Absolute advantage: A country has an absolute advantage if its
output per unit of input of all goods and services produced is higher than that
of another country.

Ad valorem taxin Latin: to the value added) - a tax based on the value
(or assessed value) of property.

Aggregate demand is the sum of all demand in an economy. This can
be computed by adding the expenditure on consumer goods and services,
investment, and not exports (total exports minus total imports).

Aggregate supply is the total value of the goods and services
produced in a country, plus the value of imported goods less the value of

Alternative minimum tax: An IRS mechanism created to ensure
that high-income individuals, corporations, trusts, and estates pay at least
some minimum amount of tax, regardless of deductions, credits or exemptions. It
operates by adding certain tax-preference items back into adjusted gross
income. While it was once only important for a small number of high-income
individuals who made extensive use of tax shelters and deductions, more and
more people are being affected by it. The AMT is triggered when there are large
numbers of personal exemptions on state and local taxes paid, large numbers of
miscellaneous itemized deductions or medical expenses, or by Incentive Stock Option
(ISO) plans.

Asset: Anything of monetary value that is owned by a person. Assets
include real property, personal property, and enforceable claims against others
(including bank accounts, stocks, mutual funds, and so on).

Average propensity to consume is the proportion of income the
average family spends on goods and services.

Average propensity to save is the proportion of income the average
family saves (does not spend on consumption).

Average total cost is the sum of all the production costs divided
by the number of units produced.

Balance of trade: The difference in value over a period of time
between a country's imports and exports.

Barter system: System where there is an exchange goods without
involving money.

Base year: In the construction of an index, the year from which the
weights assigned to the different components of the index is drawn. It is
conventional to set the value of an index in its base year equal to 100.

Bear: An investor with a pessimistic market outlook; an investor
who expects prices to fall and so sells now in order to buy later at a lower

Bid price: The highest price an investor is willing to pay for a

Bill of exchange: A written, dated, and signed three-party
instrument containing an unconditional order by a drawer that directs a drawee
to pay a definite sum of money to a payee on demand or at a specified future
date. Also known as a draft. It is the most commonly used financial instrument in
international trade.

Birth rate: The number of births in a year per 1,000 population.

Bond: A certificate of debt (usually interest-bearing or
discounted) that is issued by a government or corporation in order to raise
money; the issuer is required to pay a fixed sum annually until maturity and
then a fixed sum to repay the principal.

Boom: A state of economic prosperity

Break even: This is a term used to describe a point at which
revenues equal costs (fixed and variable).

Bretton Woods: An international monetary system operating from
1946-1973. The value of the dollar was fixed in terms of gold, and every other
country held its currency at a fixed exchange rate against the dollar; when
trade deficits occurred, the central bank of the deficit country financed the
deficit with its reserves of international currencies. The Bretton Woods system
collapsed in 1971 when the US abandoned the gold standard.

Budget: A summary of intended expenditures along with proposals for
how to meet them. A budget can provide guidelines for managing future
investments and expenses.

Budget deficit is the amount by which government spending exceeds
government revenues during a specified period of time usually a year.

Bull: An investor with an optimistic market outlook; an investor
who expects prices to rise and so buys now for resale later

c.i.f., abbrev: Cost, Insurance and Freight: Export term in which the
price quoted by the exporter includes the costs of ocean transportation to the
port of destination and insurance coverage.

Call money: Price paid by an investor for a call option. There is
no fixed rate for call money. It depends on the type of stock, its performance
prior to the purchase of the call option, and the period of the contract. It is
an interest bearing band deposits that can be withdrawn on 24 hours notice.

Capital: Wealth in the form of money or property owned by a person
or business and human resources of economic value. Capital is the contribution
to productive activity made by investment is physical capital (machinery,
factories, tools and equipments) and human capital (eg general education,
health). Capital is one of the three main factors of production other two are
labour and natural resources.

Capital account; Part of a nation's balance of payments that includes
purchases and sales of assets, such as stocks, bonds, and land. A nation has a
capital account surplus when receipts from asset sales exceed payments for the
country's purchases of foreign assets. The sum of the capital and current
accounts is the overall balance of payments.

Capital budget: A plan of proposed capital outlays and the means of
financing them for the current fiscal period. It is usually a part of the
current budget. If a Capital Program is in operation, it will be the first year
thereof. A Capital Program is sometimes referred to as a Capital Budget.

Capital gain tax: Tax paid on the gain realized upon the sale of an
asset. It is a tax on profits from the sale of capital assets, such as shares.
A capital loss can be used to offset a capital gain, reducing any tax you would
otherwise have to pay.

Cartel: An organization of producers seeking to limit or eliminate
competition among its members, most often by agreeing to restrict output to
keep prices higher than would occur under competitive conditions. Cartels are
inherently unstable because of the potential for producers to defect from the
agreement and capture larger markets by selling at lower prices.

Census: Official gathering of information about the population in a
particular area. Government departments use the data collected in planning for
the future in such areas as health, education, transport, and housing..

Central bank: Major financial institution responsible for issuing
currency, managing foreign reserves, implementing monetary policy, and
providing banking services to the government and commercial banks.

Centrally planned economy: An economic system in which the
production, pricing, and distribution of goods and services are determined by
the government rather than market forces. Also referred to as a "non
market economy." Former Soviet Union, China, and most other communist
nations are examples of centrally planed economy

Classical economics: The economics of Adam Smith, David Ricardo,
Thomas Malthus, and later followers such as John Stuart Mill. The theory
concentrated on the functioning of a market economy, spelling out a rudimentary
explanation of consumer and producer behaviour in particular markets and
postulating that in the long term the economy would tend to operate at full
employment because increases in supply would create corresponding increases in

Closed economy: An economy in which there are no foreign trade
transactions or any other form of economic contacts with the rest of the world.

Collateral security: Additional security a borrower supplies to
obtain a loan.

Commercial Policy: encompassing instruments of trade protection
employed by countries to foster industrial promotion, export diversification,
employment creation, and other desired development-oriented strategies. They
include tariffs, quotas, and subsidies.

Comparative advantage: The ability to produce a good at a lower
cost, relative to other goods, compared to another country. With perfect
competition and undistorted markets, countries tend to export goods in which
they have a Comparative Advantage and hence make gains from trading

Compound interest: Interest paid on the original principal and on
interest accrued from time it became due.

Conditionality: The requirement imposed by the International
Monetary Fund that a borrowing country undertake fiscal, monetary, and
international commercial reforms as a condition to receiving a loan for balance
of payments difficulties.

Copyright: A legal right (usually of the author or composer or
publisher of a work) to exclusive publication production, sale, distribution of
some work. What is protected by the copyright is the "expression,"
not the idea. Notice that taking another's idea is plagiarism, so copyrights are
not the equivalent of legal prohibition of plagiarism.

Correlation coefficient: Denoted as "r", a measure of the
linear relationship between two variables. The absolute value of "r"
provides an indication of the strength of the relationship. The value of
"r" varies between positive 1 and negative 1, with -1 or 1 indicating
a perfect linear relationship, and r = 0 indicating no relationship. The sign
of the correlation coefficient indicates whether the slope of the line is
positive or negative when the two variables are plotted in a scatter plot.

Cost benefit analysis: A technique that assesses projects through a
comparison between their costs and benefits, including social costs and
benefits for an entire region or country. Depending on the project objectives
and its the expected outputs, three types of CBA are generally recognised:
financial; economic; and social. Generally cost-benefit analyses are
comparative, i.e. they are used to compare alternative proposals. Cost-benefit
analysis compares the costs and benefits of the situation with and without the
project; the costs and benefits are considered over the life of the project.

Countervailing duties: duties (tariffs) that are imposed by a
country to counteract subsidies provided to a foreign producer Current account:
Part of a nation's balance of payments which includes the value of all goods
and services imported and exported, as well as the payment and receipt of
dividends and interest. A nation has a current account surplus if exports
exceed imports plus net transfers to foreigners. The sum of the current and
capital accounts is the overall balance of payments.

Cross elasticity of demand: The change in the quantity demanded of
one product or service impacting the change in demand for another product or
service. E.g. percentage change in the quantity demanded of a good divided by
the percentage change in the price of another good (a substitute or complement)

Cross elasticity of demand: The change in the quantity demanded of
one product or service impacting the change in demand for another product or
service. E.g. percentage change in the quantity demanded of a good divided by
the percentage change in the price of another good (a substitute or complement)

Crowding out: The possible tendency for government spending on
goods and services to put upward pressure on interest rates, thereby
discouraging private investment spending.

Currency appreciation: An increase in the value of one currency
relative to another currency. Appreciation occurs when, because of a change in
exchange rates; a unit of one currency buys more units of another currency.
Opposite is the case with currency depreciation.

Currency board: Form of central bank that issues domestic currency
for foreign exchange at fixed rates.

Currency substitution: The use of foreign currency (e.g., U.S.
dollars) as a medium of exchange in place of or along with the local currency
(e.g., Rupees).

Customs duty: Duty levied on the imports of certain goods. Includes
excise equivalents Unlike tariffs customs duties are used mainly as a means to
raise revenue for the government rather than protecting domestic producers from
foreign competition.

Death rate: numbers of people dying per thousand population.

Deflation: a reduction in the level of national income and output,
usually accompanied by a fall in the general price level.

Developed country is an economically advanced country whose economy
is characterized by a large industrial and service sector and high levels of
income per head.

Developing country, less developed country, underdeveloped country or
third world country: a country characterized by low levels of GDP and per
capita income; typically dominated by agriculture and mineral products and
majority of the population lives near subsistence levels.

Dumping occurs when goods are exported at a price less than their normal value,
generally meaning they are exported for less than they are sold in the domestic
market or third country markets, or at less than production cost.

Direct investment: Foreign capital inflow in the form of investment
by foreign-based companies into domestic based companies. Portfolio investment
is foreign capital inflow by foreign investors into shares and financial
securities. It is the ownership and management of production and/or marketing
facilities in a foreign country.

Direct tax: A tax that you pay directly, as opposed to indirect
taxes, such as tariffs and business taxes. The income tax is a direct tax, as
are property taxes. See also Indirect Tax.

Double taxation: Corporate earnings taxed at both the corporate
level and again as a stockholder dividend Economic growth: Quantitative measure
of the change in size/volume of economic activity, usually calculated in terms
of gross national product (GNP) or gross domestic product(GDP).

Duopoly: A market structure in which two producers of a commodity
compete with each other.

Econometrics: The application of statistical and mathematical
methods in the field of economics to test and quantify economic theories and
the solutions to economic problems.

Economic development: The process of improving the quality of human
life through increasing per capita income, reducing poverty, and enhancing
individual economic opportunities. It is also sometimes defined to include
better education, improved health and nutrition, conservation of natural
resources, a cleaner environment, and a richer cultural life.

Economic growth: An increase in the nation's capacity to produce
goods and services.

Economic infrastructure: The underlying amount of physical and
financial capital embodied in roads, railways, waterways, airways, and other
forms of transportation and communication plus water supplies, financial
institutions, electricity, and public services such as health and education.
The level of infrastructural development in a country is a crucial factor
determining the pace and diversity of economic development.

Economic integration: The merging to various degrees of the
economies and economic policies of two or more countries in a given region. See
also common market, customs union, free-trade area, trade creation, and trade

Economic policy: A statement of objectives and the methods of
achieving these objectives (policy instruments) by government, political party,
business concern, etc. Some examples of government economic objectives are
maintaining full employment, achieving a high rate of economic growth, reducing
income inequalities and regional development inequalities, and maintaining
price stability. Policy instruments include fiscal policy, monetary and
financial policy, and legislative controls (e.g., price and wage control, rent

Elasticity of demand: The degree to which consumer demand for a
product or service responds to a change in price, wage or other independent
variable. When there is no perceptible response, demand is said to be

Excess capacity: Volume or capacity over and above that which is
needed to meet peak planned or expected demand.

Excess demand: the situation in which the quantity demanded at a
given price exceeds the quantity supplied. Opposite: excess supply

Exchange control: A governmental policy designed to restrict the
outflow of domestic currency and prevent a worsened balance of payments
position by controlling the amount of foreign exchange that can be obtained or
held by domestic citizens. Often results from overvalued exchange rates

Exchange rate: The price of one currency stated in terms of another

Export incentives: Public subsidies, tax rebates, and other kinds
of financial and nonfinancial measures designed to promote a greater level of
economic activity in export industries.

Exports: The value of all goods and nonfactor services sold to the
rest of the world; they include merchandise, freight, insurance, travel, and
other nonfactor services. The value of factor services (such as investment
receipts and workers' remittances from abroad) is excluded from this measure.
See also merchandise exports and imports.

Exchange control A governmental policy designed to restrict the
outflow of domestic currency and prevent a worsened balance of payments
position by controlling the amount of foreign exchange that can be obtained or
held by domestic citizens. Often results from overvalued exchange rates.

Externalities: A cost or benefit not accounted for in the price of
goods or services. Often "externality" refers to the cost of
pollution and other environmental impacts.

Fiscal deficit is the gap between the government's total spending
and the sum of its revenue receipts and non-debt capital receipts. It
represents the total amount of borrowed funds required by the government to
completely meet its expenditure

Fiscal policy is the use of government expenditure and taxation to
try to influence the level of economic activity. An expansionary (or
reflationary) fiscal policy could mean: cutting levels of direct or indirect
tax increasing government expenditure The effect of these policies would be to
encourage more spending and boost the economy. A contractionary (or
deflationary) fiscal policy could be: increasing taxation - either direct or
indirect cutting government expenditure These policies would reduce the level
of demand in the economy and help to reduce inflation

Fixed costs: A cost incurred in the general operations of the
business that is not directly attributable to the costs of producing goods and
services. These "Fixed" or "Indirect" costs of doing
business will be incurred whether or not any sales are made during the period,
thus the designation "Fixed", as opposed to "Variable".

Fixed exchange rate: The exchange value of a national currency
fixed in relation to another (usually the U.S. dollar), not free to fluctuate
on the international money market.

Foreign aid The international transfer of public funds in the form
of loans or grants either directly from one government to another (bilateral
assistance) or indirectly through the vehicle of a multilateral assistance
agency like the World Bank. See also tied aid, private foreign investment, and
nongovernmental organizations.

Foreign direct investment (FDI): Overseas investments by private
multinational corporations.

Foreign exchange reserves: The stock of liquid assets denominated
in foreign currencies held by a government's monetary authorities (typically,
the finance ministry or central bank). Reserves enable the monetary authorities
to intervene in foreign exchange markets to affect the exchange value of their
domestic currency in the market. Reserves are invested in low-risk and liquid
assets, often in foreign government securities.

Free trade: Trade in which goods can be imported and exported
without any barriers in the forms of tariffs, quotas, or other restrictions.
Free trade has often been described as an engine of growth because it
encourages countries to specialize in activities in which they have comparative
advantages, thereby increasing their respective production efficiencies and
hence their total output of goods and services.

Free-trade area A form of economic integration in which there
exists free internal trade among member countries but each member is free to
levy different external tariffs against non-member nations.

Free-market exchange rate Rate determined solely by international
supply and demand for domestic currency expressed in terms of, say, U.S.

Fringe benefit: A benefit in addition to salary offered to
employees such as use of company's car, house, lunch coupons, health care
subscriptions etc.

Gains from trade The addition to output and consumption resulting
from specialization in production and free trade with other economic units
including persons, regions, or countries.

General Agreement on Tariffs and Trade (GATT) An international body
set up in 1947 to probe into the ways and means of reducing tariffs on
internationally traded goods and services. Between 1947 and 1962, GATT held
seven conferences but met with only moderate success. Its major success was
achieved in 1967 during the so-called Kennedy Round of talks when tariffs on
primary commodities were drastically slashed and then in 1994 with the signing
of the Uruguay Round agreement. Replaced in 1995 by World Trade Organization

Global warming Theory that world climate is slowly warming as a
result of both MDC and LDC industrial and agricultural activities.

Gross domestic product: (GDP) Gross Domestic Product: The total of
goods and services produced by a nation over a given period, usually 1 year.
Gross Domestic Product measures the total output from all the resources located
in a country, wherever the owners of the resources live.

Gross national product (GNP) is the value of all final goods and
services produced within a nation in a given year, plus income earned by its
citizens abroad, minus income earned by foreigners from domestic production.
The Fact book, following current practice, uses GDP rather than GNP to measure
national production. However, the user must realize that in certain countries
net remittances from citizens working abroad may be important to national well
being. GNP equals GDP plus net property income from abroad. Globalisation: The
process whereby trade is now being conducted on ever widening geographical
boundaries. Countries now trade across continents and companies also trade all
over the world.

Human capital Productive investments embodied in human persons.
These include skills, abilities, ideals, and health resulting from expenditures
on education, on-the-job training programs, and medical care.

Imperfect competition A market situation or structure in which
producers have some degree of control over the price of their product. Examples
include monopoly and oligopoly. See also perfect competition.

Imperfect market A market where the theoretical assumptions of
perfect competition are violated by the existence of, for example, a small
number of buyers and sellers, barriers to entry, nonhomogeneity of products,
and incomplete information. The three imperfect markets commonly analyzed in
economic theory are monopoly, oligopoly, and monopolistic competition.

Import substitution A deliberate effort to replace major consumer
imports by promoting the emergence and expansion of domestic industries such as
textiles, shoes, and household appliances. Import substitution requires the
imposition of protective tariffs and quotas to get the new industry started.

Income inequality The existence of disproportionate distribution of
total national income among households whereby the share going to rich persons
in a country is far greater than that going to poorer persons (a situation
common to most LDCs). This is largely due to differences in the amount of
income derived from ownership of property and to a lesser extent the result of
differences in earned income. Inequality of personal incomes can be reduced by
progressive income taxes and wealth taxes.

Index of industrial production: A quantity index that is designed
to measure changes in the physical volume or production levels of industrial
goods over time.

Inflation is the percentage increase in the prices of goods and

Indirect tax: A tax you do not pay directly, but which is passed on
to you by an increase in your expenses. For instance, a company might have to
pay a fuel tax. The company pays the tax but can increase the cost of its
products so consumers are actually paying the tax indirectly by paying more for
the merchandise.

Interdependence Interrelationship between economic and noneconomic
variables. Also, in international affairs, the situation in which one nation's
welfare depends to varying degrees on the decisions and policies of another
nation, and vice versa. See also dependence.

International commodity agreement Formal agreement by sellers of a
common internationally traded commodity (coffee, sugar) to coordinate supply to
maintain price stability.

International Labor Organization (ILO) One of the functional
organizations of the United Nations, based in Geneva, Switzerland, whose
central task is to look into problems of world labor supply, its training, utilization,
domestic and international distribution, etc. Its aim in this endeavor is to
increase world output through maximum utilization of available human resources
and thus improve levels of living.

International Monetary Fund (IMF) An autonomous international
financial institution that originated in the Bretton Woods Conference of 1944.
Its main purpose is to regulate the international monetary exchange system,
which also stems from that conference but has since been modified. In
particular, one of the central tasks of the IMF is to control fluctuations in
exchange rates of world currencies in a bid to alleviate severe balance of
payments problems.

International poverty line An arbitrary international real income
measure, usually expressed in constant dollars (e.g., $270), used as a basis
for estimating the proportion of the world's population that exists at bare
levels of subsistence.

Land reform A deliberate attempt to reorganize and transform
existing agrarian systems with the intention of improving the distribution of
agricultural incomes and thus fostering rural development. Among its many
forms, land reform may entail provision of secured tenure rights to the
individual farmer, transfer of land ownership away from small classes of
powerful landowners to tenants who actually till the land, appropriation of
land estates for establishing small new settlement farms, or instituting land
improvements and irrigation schemes.

Macroeconomic stabilization Policies designed to eliminate
macroeconomic instability.

Macroeconomics The branch of economics that considers the
relationships among broad economic aggregates such as national income, total
volumes of saving, investment, consumption expenditure, employment, and money
supply. It is also concerned with determinants of the magnitudes of these
aggregates and their rates of change over time.

Market economy A free private-enterprise economy governed by
consumer sovereignty, a price system, and the forces of supply and demand.

Market failure A phenomenon that results from the existence of
market imperfections (e.g., monopoly power, lack of factor mobility,
significant externalities, lack of knowledge) that weaken the functioning of a
free-market economy--it fails to realize its theoretical beneficial results.
Market failure often provides the justification for government interference
with the working of the free market.

Market-friendly approach: World Bank notion that successful
development policy requires governments to create an environment in which
markets can operate efficiently and to intervene selectively in the economy in
areas where the market is inefficient (e.g., social and economic
infrastructure, investment coordination, economic "safety net").

Market mechanism: The system whereby prices of commodities or
services freely rise or fall when the buyer's demand for them rises or falls or
the seller's supply of them decreases or increases.

Market prices: Prices established by demand and supply in a free-market

Merchandise exports and imports: All international changes in
ownership of merchandise passing across the customs borders of the trading
countries. Exports are valued f.o.b. (free on board). Imports are valued c.i.f.
(cost, insurance, and freight).

Merchandise trade balance: Balance on commodity exports and

Microeconomics: The branch of economics concerned with individual
decision units--firms and households--and the way in which their decisions
interact to determine relative prices of goods and factors of production and
how much of these will be bought and sold. The market is the central concept in

Middle-income countries (MICs): LDCs with per capita income above
$785 and below $9,655 in 1997 according to World Bank measures.

Mixed economic systems: Economic systems that are a mixture of both
capitalist and socialist economies. Most developing countries have mixed
systems. Their essential feature is the coexistence of substantial private and
public activity within a single economy.

Monetary policy: The regulation of the money supply and interest
rates by a central bank in order to control inflation and stabilize currency.
If the economy is heating up, the central bank (such as RBI in India) can
withdraw money from the banking system, raise the reserve requirement or raise
the discount rate to make it cool down. If growth is slowing, it can reverse
the process - increase the money supply, lower the reserve requirement and
decrease the discount rate. The monetary policy influences interest rates and
money supply.

Money supply: the total stock of money in the economy; currency
held by the public plus money in accounts in banks. It consists primarily
currency in circulation and deposits in savings and checking accounts. Too much
money in relation to the output of goods tends to push interest rates down and
push inflation up; too little money tends to push rates up and prices down,
causing unemployment and idle plant capacity. The central bank manages the
money supply by raising and lowering the reserves banks are required to hold
and the discount rate at which they can borrow money from the central bank. The
central bank also trades government securities (called repurchase agreements)
to take money out of the system or put it in. There are various measures of
money supply, including M1, M2, M3 and L; these are referred to as monetary

Monopoly A market situation in which a product that does not have
close substitutes is being produced and sold by a single seller.

Multi-Fiber Arrangement (MFA) A set of nontariff bilateral quotas
established by developed countries on imports of cotton, wool, and synthetic
textiles and clothing from individual LDCs

Multinational corporation (MNC) An international or transnational
corporation with headquarters in one country but branch offices in a wide range
of both developed and developing countries. Examples include General Motors,
Coca-Cola, Firestone, Philips, Volkswagen, British Petroleum, Exxon, and ITT.
Firms become multinational corporations when they perceive advantages to
establishing production and other activities in foreign locations. Firms
globalize their activities both to supply their home-country market more
cheaply and to serve foreign markets more directly. Keeping foreign activities
within the corporate structure lets firms avoid the costs inherent in
arm's-length dealings with separate entities while utilizing their own
firm-specific knowledge such as advanced production techniques.

National debt: Treasury bills, notes, bonds, and other debt
obligations that constitute the debt owed by the federal government. It
represents the accumulation of each year's budget deficit Public debt:
Borrowing by the Government of India internally as well as externally. The
total of the nation's debts: debts of local and state and national governments
is an indicator of how much public spending is financed by borrowing instead of

Newly industrializing countries (NICs) A small group of countries
at a relatively advanced level of economic development with a substantial and
dynamic industrial sector and with close links to the international trade,
finance, and investment system (Argentina, Brazil, Greece, Mexico, Portugal,
Singapore, South Korea, Spain, and Taiwan).

Nongovernmental organizations (NGOs) Privately owned and operated
organizations involved in providing financial and technical assistance to LDCs.
See foreign aid.

Nontariff trade barrier: A barrier to free trade that takes a form
other than a tariff, such as quotas or sanitary requirements for imported meats
and dairy products.

Official development assistance (ODA) Net disbursements of loans or
grants made on concessional terms by official agencies of member countries of
the Organization for Economic Cooperation and Development (OECD).

Official exchange rate: Rate at which the central bank will buy and
sell the domestic currency in terms of a foreign currency such as the U.S.

Open economy An economy that encourages foreign trade and has
extensive financial and nonfinancial contacts with the rest of the world in
areas such as education, culture, and technology. See also closed economy.

Organization for Economic Cooperation and Development (OECD):An
organization of 20 countries from the Western world including all of those in
Europe and North America. Its major objective is to assist the economic growth
of its member nations by promoting cooperation and technical analysis of
national and international economic trends.

Overvalued exchange rate An official exchange rate set at a level
higher than its real or shadow value--for example, 7 Kenyan shillings per
dollar instead of, say, 10 shillings per dollar. Overvalued rates cheapen the
real cost of imports while raising the real cost of exports. They often lead to
a need for exchange control.

Perfect competition A market situation characterized by the
existence of very many buyers and sellers of homogeneous goods or services with
perfect knowledge and free entry so that no single buyer or seller can
influence the price of the good or service.

Performance budget is a budget format that relates the input of
resources and the output of services for each organizational unit individually.
Sometimes used synonymously with program budget. It is a budget wherein
expenditures are based primarily upon measurable performance of activities.

Political economy The attempt to merge economic analysis with
practical politics--to view economic activity in its political context. Much of
classical economics was political economy, and today political economy is
increasingly being recognized as necessary for any realistic examination of
development problems.

Portfolio investment Financial investments by private individuals,
corporations, pension funds, and mutual funds in stocks, bonds, certificates of
deposit, and notes issued by private companies and the public agencies of LDCs.
See also private foreign investment.

Poverty gap: The sum of the difference between the poverty line and
actual income levels of all people living below that line.

Poverty line: A level of income below, which people are deemed
poor. A global poverty line of $1 per person per day was suggested in 1990
(World Bank 1990). This line facilitates comparison of how many poor people
there are in different countries. But, it is only a crude estimate because the
line does not recognize differences in the buying power of money in different
countries, and, more significantly, because it does not recognize other aspects
of poverty than the material, or income poverty.

Price: The monetary or real value of a resource, commodity, or
service. The role of prices in a market economy is to ration or allocate
resources in accordance with supply and demand; relative prices should reflect
the relative scarcity of different resources, goods, or services.

Price elasticity of demand: The responsiveness of the quantity of a
commodity demanded to a change in its price, expressed as the percentage change
in quantity demanded divided by the percentage change in price.

Price elasticity of supply: The responsiveness of the quantity of a
commodity supplied to a change in its price, expressed as the percentage change
in quantity supplied divided by the percentage change in price.

Quota: A physical limitation on the quantity of any item that can
be imported into a country, such as so many automobiles per year. Also a method
for allocating limited school places by noncompetitive means--for example, by
income or ethnicity.

Repo rate: This is one of the credit management tools used by the
Reserve Bank to regulate liquidity in South Africa (customer spending). The
bank borrows money from the Reserve Bank to cover its shortfall. The Reserve
Bank only makes a certain amount of money available and this determines the
repo rate. If the bank requires more money than what is available, this will
increase the repo rate - and vice versa.

Revenue expenditure: This is expenditure on recurring items,
including the running of services and financing capital spending that is paid
for by borrowing. This is meant for normal running of governments' maintenance
expenditures, interest payments, subsidies and transfers etc. It is current
expenditure which does not result in the creation of assets. Grants given to
State governments or other parties are also treated as revenue expenditure even
if some of the grants may be meant for creating assets. Subsidy : Financial
assistance (often from the government) to a specific group of producers or

Revenue receipts: Additions to assets that do not incur an
obligation that must be met at some future date and do not represent exchanges
of property for money. Assets must be available for expenditures. These include
proceeds of taxes and duties levied by the government, interest and dividend on
investments made by the government, fees and other receipts for services
rendered by the government.

Stabilization policies: A coordinated set of mostly restrictive
fiscal and monetary policies aimed at reducing inflation, cutting budget
deficits, and improving the balance of payments. See conditionality and
International Monetary Fund (IMF).

Subsidy: A payment by the government to producers or distributors
in an industry to prevent the decline of that industry (e.g., as a result of
continuous unprofitable operations) or an increase in the prices of its
products or simply to encourage it to hire more labor (as in the case of a wage
subsidy). Examples are export subsidies to encourage the sale of exports;
subsidies on some foodstuffs to keep down the cost of living, especially in
urban areas; and farm subsidies to encourage expansion of farm production and
achieve self-reliance in food production.

Tax avoidance: A legal action designed to reduce or eliminate the
taxes that one owes.

Tax base: the total property and resources subject to taxation.

Tax evasion: An illegal strategy to decrease tax burden by
underreporting income, overstating deductions, or using illegal tax shelters.

Terms of trade The ratio of a country's average export price to its
average import price; also known as the commodity terms of trade. A country's
terms of trade are said to improve when this ratio increases and to worsen when
it decreases, that is, when import prices rise at a relatively faster rate than
export prices (the experience of most LDCs in recent decades).

Treasury bill: A short-term debt issued by a national government
with a maximum maturity of one year. Treasury bills are sold at discount, such
that the difference between purchase price and the value at maturity is the
amount of interest.

VAT: A form of indirect sales tax paid on products and services at
each stage of production or distribution, based on the value added at that
stage and included in the cost to the ultimate customer.

World Bank: An international financial institution owned by its 181
member countries and based in Washington, D.C. Its main objective is to provide
development funds to the Third World nations in the form of interest-bearing
loans and technical assistance. The World Bank operates with borrowed funds.

WTO: The World Trade Organization is a global international
organization dealing with the rules of trade between nations. It was set up in
1995 at the conclusion of GATT negotiations for administering multilateral
trade negotiations.

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