).(International definition)
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51.-FULL EMPLOYMENT TOP OF PAGE
Full employment is the maximum level of employment that can be
achieved given the existence of frictional and structural
unemployment. Or, another definition, full employment is the level
of employment achieved when the labour market clears.
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52.-CYCLICAL UNEMPLOYMENT TOP OF PAGE
Cyclical unemployment is unemployment caused by recession.
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53.-STRUCTURAL UNEMPLOYMENT TOP OF PAGE
Structural unemployment is unemployment that exists because of
lack of skills or being in the wrong location.
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54.-FRICTIONAL UNEMPLOYMENT TOP OF PAGE
Frictional unemployment is unemployment that occurs when people are
changing jobs.
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55.-POTENTIAL GDP/OUTPUT GAP TOP OF PAGE
Concept based on the notion of "potential output" which is the
maximum feasible output of a firm, industry, sector of an economy
or economy as a whole, given its 'factor endowments'.
'factor endowments' is defined as the levels of availability of
factors of production in an area, or country. Factors of production
are usually defined as land, labour, capital and entrepreneurial
skills.
the high-level technology of the industrial countries uses a very
different factor mix to that which is available in less developed
countries, which causes many problems with indiscriminate use of
high-level technology in the latter.
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56.- TOP OF PAGE
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57.- TOP OF PAGE
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