Workshop on economic termsWorkshop on economic terms

a) Gross Domestic Product (GDP)a) Gross Domestic Product (GDP)

A measure of the value of all goods and services produced by the economy. Unlike gross national product (GNP), GDP includes the values of good and services earned by a nation within is boundaries.

Thus, it includes only the income derived from factories and businesses within the country (and not without).

b) Gross Domestic Product (GDP) b) Gross Domestic Product (GDP)

For example, when General Motors British unit repatriates dividends, profits, or interest on loans, the money is counted as part of US GNP, whereas British GM profit is not included in US GDP.

GDP is regarded as a better measure of how the whole economy is doing and also permits international comparison.

Gross National Product (GNP)Gross National Product (GNP)

A measure of the value of all goods and services produced in the economy and is the nation’s broadest gauge of economic health.

Balance of tradeBalance of trade

The part of a nation’s balance of payments that deals with merchandise (or visible) imports or exports.

When “invisibles”, or services, are included, the total accounting for imports and exports of goods and services is called the balance on current account.

Balance of international paymentsBalance of international payments

A statement showing all a nation’s transactions with the rest of the world for a given period.

It includes purchases and sales of goods and services, gifts, government transactions, and capital movements.

Antidumping lawAntidumping law

Statute that sets a minimum price on an import. If the import enters the country at a price below the minimum, the law prompts a government probe of possible dumping.

AntitrustAntitrust

Legislation aimed at prohibiting monopolies, restraints of trade, price fixing and discrimination, exorbitant quality discounts to large buyers, and conspiracies to suppress competition.

Free trade areaFree trade area

A free trade area exists when two or more states (normally, but not necessarly contiguous) agree to remove all restrictions on trade between them, but continue to make individual arrangements for their trade with countries not party to the free trade agreement.

Under World Trade Organization (WTO) rules, a free trade area must cover at least 90 per cent of participating states’ trade.

Customs UnionCustoms UnionA customs union is a territory within which there are

no internal barriers to the free movement of goods and in respect of which a single set of rules, tariff, quotas, etc. is applied to goods entering the territory from outside. (Common External Tariff)

A customs union is recognized as a “regional trading arrangement” under the World Trade Organization (WTO) Agreement, and the members of a customs union are exempt from the requirement to accord “most favoured nation” treatment to non-members.

Common MarketCommon Market

A common market is a customs union within which the free movement of goods, service, capital and labour is guaranted (also Single Market).

See the European Economic Community (EEC).

Interest rateInterest rateA rate, typically stated as a percentage per year,

charged on money borrowed or lent. It is the cost to use credit or money.

It is determined by supply and demand for credit or available for borrowing.

There are different kinds of interest rates such as the prime interest rate which is the rate banks charge their most financially sound corporate borrowers.

The federal discount ratefederal discount rate is the rate the Federal Reserve Banks charges its members banks for overnight loans.

Foreign exchange rateForeign exchange rate

The rate, or price, at which one country’s currency is exchanged for the currency of another country.

For example, if one British pound costs $ 1.25, then the exchange rate for the pound is $ 1.25.

A country has a fixed exchange rate, and then stands ready to defend that rate. An exchange rate which is not fixed is said to “float”.

Foreign direct investment (FDI)Foreign direct investment (FDI)

Investment that involves ownership of a company in a foreign country.

In exchange for the ownership, the investing company usually transfers some of its financial, managerial, technical, trade-mark, and other resources to the foreign country.

It is distinguished from foreign portfolio investment.

Money supply

• The level of funds available at a given time for conducting transactions in an economy. The Federal Reserve System can influence the money supply through its monetary policy measures. There are many definitions of the money supply.

Floating exchange rate

A situation in which a country’s foreign exchange rate is determined entirely by the market – by the forces

of supply and demand – without intervention by central banks or

governments. The result is usually much greater fluctuations in exchange rates than

under a fixed exchange rate.

Adjustable peg system

• An exchange-rate system in which the exchange rates between currencies are fixed or “pegged” at particular values, but which can be adjusted when they become too far out of line with fundamental forces.

Currency depreciation

• A fall in the exchange rate of one currency in terms of other currencies under a system of floating exchanges rates. This is in contrast with devaluation, which denotes a lowering of fixed rates of exchange.

Inflation• A general rise in the price level. When inflation is

present, a dollar today can buy more than a dollar in the future.

• Although the causes of inflation are diverse, a frequent source of inflationary pressures is the excess demand for good and services which pulls product prices upward – demand-pull inflation.

• Rising wages and material costs may lead to the upward pressure on price – cost-push inflation.

• Furthermore, excessive spending and/or heavy borrowing due to a budget deficit by the federal government can be inflationary.

Deflation

• A general decrease in prices. It is the opposite of inflation and distinguished from disinflation, which is a reduction in the rate of price increases. Deflation is caused by a deflation policy whose tools include fiscal measures such as tax increases and monetary measures such as high interest rates.

Depression

• A prolonged period during which unemployment is unusually high and plants are operating much below capacity. • “Depression” is said to have been used first by President Herbert Hoover around 1930, because it sounded less frightening than words such as “panic” or “crisis”. But the Great Depression of the 1930s gave that word ugly associations, and it was replaced by yet another euphemism, recession. • Today, a recession is usually defined as a period of at least two consecutive quarters during which real GNP declines.