387

GLOSSARY

Absolute advantage: A situation in which one nation can produce a given output at a lower resource cost than its trading competitors

Accelerator theory of investment: A theory which relates changes in the level of investment to changes in the national income

Accommodating capital movements: Those transactions in the balance of payments that are necessary to finance the difference between reven­ue from the sale of exports and expenditure from the purchase of imports

Accounting profit: The difference between expen­ses of a firm and the revenue it raises from the sale of output; no allowance is made in accounting profit for the opportunity cost of the resources used in production

Activist strategy: The view that deliberate chan­ges in monetary and/or fiscal policy can be used to stimulate aggregate demand during a recession and restrain aggregate demand during a boom so as to minimise economic instability

Adaptive expectations hypothesis: The view that economic agents base their future expecta­tions on the basis of their experiences, particularly their recent experiences

Aggregate demand: The total value of all planned expenditures on the output of a particular econ­omy over a given time period

Aggregate demand schedule (curve): A curve indicating an inverse relationship between the price level and the total volume of goods and services demanded in an economy

Aggregate supply: The total value of all goods and services produced in an economy over a given time period

Aggregate supply schedule (curve): A curve indicating a positive relationship between the output of an economy and the price level

Allocative efficiency: When the price of the last unit produced is exactly equal to its opportunity cost of production

Anticipated inflation: An increase in the general level of prices that is widely expected by economic agents

Appreciation: An increase in the value of the domestic currency against other currencies on the foreign exchange market which is caused by a change in market forces

Arbitrage: Any activity whereby profit is earned simply by buying a commodity at one price and re-selling it at another

Automatic stabilisers: Changes in taxes and transfer payments that occur automatically as nominal GNP rises or falls

Autonomous variables: Those variables which do not vary directly with the level of income.

Average cost: Total cost divided by total output Average product: Total product (output) divided

by number of variable inputs (usually workers) Balance of payments: A record of earnings from

abroad from the sale of goods and services as well as capital inflows and expenditures on goods and services bought from abroad and capital outflows

Balanced budget: A situation where government expenditure is exactly equal to government revenue

Base year: A year chosen for purposes of compar­ison on which index numbers are based

Black economy - see Underground economy Black market: Goods sold at prices that contravene

legally established minimum prices Bond: A security given in recognition of a debt on

which interest is paid and which will be redeemed at some future date

Break-even point: The level of output at which a firm's revenue is exactly equal to its expenditure

Budget deficit: A situation where government expenditure exceeds government revenue

Budget line: A line showing the different combina­tions of goods and services that can be purchased at given prices with a given income

Budget surplus: A situation where government revenue exceeds government expenditure

388 GLOSSARY

Capital: Any man-made aid to production Capitalism: An economic system based on the

private ownership of productive resources in which goods and services are allocated through the operation of free markets

Cartel: An agreement among sellers of a product to coordinate their levels of production in such a way as to increase the profits of members; effectively a cartel will aim to create a monopoly in the market

Central bank: The bank whose major responsibil­ities are control of the money supply and super­vision of the banking system.

Collective bargaining: The process whereby trade unions negotiate collectively the wages and condi­tions of their members, rather than allow one person to negotiate individually with the employer

Collusion: Agreements among firms to avoid com­petitive price changes; the most rigid form of collusion is a cartel

Commercial bank: A privately owned institution which accepts deposits and makes loans with the aim of making profits from its activities

Complements: Goods which are jointly consumed such as cereal and milk

Concentration ratio: The total sales of a small group of firms; the most commonly used ratios in the UK are the three-firm and five-firm concentra­tion ratios

Conglomerate merger: the combining of firms which operate in different markets under single ownership

Constant returns to scale: When a change in the input of all factors of production leads to an equi­proportionate change in output

Consumer equilibrium: When a consumer cannot increase total utility by changing the range of goods and services currently consumed

Consumer surplus: The difference between the maximum amount a consumer would be willing to pay and the amount that is actually paid for a good or service

Contestable market: A market in which the costs of entry and exit are low so that there is little risk to firms which enter the market

Cost-benefit analysis: A technique of investment appraisal in the public sector which evaluates the full social costs and social benefits of a project

Cost push inflation: A rise in the general level of prices caused by a rise in costs

Counter-cyclical policy: A policy aimed at mov­ing the economy in the opposite direction of the business cycle; aggregate demand is stimulated during the downturn of the cycle and contracted during the upturn

Cross elasticity of demand: The ratio of the change in the price of one good to the change in demand for another good

Crowding-out effect: The reduction in private investment caused by an increase in public sector investment

Crude birth rate: The number of live births per year per thousand of population

Crude death rate: The number of deaths per year per thousand of population

Current account: A record of all transactions which involve the purchase or sale of goods and services abroad as well as international transfer payments

Cyclical unemployment: The portion of unem­ployment that is attributable to a decline in a country's total production; cyclical unemployment rises during a recession and falls during a boom

Demand deposits: Those deposits which can be withdrawn from a bank on demand; they are often referred to as sight deposits

Demand pull inflation: A rise in the general level of prices caused by a rise in demand at the existing price level

Depreciation: A decrease in the value of the domestic currency against other currencies on the foreign exchange market which is caused by a change in free market forces

Depression: An extended period of heavy unem­ployment during which the level of output is well below potential

Derived demand: Demand for one item which derives from the demand for another item; the demand for any factor input is a ~erived

demand Devaluation: A movement of the domestic currency

against foreign currencies from one fixed parity to a lower fixed parity; such a movement is the result of an official act of policy rather than the result of free market forces

Dividend: That part of a company's profits distrib­uted to its shareholders

Discounting: Calculating the present value of a future payment or return by using a rate of interest

Diseconomies of scale: When a change in all factor inputs leads to a less than proportional change in output

Disposable income: Personal income less personal taxes

Dissaving: Consumption which is financed by drawing on past savings; in effect, it is the difference between income and consumption when consumption exceeds income

GLOSSARY 389

Division of labour: The breaking up of a produc­tive process into different tasks, each done by a different worker

Dumping: The sale of a good by a foreign supplier in one country at a price below the price at which the supplier sells it in the home market

Econometrics: The application of statistical meth­ods to economic problems

Economic good: Any good that is produced from scarce resources; only economic goods have an opportunity cost

Economies of scale: When a change in all factor inputs leads to a more than proportional change in output

Entrepreneur: A profit-seeking, decision-taking bearer of risks; it is the entrepreneur who decides how resources are to be combined into output

Equilibrium: A state of balance that is self-perpet­uating in the absence of a disturbance

Euro-currencies: Currencies deposited with a European bank outside their country of origin

Exchange rate: The rate at which domestic cur­rency can be exchanged for foreign currency

Expansionary fiscal policy: An increase in gov­ernment expenditure and/or a reduction in taxation aimed at increasing the level of aggregate demand

Externalities: The spillover effects of consumption and production which affect non-consumers and/ or non-producers. Externalities might be beneficial or detrimental to the well-being of those on whom they are imposed

Factor markets: The markets in which the factors of production - land, labour and capital - are bought and sold.

Factors of production: The inputs of natural resources, labour, capital and entrepreneurship used in producing goods and services

Fiat money: Money which is not backed by some commodity such as gold which has some intrinsic value

Financial intermediary: A financial institution which accepts funds from savers and makes loans to borrowers

Fiscal policy: The use of government spending and taxation policies for the achievement of macro­economic goals

Fixed cost: Cost that does not vary with output Fixed exchange rates: A system of exchange

rates where currencies have a fixed value against other currencies

Floating exchange rates: A system of exchange rates where the value of a currency against any other currency changes in response to changes in free market forces

Foreign exchange market: Those institutions which buy and sell foreign currency including commercial banks and foreign exchange dealers.

Fractional banking: A banking system in which banks maintain a minimum ratio between certain assets and their total liabilities

Free goods: Those goods such as fresh air which do not embody scarce resources

Frictional unemployment: Unemployment due to a mismatch between qualified workers seeking employment and obtaining a suitable position

General Agreement on Tariffs and Trade (GATT): An organisation consisting of most non-'communist' countries which aims to reduce barriers to trade

Gross National Product (GNP): The total an­nual value of output produced by a nation's resources

High-powered money: That component of the money stock that is directly under the control of the central bank. In the UK it consists of cash in circulation with the public and operational depos­its at the Bank of England

Homogeneous: Alike in all respects Horizontal integration: The combining under a

single ownership of firms at the same stage of producing the same good

Hyperinflation: Very rapid and sustained inflation Import quota: A restriction on the volume of a

particular good that can be imported within a particular period of time

Income effect: That part of an increase in the amount consumed of a good whose price has fallen that is attributable to the increase in real income that results from the fall in price

Income elasticity of demand: The ratio of the percentage change in demand for a good to the percentage change in income

Income multiplier: The ratio of the change in the equilibrium level of income to the change in injections

Incomes policy: A policy that limits the increase in wages in an attempt to limit the rate of inflation

Indifference curve: A curve that shows different combinations of goods which give the consumer equal satisfaction

Inferior goods: Goods for which the income elasti­city of demand is negative

Inflation: A continuous rise in the price level Injection: Spending in the economy other than

consumption spending Innovation: The introduction of new products and

processes; it often stems from the application of inventions

390 GLOSSARY

Intermediate good: A good that is not sold to the ultimate user and which is used as an input in the production of final goods and services

International Monetary Fund (IMF): An organi­sation set up to make loans to countries with a balance of payments deficit which they are unable to finance themselves; most loans are conditional on recipients adopting a particular set of economic policies

Inventories: Stocks of unsold goods and raw materials

Investment: The flow of resources into the produc­tion of new capital

Invisible: The export or import of a service such as tourism, transport or banking

J curve effect: The tendency for a depreciation of a country's currency against other currencies initi­ally to worsen the trade deficit before an improve­ment is discernible

Kinked demand curve: A demand curve that is relatively elastic for a price rise and relatively inelastic for a price reduction

Labour force: The portion of the population that is aged between the minimum school-leaving age and the age of retirement; for definitions of the labour force it is immaterial whether members of this group are employed or unemployed

Law of comparative advantage: A principle which states that individuals, regions and nations can gain by specialising in the production of those goods where they have a lower opportunity cost than other individuals, regions and nations.

Law of demand: A principle which states that there is an inverse relationship between the price of a product and the quantity consumers will demand

Law of diminishing marginal utility: A principle which states that as consumption of a good or service increases each successive unit consumed will give less satisfaction than the preceding unit

Law of diminishing returns: A principle which states that as more units of a variable factor are used with a fixed amount of another factor a point will be reached when output rises at a slower rate: that is, marginal product will decline

Law of supply: A principle which states that there is a direct relationship between the price of a good and the amount that will be offered for sale

Leakage: That part of national income not devoted to consumption of domestic output

Less developed country: Low income countries characterised by rapid population growth and extreme poverty for the majority of the popula­tion; there is usually a large agricultural sector, a

high degree of inequality, illiteracy and poor medical provision

Liquid asset: An asset which is easily and quickly converted into the means of payment without the risk of loss

Long run: A time period during which it is possible to vary the input of all factors of production; in the long run, there are no fixed factors

Macroeconomics: The branch of economics that deals with overall aggregates in the economy such as output, inflation and employment

Marginal cost: The change in total cost when one more unit is produced

Marginal physical product: The change in total output when one more variable factor (usually labour) is employed

Marginal propensity to consume: The propor­tion of each increase in income that is spent on additional consumption

Marginal propensity to save: The proportion of each increase in income that is saved

Marginal rate of substitution: The rate at which one good or service can be substituted for another good or service without loss of satisfaction

Marginal revenue: The change in total revenue that results from the sale of an additional unit of output

Marginal revenue product: The change in total revenue that results from the employment of an additional variable factor (usually labour)

Marginal tax rate: The amount of additional earnings that must be paid in tax

Marginal utility: The change in total utility that is received when consumption increases by a single unit

Market: Any arrangement which brings buyers and sellers into contact.

Market failure: The failure of the market system to allocate resources in an optimum way; this implies that there are unreaped gains to society

Market mechanism: A method of allocating re­sources which allows consumers freely to express their preferences for output by what they pur­chase; individuals are free to own private property and can undertake production in their quest for profit

Market structure: The characteristic features of markets such as the number of suppliers, the ease of entry and exit and the extent of product differentiation

Microeconomics: That branch of economics which deals with individual units such as the individual consumer, the individual market and the indivi­dual firm

GLOSSARY 391

Minimum efficient scale: The smallest level of output at which average cost is at a minimum

Monetarists: Those economists who believe that changes in the money supply cause changes in nominal GNP which, in the long run, is reflected in a higher rate of inflation

Monetary base- see High-powered money Money supply: Those assets which function parti­

cularly as a means of payment and unit of account; in the UK money supply consists mainly of cash and bank deposits

Money supply multiplier: The ratio of bank deposits to reserves held by the banking sector

Monopolistic competition: A market in which there are large numbers of sellers each selling a product which is slightly differentiated from that of rival suppliers

Monopoly: The sole supplier of a good or service; this might be a single firm or a small group of firms who coordinate their activities so as to function as the sole supplier of a good or service

Monopsony: A market in which there is only one buyer

Multinational: A firm which invests in more than one country and produces and markets its pro­ducts in different countries

Multiplier - see Income multiplier and Money supply multiplier

National income: The total of all incomes received by the factors of production during a year; it is therefore the value of all output produced during the same period

Natural monopoly: A market situation in which average cost falls over large ranges of output so that the market is most efficiently served by a single supplier

Natural rate of output: The long run equilibrium level of output in an economy

Natural rate of unemployment: The long run equilibrium level of unemployment; it is also the only level of unemployment that is consistent with a non-accelerating rate of inflation

Nominal values: Measurements of economic values in market prices

Normal good: A good which consumers demand more of when they experience an increase in income; this implies that an increase in income causes a rightward shift of the demand curve

Normal profit: The opportunity cost of the entre­preneur. It is the minimum reward the entrepre­neur will accept to remain in a particular industry

Normative statements: Statements which are matters of opinion which cannot be proved or disproved by reference to the facts

Oligopoly: A market structure when there are a small number of producers such that the actions of one firm have implications for other firms in the industry; the market is therefore characterised by interdependence between firms

Open economy: An economy which engages in international trade

Open market operations: The purchase or sale of securities by the central bank

Opportunity cost: The cost of doing one thing measured in terms of the alternative forgone; in particular, resources have alternative uses and if they are used to produce one thing the opportunity cost is the alternative they might otherwise have produced

Patent: The exclusive right to produce a particular good or use a particular process

Perfect competition: A market structure in which there are many buyers and many sellers of a homogeneous product; there are no barriers to entry or exit from the market and no individual buyer or seller has, by his actions, any influence on price

Permanent income hypothesis: The hypothesis that consumption depends on some estimate of expected long run income rather than current mcome

Personal disposable income: The income that is available to individuals after payment of taxes

Phillips Curve: A curve showing an inverse rela­tionship between the rate of inflation and the level of unemployment

Policy-ineffectiveness proposition: The view that systematic or predictable changes in govern­ment policy will have no effect on macroeconomic variables

Positive statements: Statements which can be proved or disproved by reference to the facts

Price ceiling: A legal maximum price that can be charged for a particular product

Price discrimination: The practice of charging different prices for the same product

Price elasticity of demand: The ratio of the percentage change in demand for a good to the percentage change in its price

Price elasticity of supply: The ratio of the percentage change in supply for a good to the percentage change in its price

Price leadership: A situation in oligopolistic mar­kets where one firm sets the price for a particular product and other firms simply follow suit

Production possibility curve: A curve showing the maximum output that an economy can pro­duce given its existing resources and a given level of technology

392 GLOSSARY

Productivity: The average output per worker Profit - see Accounting profit Progressive tax: A tax where the marginal rate

exceeds the average rate Protectionism: Policies aimed at protecting domes­

tic industry from foreign competition Public goods: Goods and services which cannot be

supplied to one person but not to others and which once they are provided have zero marginal cost

Purchasing power parity theory: A theory which implies that a country's nominal exchange rate is determined by its rate of inflation relative to the rate of inflation abroad

Quantity theory of money: A theory which implies that changes in the money supply cause proportional changes in the price level

Rational expectations: Expectations which are formed by considering all relevant information rather than just past experiences

Real values: The measurement of a variable after it has been adjusted to take account of price move­ments

Recession: A reduction in real GNP for two succes­sive quarters; it is characterised by falling output and rising unemployment

Reflation: An expansion of aggregate demand during a recession

Regressive tax: A tax which takes a larger percen­tage of income from the less well-off members of society

Resources: Factors of production Saving: Disposable income that is not spent on

consumption Scarcity: A situation in which society desires more

output than is currently available Short run: A period of time when there is at least

one fixed factor of production Social cost: The private cost of production plus the

value of any externalities Special Drawing Rights (SDRs): Assets created

by the IMF which give holders unconditional drawing rights

Stagflation: Rising inflation occurring simulta­neously with falling output

Strike: A withdrawal of labour which is authorised by a trade union

Structural unemployment: That portion of unem­ployment caused by a reduction in demand for a particular product

Substitutes: Goods that are related in such a way that a rise in the price of one good causes an increase in demand for the other

Substitution effect: That part of an increase in the quantity of a good demanded whose price has fallen which is attributed to consumers substituting cheaper goods for relatively more expensive goods

Sunk cost - see Fixed cost Supply curve: A curve showing a positive relation­

ship between price and the quantity supplied Tariff: A tax levied on imports of goods Tax incidence: The way in which the burden of a

tax is shared between different parties Terms of trade: The ratio of export prices to

import prices Time deposits: Deposits which are subject to notice

of withdrawal before they can be withdrawn Transfer payments: Payments made by the state

which are not in return for some productive activity or the result of purchases of goods or services

Underground economy: Economic activity which is concealed from the authorities with the aim of avoiding tax liability

Unemployment: Those who register as available for employment

Unit elasticity of demand: When the percentage change in price of a good is exactly equal to the percentage change in the quantity of that good demanded

Utility: The economist's term for satisfaction de­rived from consumption

Variable cost: Those costs which vary directly with output

Vertical integration: A merger between firms at different stages of the same productive process; vertical integration may be backwards towards the raw material suppliers or forwards towards the retail outlets

Vicious circle of poverty: A feature of low income countries, 'low income' implies low ability to save, which implies low investment, which implies low income growth, which implies low ability to save, and so on.

Visibles: Exports or imports of goods Withdrawals - see Leakages Working population: The total of the employed,

the self-employed and the unemployed seeking work

393

INDEX

A Abnormal profit see Supernormal profit Absolute advantage 297, 281 Accelerator theory 192-3 Accepting houses 222, 244 Adaptive expectations 269--70, 276--7 Advertising 68, 87, 101 Aggregate demand 170--1, 181--6, 197-201, 203-7,

236, 258--62, 269, 272, 319, 355, 365 Aggregate supply 198-200, 202-7, 258--62, 269,

272, 319, 355, 367 Aid, bilateral and multilateral 166, 380--1, 383 Allocative efficiency 6, 91, 97, 106, 111, 265--6,

336--7 Appreciation of currency 310, 313, 317 Arbitrage 103, 229, 231, 313 Assisted areas 120, 121, 336 Autonomous investment 171 Autumn Statement 349 Average cost 74-9, 89-93, 96--7, 105--6, 110--11 Average product 66--7, 73, 75--6 Average propensity to consume 171, 178-80 Average revenue 79, 88-92, 95-7, 103, 105--6,

110--11, 113-14 Average revenue product 143, 148 Aylen,]. 78

B Balance of payments 1, 247, 266, Ch.32, 292, 310,

315, 320 and capital flows 303--5, 308 exchange rates 317-19 equilibrium 303, 354, 356--7

Balance of trade 303, 319 Balanced budget multiplier 184-5 Balancing item 305--6 Baldwin, R. and Krugman, P. 294 Bangladesh, enterprise in 382 Bank deposits Ch .23, 226--8, 231

Bank deposit multiplier see Money supply multiplier

Bank of England 217-21, 224, 226--31 Barriers to employment 359--63 Barriers to entry 87, 94-5, 109 Barriers to trade 290--2, 295, 297-9 Barter 208 Baumol, W.]. 98 Bilateral aid 380 Bill of exchange 83--4, 214, 216, 219, 222 Birth rate 122, 384" Black economy 46, 162-3 Black market 46 Bonds 216, 218 Brady Plan 379 Break -even output 80--1 British Telecom 368--9 Budget 201, 0-7, 231, 236, 253, 274, 276, 337-8, 342,

345, 352 Budget line 53, 56--7, 351 Budgetary policy 355--6 Bulk-buying 68 Bus services 366--7

c Canons of taxation 339-41 Capital 2, 4, 5, 66, 68, 73, 138--41, 190, 192-3, 199,

202-7, 233, 235, 254 Capital account (balance of payments) 303-5,

307--8 Capital depreciation see Depreciation of capital Capital Gains Tax 343 Capital market 83, 86 Capitalism 5, 6 Cartels 95, 115, 117 Cash ratio deposits 220-1 Central bank see Bank of England Centrally planned economies 1, 6--8 Certificates of deposit 214, 216, 221-8, 227 Cheques 209, 211, 213 Choice (and scarcity) 1, 2, 8

394

Circular flow of income 173 Clearing banks 218, 228-9 Clements, K. and Sjaastad, L. 292 Collective bargaining 149, 360, 364 Collusion 114-16 Command economies 1, 6-8 Comecon 321 Commercial banks 328 Common Agricultural Policy (CAP) 49, 50, 327-9 Comparative advantage (cost) 280-5, 376 Complementary goods 20, 30 Concentration ratio 111 Constant returns 279, 283 Consumer sovereignty 1, 2, 5, 8 Consumer surplus 105, 296 Consumption, determinants of 171, 178-80 Consumption function 171, 177-80 Contestable markets 98, 366 Corporation Tax 339 Cost-benefit analysis 193-5 Cost curves

long run 78-9 short run 76-8, 80 total 81

Cost-plus pricing 132 Costs of production 66, 199, 202-4, 259-60

average 74-9 fixed 74-6 marginal 75-6 variable 7 4-6, 78

Cost-push inflation see Inflation: cost push Coughlin, C. and Wood, G. 298 Covered interest parity 315 Cross-elasticity of demand 29, 30, 60, 65 Current account 302-7, 319-20 Customs union 324, 331

D Death rate 122, 384 Debentures 83, 85, 86 Debt crisis 223, 316 Deduction 9-10 Deflationary gap 355 Deflationary policy 316, 319, 356 Deindustrialisation, in UK 305 Demand

aggregate see Aggregate demand for capital 192-3 curve, construction of 12, 13, 56, 65 derived 146 elasticity of 25-8, 31, 34, 58, 60, 65, 146, 310,

319, 320, 344-5 for labour 144-7

INDEX

for money 232, 236-42, 258 law of 19, 20, 55-9

Demand management 366-7, 359 Demand-pull inflation see Inflation: demand pull Dependency ratio 123, 126, 284 Depreciation

of capital 160-2, 169 of currencies 245, 310, 313-15, 319-20, 323

Deregulation 366-7 Devaluation 310, 316, 319, 323, 356 Developing countries Ch. 38 Delors Report 332-3 Diminishing marginal utility 51-2, 59-63, 341 Diminishing returns 31, 66-8, 73, 75-6, 143 Direct cost see Variable cost Direct taxes 338-9, 345-6 Discount houses (market) 214, 217, 219-21, 224,

228-31 Discounting to present value (DPV) 190-1 Diseconomies of scale 66, 69, 73, 79 Distribution of income and wealth 1, 3, 42, 142,

152-6, 165, 179, 336-7, 341, 346 Division of labour 118-20 Divorce of ownership and control 129-30, 132

E Economic development Ch. 38 Economic efficiency see Efficiency, allocative Economic goods 4 Economic growth 157, 166, 354, 356, 369-71 'Economic miracle', UK 371-2 Economic reform

in developing countries 380-1 in USSR 7, 8

Economic rent 149-52 Economic welfare

and monopoly 91 and protection 395-7

Economies of linked processes 68 Economies of scale 66, 68-71, 73, 78-9, 86, 93, 98,

208 Effective exchange rate 310, 319 Efficiency, allocative and productive 6, 91, 92, 97,

106, 110-11, 255-6, 336, 367 Eisenhammer, ]. 362 Elasticity of demand see Demand, elasticity of Elasticity of supply see Supply, elasticity of Eligible bills 228-9 Emigration 124 Employment Acts 360 Engel Curve 56-8, 249 Entrepreneur 2, 128-9, 133, 135-6, 161, 385 Equation of exchange 257-8

INDEX 395

Equilibrium level of income 172-7, 181-7 Equilibrium price 23-4 Equi-marginal returns 61-2 Equity see Ordinary shares European Community 3, 166-8, Ch. 34 Eurocurrencies 28, 223-4, 311, 315 European Currency Unit (ECU) 322, 329-33 European Monetary Union (EMU) 322-3 Exchange controls 290 Exchange Equalisation Account 218 Exchange rates 166-9, 200-1, 218, 232, 245,

Ch. 33 Exchange Rate Mechanism (ERM) 223, 230, 245,

315-16, 318-19, 329-31 Excise duties 338 Expectations 191

adaptive 269-70, 276-7 rational 197, Ch. 29

Expectations-augmented Phillips Curve 263-4 Exports 4, 160-2, 169, 185-7, 198, 201, 259, 266-7,

286, 303-7, 312, 316, 319, 320 Externalities 40-1, 106, 132, 164, 194--6

F Factoring 84 Factors of production

fixed 66-8, 73-4 variable 66-8, 73-4

Financial economies 69 Financial intermediation 217 Fiat money 209, 225 Firm, objectives of the 130-2 Fiscal drag 268 Fiscal policy 201, 225, 231, 274, 276, 355-6 Fixed costs 66, 74-7, 80, 92 Fixed exchange rates 310, 315-16, 318-19, 323 Floating exchange rates 310, 313-18, 320, 323 Foreign debt, and developing countries 378-9 Forward exchange rate 310-12, 315, 323 Free enterprise economies see Market economies Free rider 41 Free trade (and protection) Ch. 31 Friedman, Professor M. 178-9, 265, 27 4, 276 Full employment 199, 200, 353

G Gearing ratio 83, 85, 86 General Agreement on Tariffs and Trade

(GATT) 297, 299-300 Giffen goods 56-7, 59--60 Gilt-edged securities 218, 231 Gorman, Teresa 42

Government economic policies 353--8 expenditure 161, 259, 274, 336, 346-50 revenue 337-8, 352

Gross domestic fixed capital formation 159--60 Gross Domestic Product 157, 159--62, 167-9, 276-7,

321, 370, 377-8 Gross National Product 157, 159--65, 169, 237, 257 Growth see Economic growth

H Hard ECU 334 High-powered money 225--6, 231 Hire purchase 83, 84 Horizontal integration 70, 71 Housing market 47, 180 Hyperinflation 2, 8, 255-7 Hypothesis 9, 10

Imperfect competition Ch. 13 Import quotas 290, 300 Import restrictions 290-1, 300, 377 Import substitution 377 Imports 11, 160-2, 169, 185-7, 198, 201, 207, 259,

266-7, 303-4, 307, 312, 315-16, 319-20 Incidence of taxation see Taxation, incidence of Income determination Chs 19, 20 Income effect 55-8, 65, 351 Income effects, of exchange rate changes 320 Income elasticity of demand 28-31, 57-8, 65, 320 Income tax 207, 252, 259, 267, 338-42, 363, 365 Incomes policy 356-7 Increased dimensions 68 Increasing returns 66-8, 73, 75, 78 Index of Retail Prices (RPI) 250-4 Index numbers 163, 169, Ch. 27, 255 Indifference curves 52-8, 61-5, 351 Indirect costs see Fixed costs Indirect taxes 339, 344-5 Indivisibilities 68 Induction 9 Industrial relations 361 Infant industry 293-4 Inferior goods 20, 28, 56-9 Inflation 1, 163, 197, 201, 204, 226, 245-7, 250-4,

Ch. 28, 269-71, 273-7, 310, 314, 316, 318, 320, 323, 353--6

demand-pull 256, 258-9, 268 cost-push 256, 259--61, 268, 318

Inflationary gap 355 Infrastructure, Nigeria 382

396 INDEX

Ingham, A. 18 Inheritance tax 153-4, 344 Injections and leakages 173-7, 183-4, 186, 320 Innovation 192, 288, 369, 374 Integration see Vertical integration; Horizontal

integration Inter-bank market 214, 222 Interest rates 152, 197-8, 201, 219--20, 222-3, 226,

228-31,Ch.26, 250-1,267,269,272-3,310-11, 316

and exchange rate 245, 314, 315, 323 term structure of 242-4

International Bank for Reconstruction and Development (World Bank) 322, 380-3

International Development Agency (IDA) 380-3 International Monetary Fund (IMF) 166, 310, 321-2 International trade Ch. 30, 310, 312, 318 Intra-industry specialisation 286 Investment 5, 8, 138-9, 159, 166, 198, 201-3, 206,

233, 235-6, 259, 266-7, 312 accelerator, theory of 192-3 determinants of 191-2 and rate of interest 191, 233, 235, 241 and saving 173-7

Invisible trade 303, 306-7

J ] curve 310, 320 Joint demand 20, 30 Joint supply 22

K Katz,]. 383 Keynes, ]. M. 170, 184, 339, 353, 355-6 Keynesian theory of income determination Chs 19,

20 Keynesian theory of interest 237-42 Kinked demand curve 112-14

L Labour 2, 3, 5, 66, 73, 201-2

demand for 144-7 and economic rent 149, 150-1 marginal revenue product 142-4 market reform, in UK 359-62 mobility of 120-2 supply of 123-4, 126, 144-8, 203, 262, 360-1

Land 2, 4, 137-9, 141 Law of large numbers 10 Leakages and injections 173-7, 183-4, 186, 320 Leasing 83-4

Less developed countries see Developing countries Life-cycle hypothesis 179 Liquidity 208-9, 219, 222, 224, 321 Liquidity preference theory 232, 237-42, 269, 273 Limited liability 128-9, 134 Loanable funds theory 232-7 Local authority bills 216, 220, 233 Local taxation 340 Long run 33, 38, 66, 68-9, 76-8, 89-90, 93, 96,

110-11, 198-206, 257-8, 263-5, 271 London Dockland Light Railway 196 Lorenz Curve 154-5 Loss leader 130

M Managed trade 295 Marginal cost 74-7, 89--93, 96-7, 103, 105, 106,

110-11, 113--14 Marginal efficiency of investment 193 Marginal product 66-8, 73, 75-6, 142-4, 326 Marginal propensity

to consume 171, 174-5, 178 to import 184, 314, 316 to save 171

Marginal rate of substitution 52, 61, 62 Marginal revenue 79--80, 89--92, 95--7, 103, 105-6,

110-11, 113-14 Marginal revenue productivity 143-4, 148 Marginal utility 51-2, 59-63, 341 Market economies see Free enterprise economies Market failure 39--42 Marketing economies 68 Marshall, A. 58 Marshall-Lerner conditions 310, 319 Matthews, K.G.P. 365 Maynard, A. 369-70 McRea, H. 364-5 Medewar, Sir Peter 9 Medium Term Financial Strategy 276, 346 Merchant banks 222 Mercury Communications 369 Mergers 70, 99--101 Merit goods 41, 45 Migration 120-2 Minimum wage 360 Mixed economies 6, 8 Mobility of labour 120-2, 137, 139-41, 374 Models 9 Monetarism 200, 257-8, 260-1

and Keynesianism 276-7 Monetary policy 208, 215, 218, Ch. 25, 232, 269, 272,

274-7, 355-6 Money 2

INDEX 397

demand for 236-42 functions of 208-9, 225 Quantity Theory of 255, 257-9, 264, 268-9, 271,

273 supply of see Money supply value of see Inflation

Money market Ch. 24, 246 Money supply 200, 208, 210, Ch. 25, 236, 241, 245,

257-9, 263, 270-5, 277 definitions of 200, 210, 226-7 multiplier 208, 210-13

Monopolies and Mergers Commission 99-101 Monopolistic competition 109-11 Monopoly 71, 94---6

and competition 97-8 discriminating Ch. 12 and public ownership 40--1, 367 and public policy 99-101

Mortality rate 122-3, 126, 384 Moving averages 14, 15 Multilateral aid 380 Multinational companies 320 Multiplier 17 4---6, 183-4, 187, 267

N National Debt 338, 352 National Income 237, 241, 316

determination of Chs 19, 20 measurement of Ch. 18

Nationalised industries 94 Natural rate of output 199-207, 258, 272 Natural rate of unemployment 259, 262--4, 268,

271-3, 275, 277 Net property income from abroad 159, 169 New classical macroeconomics 270, 274-7 New protectionism 291, 297-8, 300 Non-tariff barriers to trade 290--2, 297-8, 300 Normal good 20, 56-9 Normal profits 89-91, 110, 152 Normative statements 10 North Sea oil 305

0 Office of Fair Trading 99 OFTEL 369 Oligopoly 111-16 Open market operations 225---6, 228, 231 Operational deposits 220--1, 228 Opportunity cost 1, 3, 5, 7, 140, 149, 151, 240

and international specialisation 279-83

Optimum population 124, 126 Ordinary shares 83-6 Overdraft 220 Overhead costs see Fixed costs

p

Parallel economy see Black economy Parallel money markets 214, 222-3 Pareto optimality see Allocative efficiency Participation rate see Activity rate Patents 94, 101 Peace dividend 4 Per capita income 164-9, 373--4 Percentage changes 13 Perfect competition Ch. 10 Permanent income hypothesis 178-9, 200 Personal disposable income 157, 163-4 Petroleum Revenue Tax 338 Phillips Curve 255, 262-4, 268-9, 271-2 Planned economies see Centrally planned

economies Population 1, 5, 7, 122---6, 144, 164, 206, 251

expansion in developing countries 383-5 Porter, M.E. 287-8 Positive statements 10 Poverty trap 342-3 Precautionary demand for money 232, 238, 240 Preference shares 83-6 Price controls 44-50, 356 Price discrimination Ch. 12 Price leadership 114-15, 117 Price level 163, 197-207, 257---62, 269, 271-3, 276-7 Price mechanism 1, 5, 6, 7, 35-8 Primary products and developing countries 286,

376-7 Prime cost see Variable cost Principle of multiples 68, 69 Private companies 129 Private sector 2, 5, 231, 276, 366 Privatisation 366-9 Product differentiation 109-10 Production 2, 5, 6, 68, 159 Production possibility curves 1, 4, 140 Producer sovereignty 96 Productive efficiency 91-2, 110, 367 Productivity 7, 66, 139, 142-3, 145, 199, 203, 207,

235, 259, 369-71 Profits 5, 6, 8, 51, 86, 158, 160--1, 164, 199, 203-4,

259, 262, 264, 269 normal 80, 89-91, 110, 152 subnormal 80, 89, 91, 106 supernormal 80, 89-91, 96-7, 103---6, 110, 152

398 INDEX

Progressive taxes 267, 340-1, 345--6 Propensity to consume

average 171, 178-80 marginal 171, 174-5, 178

Proportional taxes 340 Protection Ch. 31, 310, 327 Public companies 86, 129 Public finance 336--8 Public goods and services 40-1, 336 Public sector 4, 366 Public Sector Borrowing Requirement 208 Purchasing power parity 166-9, 310, 313-14, 323

Q

Quantity Theory of Money 255, 257-9, 264, 268-9, 271, 273

Quasi-rent 151 Quotas 95, 290

R Rate of interest see Interest rates; Monetary policy Rational expectations 197, Ch. 29 Rationing, physical 3, 35-6, 44-5 Real balance effect 199, 201, 207 Real cost see Opportunity cost Real income 58, 65,157,163,166,169,197,200,204,

251, 257, 267-8, 271-2, 314 Real interest rate 244 Real wages 262--4 Recession 204-5, 277, 354 Reflation 356 Regional blocs 286 Regressive taxes 340, 345 Relative income hypothesis 178 Renewable resources 137-8 Rent 49, 162, 169 (see also Economic rent) Rent controls 47-8 Resource allocation 35-7 Restrictive practices 95, 101, 107, 115-16 Restrictive Practices Court 99, 101 Retail Price Index 247--8, 250-5, 276 Revenue

average 79, 88-92, 95-7, 103, 105--6, 110-11, 113-14

marginal 79-80, 89-92, 95-7, 103, 105--6, 110-11, 113-14

total 79--81, 90, 95 Revaluation 310, 356 Ricardo, D. 149, 282 Risk-bearing economies 69 Risk-taking 128, 134

s Satisficing 132 Savings 198, 206, 252, 266

determinants of 180, 233, 236 ex ante and ex post 176-7 and investment 173-7

Scarcity (and choice) 1, 2, 8 Scientific method 9, 10 Seasonal adjustment of data 14-16 Shadow prices 194 Short run 66-8, 74, 77, 89-92, 110, 198-206, 258,

263-5, 268, 271-2, 274--6, 277, 319 Smith, A. 119, 339 Social cost (and benefits) 40, 43, 193-5 Sole proprietor (trader) 129 Special deposits 221, 225, 231 Special Drawing Rights 310, 321-3 Specialisation

of countries Ch. 30, 320 of labour 66-7,118-20, 208

Speculative demand for money 238--40 Standard of living 158, 164-9, 200, 206, 373, 375 Stock Exchange 83, 86, 224 Stop-go policies 358 Strikes 360 Sub-Saharan Africa 376-7, 381 Subsidies 1, 159, 161, 290-1 Substitutes 20, 30 Substitution effect 55-8, 65, 351 Supernormal profit 80, 89-91, 96-7, 103-6, 110,

152 Supplementary cost see Fixed cost Supply

aggregate 197-201,203-7,236,258--62,269,272, 319, 359, 365

curve, construction of 12, 92-3 elasticity of 30-3, 147, 149-51, 344-5 law of 21-3

Supply-side economics 359 Supply-side policies, in UK Ch. 37

T Takeovers 70, 99-100 Tariffs 95, 290, 294, 296-7 Tax and Price Index 247, 253 Taxation

economic effects of 340, 363, 365 and economic rent 151 and flow of income 183 and inflation see Fiscal drag reform of 363, 365--6

Technical economies 68

INDEX 399

Terms of trade 280, 283 Trade restrictions see Protection Trade unions

reform of 360 and wages 146, 148, 154, 267

Trades Union Congress 154 Training 203, 361-3 Transactions demand for money 232, 236-7, 239-

40 Transfer earnings 149-50, 152 Transfer payments 158, 161, 163-4, 169 Treasury bills 214-15, 219-21, 223, 227-9, 232 Trusthouse Forte 364-5

u Underground economy see Black economy Unemployment 158, 166, 247, 273-4, 276-7

and inflation 255, 258-68 insider and outsider, theory of 360 measurement of 17, 18 and minimum wage legislation 360 natural rate of 259, 262-4, 268, 271-3, 275, 277 trap 342-3, 365 and wages 360

Uruguay Round (GATT) 30, 299 Utility 51-2, 59-63, 341

v Value Added Tax 201, 252, 268, 336, 338-41 Value judgements 10

Value of money see Inflation Variable costs 7 4, 92 Variable proportions 75 Veblen goods 55-7 Velocity of circulation 255, 257-8 Vertical integration 70 Visible trade 303, 306 Voluntary export restraints (VERs) 291, 297-8,

300

w VVages 161, 199, 204-6, 271

differentials 7, 144-8 flexibility of 364-5 and incomes policy 356-7 and inflation 258--9, 275

VV ealth 152-3 VVhite, M. 371-2 VVorking population 123-4 VVorld Bank see International Bank for

Reconstruction and Development

X X-inefficiency 70

y

Yield curve 243-4 Youth Training Scheme (YTS) 361