S-Cool Revision Summary

S-Cool Revision Summary

Absolute advantage

A country has an absolute advantage over another country in the production of a certain good if it can make a unit of that good at a lower cost in terms of resources used. The country in question is absolutely better at making the good. This does not mean that the country necessarily has a comparative advantage in the production of this good.

Buffer stock schemes

A Buffer stock scheme is one where, having set an 'intervention' price, the government will intervene and either buy excess stock or sell their excess stock in an attempt to keep the price around the intervention price. This occurs, in particular, in markets for agricultural products, where prices can be very variable depending on the quality and quantity of the harvest.

Ceteris paribus

This is a Latin phrase meaning 'all other things being equal'. It is used in economics because it would be difficult to assess the relationship between one variable and another without assuming that all other variables remain constant. It's a bit like having the 'control' in science experiments.

Circular flow of income

This is a diagram that shows all the resources, goods and services and money flowing around the economy. In equilibrium, any injections into the circular flow are matched by leakages out of the circular flow.

Common Agricultural Policy (CAP)

This is a policy of the European Union and is similar to a Buffer stock scheme. The EU tries to protect the incomes of European farmers by offering various subsidies so as to protect them from the fierce competition from abroad. The EU does not want to find itself in a situation where it relies on other countries for all its food requirements.

Comparative advantage

For a country to have a comparative advantage over another country in the production of a given good, it must be relatively better at making the good. A country might be absolutely better at making two specific goods, but it will be much better at making one of them and only a little bit better at making the other. The good that it is much better at making is the one in which this country has a comparative advantage.

Consumer surplus

This is the intangible benefit that consumers derive from the fact that the price some of them are willing and able to pay (represented by the demand curve) is higher that the price that they actually have to pay.

Customs union

A customs union is a group of countries that trade free of barriers between themselves but have a common external tariff for all countries trying to import into the customs union. The EU is a good example.

Dumping

This is where a firm may sell a product in another country at below cost price. The spare goods are being 'dumped' on the target country. Sometimes this is done, just to get rid of excess stock, but more sinisterly it is often done deliberately to force the domestic firms out of business and so increase future market share.

Economies of scale

Quite simply, this refers to 'economies' made by firms or industries as a result of increasing in 'scale'. In other words, as a firm gets bigger, its average cost tends to fall because of things like bulk buying, specialisation and spreading administrative costs.

Free trade

Free trade refers to a situation where countries trade with each other 'free' of trade barriers.

General Agreement on Tariffs and Trade (GATT)

The General Agreement on Tariffs and Trade (GATT) was formed at Bretton Woods (a small town in the USA) in 1948. Its aim was free trade throughout the world (free from import controls, that is). Tariffs averaged 50% just after the war. By the time that the GATT became the World Trade Organisation (WTO) in 1993, tariffs averaged 5% around the world. Whereas GATT was a series of long meetings between countries called 'rounds', the WTO is an on-going organisation to which countries can complain if they feel another country is obstructing the sale of their exports in an unfair way.

Income elasticity of demand

It measures the responsiveness of the quantity demanded to a given change in real income. It can be calculated by dividing the percentage change in the quantity demanded of a good by the percentage change in real income.

Index series

An index series is a set of numbers with no units that are used to measure the relative changes in a statistic from one time period to another. All of these 'numbers' are set against a base year, or base month, which is always 100. For example, the Retail Price Index (RPI) has no units. The percentage difference between each monthly 'number' and the last is the percentage change in the average price level for a given basket of goods and services.

Labour productivity

Labour productivity is the output per unit of labour. Sometimes it is measured in terms of output per man-hour. Productivity can also be measured in terms of factor inputs or capital.

Market structure

The structure of a market can range from the most competitive, perfect competition, to the least competitive, monopoly. Other factors that affect the structure of a market include the number of buyers and sellers, the level of barriers to entry and exit, the extent to which the goods produced are similar and the extent to which all the firms in the market share the same knowledge.

Monopoly

This is the least competitive form of market structure. A monopolist is the only firm in the industry, and so has total power. Monopolists tend to maximise profits to the detriment of efficiency.

Negative externality

An externality is a sort of 'by-product' of a certain production process, or of consuming something that affects a third party. Negative externalities are 'by-products' that impose costs on a third party. For example, pollution is an example of a negative by-product of a production process that will affect a third party (affluent pumped into a river that is used by fisherman, for example).

Non-tariff barriers

These are all trade barriers except the tariff. They include quotas, exchange controls and other bureaucratic barriers.

Opportunity cost

The opportunity cost is the sacrifice when an individual chooses one set of wants over another in the situation of scarce resources. The production possibility frontier illustrates this concept well. If an economy is on its PPF and wants more non-military goods (for example), it will have to give up the production of some military goods.

Perfect competition

This is the most competitive form of market structure. Firms in perfect competition have numerous characteristics (see the topic of 'Market structure' for details). It is felt that this is the most efficient of all the market structures. Unfortunately, it is also the most unrealistic!

Predatory pricing

As the title suggests, this is a pricing strategy used by firms to kill off other firms. The price is reduced to below cost price. The short term loss is considered worthwhile if the result is fewer firms in the industry. Once the firm in question has been forced out of the industry, the price rises back to the original level and market share should increase.

Producer surplus

This is effectively profit. If a producer has a surplus over and above his costs, then he is making profit. Diagrammatically, it is the area above the supply curve, below the price and to the right of the y-axis.

Production possibility frontier

This is a curve that tends to be convex to the origin and shows all the possible combinations of two mutually exclusive groups of goods (military and non-military goods, for example) where all the economy's resources are being used and in the most efficient way possible. It is important that both of those conditions are fulfilled for an economy to be in a situation on rather than within its PPF.

Protectionism

Those who believe in protectionism think that there are grounds for using trade barriers to 'protect' domestic industries. Examples include protecting domestic jobs, retaliating against dumping and the infant industry argument.

Quota

A quota is a physical limit on the amount of imports allowed into a country.

Retail Price Index (RPI)

The Retail Price Index (RPI) has no units. The percentage difference between each monthly 'number' and the last is the percentage change in the average price level for a given basket of goods and services. The RPI is a weighted average. The weights depend on the importance of each of the items in the basket. This, in turn, depends on the results of the Family Expenditure Survey taken each year. The headline rate of inflation for any given month is the percentage change of that month's RPI compared with the figure for the same month in the previous year.

Subsidies

These are payments made by the government to various firms to encourage them to set up in areas of high unemployment, or to continue producing essential goods. Farmers are given subsidies because they make important goods. A subsidy will shift a firm's supply curve to the right.

Tariff

This is the most famous of all trade barriers. It is a tax, or duty, imposed by the government on imported goods.

Terms of trade

Put simply, this is the 'terms' (or price) agreed for trade. In the context of a whole economy, it is often expressed as the ratio of export prices divided by import prices.

Trade barriers

Often sub-divided into tariff barriers and non-tariff barriers. All barriers are used to stop or discourage foreign competition in the form of imports.

Unit labour costs

As the title suggests, these are the labour costs per unit of output. If you take the total labour costs in terms of wages, salaries, sick pay, etc. and divide by the total output you will get the unit labour cost.

Voluntary Export Restraints (VER)

This is a variation on the quota. It is a limit on the amount of imports into a country (or exports from a country) but it is 'voluntary' in the sense that both countries agree on the numbers to be exported.

World Trade Organisation (WTO)

The General Agreement on Tariffs and Trade (GATT) was formed at Bretton Woods (a small town in the USA) in 1948. Its aim was free trade throughout the world (free from import controls, that is). Tariffs averaged 50% just after the war. By the time that the GATT became the WTO in 1993, tariffs averaged 5% around the world. Whereas GATT was a series of long meetings between countries called 'rounds', the WTO is an on-going organisation to which countries can complain if they feel another country is obstructing the sale of their exports in an unfair way.