Econ definitions

Question 1

Absolute poverty

Answer 1

Inability to afford basic necessities, not enough money

Question 2

Relative poverty

Answer 2

A comparison of the standard of living of a person with another

Question 3

Actual production

Answer 3

Utilization of already available resources in an economy that were not being put in use before. This can be shows by a movement within the PPC curve towards a point closer to the curve

Question 4

Production potential

Answer 4

When the quantity or quality of resources improves. Shown by shift to the right of the PPC curve

Question 5

Ad valorem tax

Answer 5

Tax based on the value of a product. The more expensive a product is, the higher the ad valorem tax

Question 6

Specific tax

Answer 6

This is when the tax amount per unit is a fixed amount. Based on the number of units purchased.

Question 7

Asymmetric information

Answer 7

When one of the parties in a transaction has more information than the other.

Question 8

Moral hazard

Answer 8

Change in behaviour after agreement. Between buyer and seller

Question 9

Devaluation and depreciation of currency

Answer 9

Devaluation is due to government actions while depreciation is due to market forces

Question 10

Direct taxes

Answer 10

Tax directly paid to the government. Tax on income

Question 11

Indirect taxes

Answer 11

Taxes applied on consumer expenditure

Question 12

Economic growth

Answer 12

Increase in real output of an economy

Question 13

Economic development

Answer 13

Improvement of quality of life and well being of citizens in an economy. Increase in literacy rate and life expectancy

Question 14

Economies of scale

Answer 14

Decrease in average cost per unit in the long run due to expansion of a business. Benefits of business expansion

Question 15

Increasing return to scale

Answer 15

When percentage change in output exceeds the percentage change in inputs

Question 16

Equality

Answer 16

When everyone receives the same outcome/income

Question 17

Equity

Answer 17

The fair ratio of reward and effort

Question 18

Free goods

Answer 18

Resources that are not scarce and do not have an economic cost attached to them. e.g. sunshine

Question 19

Economic goods

Answer 19

Goods that are desirable and scarce. Examples include: public, private, merit and demerit goods.

Question 20

Free trade area

Answer 20

Area where trade barrier are completely abolished for its members. Allows them to independently decide tariffs for non-members

Question 21

Custom union

Answer 21

Not only removes all trade barriers for members but also maintains a uniform tariff policy for non members

Question 22

Government borrowing

Answer 22

Borrowing that is needed to finance a budget deficit

Question 23

National debt

Answer 23

Rising public sector borrowings raise national debt and the decision of the government to repay loans reduces it.

Question 24

Inflation

Answer 24

Persistent increase in general price levels. Price levels rise when there is positive inflation

Question 25

Disinflation

Answer 25

Fall in inflation rate. Price levels still rise but at a slower rate

Question 26

Deflation

Answer 26

Negative inflation rate. Price levels fall

Question 27

Internal value of money

Answer 27

The purchasing power of money to buy goods and services. It reduces when inflation rises

Question 28

External value of money

Answer 28

This is the exchange rate. How much foreign currency can be purchased with a given amount of national currency.

Question 29

Kinked demand curve

Answer 29

Assumes that the decision of a firm to raise its prices is not matched by its competitors, leading to a proportionately larger fall in its quantity demanded. Firms choosing to raise prices face a flatter price elastic demand curve. However, decision to reduce prices is followed by competitors, leading to price inelastic demand. Demand curve is kinked at the point of initial price and quantity.

Question 30

Kuznets curve

Answer 30

Shows relationship between per capita income and income inequality. According to the curve, a rise in per capita income initially raises income inequalities, but eventually income inequalities begin to fall

Question 31

Laffer curve

Answer 31

Increase in tax rates initially raises tax revenues, but eventually tax receipts begin to fall. High tax rates reduce incentive to work and also lead to tax evasion.

Question 32

Lorenz curve

Answer 32

Graphical representation of income or wealth inequality. The further the Lorenz curve is from the line of equity (45 degree line). The greater would be the Gini coefficient and income disparities

Question 33

Liquidity trap

Answer 33

Very low interest rates and high savings

Question 34

Poverty trap

Answer 34

Situation where benefits of rising income are offset by the removal of means tested benefits, leaving the person no better off

Question 35

Market equilibrium

Answer 35

When demand equals supply with no tendency to change in equilibrium price and quantity

Question 36

Consumer equilibrium

Answer 36

When a consumer maximizes his total utility by equating the marginal utility per dollar for the last units of all commodities

Question 37

Normal goods

Answer 37

Goods whose demand rises with income

Question 38

inferior goods

Answer 38

Goods whose demand falls when income rises

Question 39

Necessities

Answer 39

Demand does not change much with income. Price inelastic

Question 40

Primary income

Answer 40

Income earned from providing factor services in other countries. e.g wages, rent, interest payments and dividends

Question 41

Productivity

Answer 41

Ratio of output produced and inputs employed

Question 42

Profitability

Answer 42

The ratio of profits and sales or capital employed

Question 43

Private goods

Answer 43

Goods that are excludable and rivalrous

Question 44

Functions of money

Answer 44

Medium of exchange Store of value Unit of value Standard for deferred payments

Question 45

Real income

Answer 45

Purchasing power

Question 46

Disposable income

Answer 46

Income minus direct taxes

Question 47

Secondary income

Answer 47

Payment received from another country. Not used for production purposes. e.g. pensions and donations

Question 48

Social cost

Answer 48

Sum of private and external costs of an economic transaction.

Question 49

External cost

Answer 49

Costs affecting people outside economic activity

Question 50

Tax rate

Answer 50

Ratio of tax amount and income. It is progressive when tax rate rises with income, proportionate when tax rate does not change with income and regressive when tax rate falls when income rises

Question 51

Terms of trade

Answer 51

The ratio of average export price and average import price

Question 52

Balance of trade

Answer 52

Difference between exports and imports of goods

Question 53

Trade deficit

Answer 53

When exports of goods fall short of their imports

Question 54

Budget deficit

Answer 54

When government expenditure exceeds tax revenues

Question 55

Current account deficit

Answer 55

When inflows from exports of goods and services, factor incomes and net transfers fall short of outflows for the same.

Question 56

Transfer payments

Answer 56

Payments that have no relation to production activity. Examples include pensions and unemployment allowances

Question 57

Universal benefits

Answer 57

Medical care, public schooling and pensions. These are unconditional and given to everyone, irrespective of their income.

Question 58

Means tested benefits

Answer 58

Given to individuals and families on the basis of their income and resources. These benefits are gradually withdrawn when income rises.

Question 59

X-efficiency

Answer 59

The degree of efficiency maintained by firms in imperfect markets (little competition). It is the difference between actual efficiency and potential efficiency

Question 60

Dynamic efficiency

Answer 60

Involves improving efficiency over time. Achieved by developing new/better products or by discovering better production techniques.