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Absolute Advantage
When a producer can create a given amount of output with the smallest amount of inputs.
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Budget Deficit
When the government spends more money than it receives.
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Capital
Money, machinery, and education put toward a business to increase its productivity.
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Comparative Advantage
When a producer has a lower opportunity cost of production for an item than another producer's.
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Consumption
Goods and services purchased by consumers.
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Cost of living
The relative amount of money needed to maintain a given lifestyle.
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Exchange Rates
Numbers that tell how much foreign product can be purchased with similar domestic product.
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Exports
Goods sent to another country for sale.
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Free Trade
Trade with which the government does not interfere.
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Goods
Products that consumers, manufacturers, and governments exchange.
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Imports
Goods produced in a foreign country and consumed in a domestic country.
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Income
Money that enters a country or household.
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Investment
Money spent to improve a company's growth and productivity.
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Net Exports
The difference between exports and imports.
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Net Foreign Investment
The total amount of investment in a country that results from trade deficits. Net foreign investment always equals net exports.
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Nominal Exchange Rates
The amount of foreign currency that exchangeable for domestic currency.
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Nominal Output
The amount of output valued in currency dollars.
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Opportunity Cost
What is given up in pursuing one option over another.
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Output
Goods and services produced.
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Protectionist Policies
Governmental policies that serve to help developing domestic industries.
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Quota
When a government limits the amount of a given good that can be imported. Imposing quotas is a protectionist policy.
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Real Exchange Rates
Numbers that describe the relative real value of foreign and domestic goods.
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Subsidy
Grants paid by the government to producers to help them develop. Subsidizing is a protectionist policy.
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Tariff
Fees charged by the government on imported goods to help raise the price and decrease the quantity sold. Use of tariffs is a protectionist policy.
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Trade
When goods from one producer are exchanged for goods from another producer. In this case, goods can be very broadly interpreted.
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Trade Balance
Exports minus imports.
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Trade Deficit
A trade deficit occurs when a country imports more than it exports.
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Trade Surplus
A trade surplus occurs when a country exports more than it imports.
Formulae
| Output = income Y = C + I + G + NX | Y = C + I + G + NX |
| Net Exports | Net Exports = exports - imports |
| Real Exchange Rate | Real exchange rate = ((nominal exchange rate)(domestic price)) /(foreign price) |
| Nominal Exchange Rate | Nominal exchange rate = (price of foreign currency) / (price of domestic currency) |
