Definition
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Answer
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A record of a country's trading and financial transactions with the rest of the world.
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The Balance of Payments
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Records the transfer of ownership of UK or foreign businesses between residents in different countries.
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Foreign Direct Investment
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Refers to financial flows between economies arising from the purchase and sale of financial assets such as shares and bonds.
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Portfolio Investment
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Refers to funds that flow between financial markets as investors seek to earn the highest possible returns.
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Hot Money
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Exists when inflows of currency recorded on the current account exceed outflows over some period of time.
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A Current Account Surplus
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Exists when inflows of currency recorded on the current account are smaller than outflows over some period of time.
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A Current Account Deficit
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Operates with the aim of diverting consumers' expenditure away from imports and towards domestically produced goods and services.
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Expenditure-switching Policies
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Policies designed to reduce aggregate demand in the economy and, with it, consumer spending on imports.
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Expenditure-reducing Policies
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An action by governments or other authorities implemented with the intention of reducing aggregate demand.
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A Deflationary Policy
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The proportion of a rise in income that is spent on imported products.
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The Marginal Propensity to Import
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States that currency devaluation will only lead to an improvement in the balance of trade element of the current account if the sum of the elasticities of demand for imports and exports is greater than one.
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The Marshall-Lerner Condition
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A part of the current account balance and measures the earnings from export minus expenditure on imports.
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The Balance of Trade
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The price of one currency expressed in terms of another.
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The Exchange Rate
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Exists when a currency is maintained at a stable value in relation to other currencies.
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A Fixed Exchange Rate
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Operates when a currency's value is determined in the free market through the interaction of the forces of supply and demand.
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A Floating Exchange Rate
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Shows how a single currency changes in value over time against a 'basket' of other currencies.
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A Trade-Weighted Index
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Exists when two or more countries use the same currency as well as a single monetary and foreign exchange policy.
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A Currency Union
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A country's GDP divided by the size of its population.
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Income Per Capita
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An exchange rate based on the cost of a common basket of goods and services in different countries.
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Purchasing Power Parity
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Contains those businesses that make direct use of natural resources such as minerals and land.
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The Primary Sector
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The knowledge and skills possessed by employees that contribute to their ability to create economic value.
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Human Capital
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The planned spending by firms that adds to an economy's capital stock.
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Investment
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The value of all physical assets used in production in the economy that are still in use, such as machinery, property and vehicles.
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Capital Stock
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Refers to the basic facilities available to a society, such as transport and communication links which support economic activity.
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Infrastructure
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Dishonest or fraudulent behaviour by those in authority and often takes the form of bribery or theft.
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Corruption
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Someone who benefits from a good or a service without paying for it.
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A Free Rider
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When one country can produce a good or service at a lower opportunity cost than another.
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Comparative Advantage
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The trend for many markets to become worldwide in scope.
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Globalisation
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States that the rate of economic growth depends upon an economy's level of savings and the productivity of its investment.
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The Harrod-Domar Model
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The voluntary transfer of financial or physical resources from one country or organisation to a recipient country. It is also called official development assistance (ODA).
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Foreign Aid
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The exchange of goods and services across national frontiers.
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International Trade
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