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 A
ability-to-pay
absolute advantage 
absolute income hypothesis
accommodation (monetary policy instrument)
action lag
active element of fiscal policy
activist view of fiscal policy 
AD-AS model
ad valorem tarrif
ad valorem tax
adverse supply shock
aggregate autonomous spending (A)
aggregate demand (spending)
aggregate demand curve
aggregate supply curve
allocation function of government
allocative efficiency
alternative products (substitutes in production)
animal spirit
anti-cyclical fiscal policy
appreciation
artificial monopoly
asymmetric information

autocratic model
automatic (or built-in) stabiliser
autonomous consumption
autonomous imports
autonomous investment
autonomous variable
average
average cost (AC)
average fixed cost (AFC)  
average import ratio
average product (AP)
average propensity to consume
average revenue (AR)
average variable cost (AVC)
average tax rate

 




 

ability-to-pay 
Referring to taxation, the ability to pay principle means that  individuals who earn more income, pay more tax, not because they use more government goods and services but because taxpayers who earn more have the ability to pay more.  In the case of income taxation, we measure ability to pay by income, which is the basis of our progressive income tax system; in property taxation we measure it by property value; and so on.

There are two notions of equity in this regard: horizontal equity and vertical equity.  Horizontal equity requires that people in the same position (ie two taxpayers who have the same income) should be taxed equally. Vertical equity requires that people in different positions should be taxed differently. Rich people should therefore pay more tax than poor people.

Related concepts:  [personal income tax] [direct tax] [progressive tax] [taxes]

 

absolute advantage 
A country is said to have an absolute advantage over another in the production of a particular good or service if it has the ability to produce this good or service with fewer resources or can produce more of a product per resource unit than another country.  In other words, it is more efficient in the production of the particular good or service.  The existence of an absolute advantage is one of the reasons why international trade occurs.  (more)

Related concepts: [comparative advantage

 

absolute income hypothesis
Keynes (1936: 96 ) formulated the basis of his consumption function as follows:

The fundamental psychological law, upon which we are entitled to depend with great confidence both a priori from our knowledge of human nature and from the detailed facts of experience, is that men are disposed to increase their consumption as income increases, but not as much as the increase in income.

Keynes believed that the level of consumer expenditure was a stable function of income and that income was the most important factor determining consumption spending.   According to this hypothesis income refer to current disposable income and the consumption function is given as:

C = C + cYd 
C - consumption
C - autonomous consumption
c - marginal propensity to consume
Yd - disposable income

 

accommodation (monetary policy instrument)
The provision of borrowing facilities by the central bank to the private banking sector.  In South Africa, the South African Reserve Bank (SARB) relies extensively on its accommodation policy to influence interest rates.

Related concepts: [market-oriented measures] [monetary policy] [South African Reserve Bank

 

action lag
The action lag refers to the delay between the policy decision and the actual implementation of the policy measure(s) concerned. The action lag is sometimes also called the implementation lag.   

Related concepts: [decision lag] [inside lag] [outside lag] [recognition lag]

 

active element of economic policy
Economic policy has both an active element and a passive element.  An active economic policy is  when a deliberate step is taken to do something, say, to reduce the budget deficit or to raise interest rate. However, the mere decision to do something is not sufficient. The decision must be applied or implemented. In other words, action has to be taken. Good policy decisions frequently turn out to be ineffective because they are not properly implemented.

Related concepts: [economic policy] [passive element]   

 

activist view of fiscal policy 
Activist view of fiscal policy (often referred to as Afine tuning@) is embedded in anticyclical fiscal policy.  

The activist view of fiscal policy encountered practical and theoretical obstacles. For example, the practical problem imposed by the long inside lag of fiscal policy. There are definite limits to the extent to which government spending and taxes can be varied in an attempt to stabilise fluctuations in the level of economic activity. 

Apart from these practical considerations, the very notion of an anticyclical fiscal policy, aimed at regulating or managing aggregate demand in the economy (illustrated in standard macroeconomic models as shifting the AD curve or moving along a downward-sloping Phillips curve), was also increasingly questioned during the 1970s and subsequently on theoretical grounds.   

Related concepts: [anti-cyclical fiscal policy] [ fiscal policy

 

AD-AS model 
The aggregate demand and supply model is a macroeconomic model for studying output and price level determination - just as in microeconomics, demand and supply curves are the essential tools for studying output and price determination in a single market.  But the aggregate demand and supply curves are not as simple as the microeconomic demand and supply curves, for we are now dealing with the economy at large. (more)

In the AD-AS model the price level and level of output is determined in such a way that the goods market, money market and labour market are in equilibrium.

Related concepts: [aggregate demand curve] [aggregate supply curve] [shifts in aggregate demand curve]  [shifts in aggregate supply curve]   

 

ad valorem tariff
An ad valorem tariff is expressed as a percentage of the value of an imported commodity. It is superior to a specific tariff as it can be applied to commodities with a wide range of grade variations. It can distinguish between small differences in product quality to the extent that they are reflected in the price of the product. Another advantage of the tariff is that it tends to maintain a constant degree of protection for local manufacturers during times of changing prices. Despite these advantages, the ad valorem tariff suffers from administrative complexities. The main problem has to do with determining the value of an imported item. Import prices are estimated by customs appraisers who may disagree on product values.

Related concepts: [specific tariff]  [import tariffs]

 

ad valorem tax
A tax based on the value of a transaction.  It is normally a given percentage of a price at retail, wholesale or manufacturing stage and is a common form of sales tax.  Value-added tax is an example of an ad valorem indirect tax.

Related concepts:  [indirect tax] [value-added tax]

 

adverse supply shock
Inward shift in the aggregate supply curve.The immediate effect of the supply shock is  to raise the price level and reduce the level of output. An adverse supply shock is doubly unfortunate: it causes higher prices and lower output. (more)

The increase in the price of oil that resulted from the OPEC oil embargo of the early 1970s is a classic example. The recent introduction of the GST is another example.

 

aggregate autonomous spending
Aggregate autonomous spending in the simple Keynesian model consists of all the spending  variables that are independent from the level of income and output.

In the simple Keynesian model for a closed economy without a government and no foreign sector, aggregate autonomous spending is  A = C + I . (more)
In the simple Keynesian model with a government and no foreign sector, aggregate autonomous spending is  A = C + I + G.  (more)
In the simple Keynesian model with a government and a foreign sector, aggregate autonomous spending is A = C + I + G + (X - Z). (more)

In the simple Keynesian model it is indicated by the vertical intercept of the aggregate demand function.


Related concepts: [aggregate demand]  [autonomous consumption] [autonomous imports] [autonomous investment] [autonomous variable] [Keynesian model]

 

aggregate demand (spending)

In The general theory of employment, interest and money, John Maynard Keynes stressed the importance of aggregate demand as a determinant of the level of output in the economy.  This lead to the development of a number of macroeconomic models which came to be known as the Keynesian models. 


Aggregate demand is the total demand for goods and services in the economy and consists of the following components: Consumption spending by households (C) plus investment spending by businesses (I) plus government spending on goods and services (G) plus  exports (X) minus imports (Z).  In terms of symbols, it is represented as follows:

A = C + I + G + X - Z

In the simple Keynesian and IS-LM models, aggregate demand is the main determinant of the level of output and producers of goods and services change their production plans according to changes in the existing and expected aggregate demand. (more)

In a simple Keynesian model without a government and foreign sector A = C + I.  (more)
In simple Keynesian model with a government and no foreign sector A = C + I + G. (more)
In a simple Keynesian model with a government and foreign sector A = C + I + G + (X - Z). (more)

 

 

aggregate demand curve
The aggregate demand curve captures the relationship between the amount of goods and services people wish to purchase and the price level.  It is downward sloping indicating that a decrease in the price level increases the amount of goods and services people wish to purchase. 

 (more)


In the AD-AS model it represents, for each price level, the level of output  at which the goods market and the money market are simultaneously in equilibrium. 

Related concepts:  [AD-AS model] [aggregate supply curve]  [shifts in aggregate demand curve]   

 

aggregate supply curve
The aggregate supply curve is primarily governed by the cost of production. The cost of production is governed by the prices and productivity of the various factors of production.

The AS curve can be depicted as having a flat part, a rising part and a vertical part. 

(more)

The steepness of the supply curve is one of the main controversies in macroeconomics.

Related concepts:  [AD-AS model] [aggregate demand curve]  [shifts in aggregate supply curve]   

 

allocation function of government
Refers to the role of government in achieving an efficient allocation of resources.  This need for government intervention in the economy arises due to the existence of public goods and externalities.

Related concepts:  [externality]  [market failure] [public goods]

 

allocative efficiency
Allocative efficiency occurs when productive resources are allocated between alternative uses in such a way that the optimal mix of commodities desired by consumers is produced.  Allocative efficiency implies Pareto efficiency.

Related concepts: [pareto efficiency] [production possibility curve]  [technical efficiency

 

alternative products (substitutes in production)
Different goods and services can be produced with the same resources .  These different products are called substitutes in production.

 

animal spirit
Waves of optimism and pessimism on the part of consumers and businesses

 

anti-cyclical fiscal policy
The broader, macroeconomic notion of an anti-cyclical fiscal policy is based on Keynesian thinking. In the 1930s John Maynard Keynes advocated (and provided a theoretical basis for) the use of an expansionary fiscal policy to pull the world economy out of the grips of the Great Depression.

During the heyday of Keynesianism in the 1950s and 1960s, fiscal policy was generally regarded as an important instrument of stabilisation policy.

If the economy was suffering from unemployment, an increase in government expenditure and/or a lowering of taxes were prescribed, with a consequentially higher budget deficit (or lower budget surplus). 

When private sector spending was creating inflationary pressure and/or balance of payments problems, the reverse had to be applied. 

Moreover, the income tax and unemployment benefits were regarded as automatic (or built-in) stabilisers, in the sense that changes in income would automatically trigger changes in tax revenue and transfer payments, thus stabilising aggregate demand, income and output. 

Related concepts: [activist view of fiscal policy] [automatic (or built-in) stabiliser] [fiscal policy

 

appreciation of a currency 
In general the term appreciation means an increase in the value of an asset.

An appreciation of a currency implies an increase in the value of the domestic currency relative to the currencies of other countries. Using the conventional method of quoting the domestic price of foreign currency, it means that a lower price or exchange rate reflects an appreciation of the local currency against the foreign currency. Thus a fall in the rand/dollar exchange rate from R4,7400 to R4,5000 implies an appreciation of the rand against the dollar of roughly 5 percent (simply because so much fewer rands are needed to purchase the required dollars).  The term is used when exchange rates are floating.

An appreciation of a currency, for instance the rand/dollar exchange rate, can be the result of 

Related concepts: [depreciation of a currency

 

artificial monopoly
Artificial monopoly is a situation in which potential competitors are prevented from entering the market in question.  This may be because of certain restrictions imposed by the government or applied by a professional body.  Limited market entry could also be the result of efforts by a firm to limit entry by setting the price below the profit maximising level.

Related concepts:  [natural monopoly] [monopoly

 

asymmetric information 
Asymmetric information can be a cause of market failure.  Asymmetric information is when somebody in the market knows more than someone else.  Perfect information therefore does not exist in the market place and it is difficult for consumers and firms to equate marginal benefit with marginal cost. 

Asymmetric information is also the cause of the principal-agent problem.     

Related concepts:   [market failures

 

autocratic model
The autocratic model refers to countries who do not have democratic governments and important economic decisions are often made by the head of state or by a small number of politicians.

Related concepts:  [corporatism] [pluralism] [technocratic model]

 

automatic (or built-in) stabiliser
An automatic (or built-in) stabiliser can be defined as any mechanism in the economy that reduces the effects of changes in autonomous demand. In terms of the simple Keynesian model it stabilises the economy by reducing the multiplier effects of any disturbance to aggregate demand. However, inflation and the propensity of governments to spend additional tax revenue have tended to render the concept of automatic stabilisers practically irrelevant.   

 

autonomous consumption
Autonomous consumption is positive even if income is zero and is that part of consumption which is independent of the level of income - this reflects the influence of non-income determinants of consumption expenditure. 

(more)
(more)

Non-income determinants are things such as interest rates, expectations, wealth, income distribution and  health.  Autonomous consumption can also be regarded as consumption that is financed from sources other than income, for example inheritance, past savings or credit.

Related concepts: [aggregate demand] [aggregate autonomous spending] [autonomous imports] [autonomous investment] [autonomous variable] [induced consumption] [Keynesian model]

 

autonomous imports
If imports are regarded as autonomous, it is not influenced by the level of output and income and the import function is:

Z = Z

(more)

 

Related concepts: [aggregate demand] [aggregate autonomous spending]  [autonomous consumption] [autonomous investment] [autonomous variable] [Keynesian model]

 

autonomous investment
In the simple Keynesian model, investment is regarded as an autonomous function I =
I which is determined independently from the current level of output. It is one of the components of aggregate demand that influences the level of output.  

The decision of firms to invest depends largely on the following factors and variables:   interest rates, expectations, business confidence and regulations.  A change in any of these factors will cause a change in investment and consequently the level of output changes. (more)

In the IS-LM model, the investment function is I = I - bi to make it an explicit function of the interest rate.

Related concepts: [aggregate demand] [aggregate autonomous spending] [autonomous consumption] [autonomous imports] [autonomous variable] [investment function] [Keynesian model]

 

autonomous variable
An autonomous variable is that variable which is independent of the variables explained in a given theory. 

This distinction is similar to the distinction between endogenous and exogenous variables. Endogenous variables are variables whose values we want to determine.  Exogenous variables are variables whose values are determined outside the model (by external forces). The exogenous variables are used to explain the endogenous variables, but are not themselves explained in the model.

Related concepts: [aggregate demand] [aggregate autonomous spending] [autonomous consumption] [autonomous imports]  [autonomous investment

 

average

The average of a group of numbers is the sum of those numbers, divided by the number of numbers in the group. For example, the average of 3 and 7 is 5 because 3 plus 7 equals 10, and 10 divided by 2 equals 5.

 

average cost (AC)

Average cost is the total cost divided by total output.  For example, if the total cost of producing 1 000 tables is R910 000 then the average cost is R910 000 divided by 1 000 = R9 100.
(more)

 

average fixed cost (AFC)  

Average fixed cost (AFC) is the total fixed cost divided by total product (output) and decreases steadily as more units are produced.  

(more)

 

average import ratio
The ratio between the level of imports and the level of output or expenditure.  

 

average product (AP)

The average product (AP) of the variable input is the average number of units of output produced per unit of the variable input.  It is obtained by dividing total product by the units of variable input (for instance labour) that is employed to produce the total product.  
(more)

 

average propensity to consume
Average propensity to consume is the relationship between total consumption and total income.

 

average revenue (AR)

Average revenue is the revenue per unit sold.  Average revenue is equal to total revenue divided by the number of units which is equal to the average price per unit.  
If the units are sold at the same price the firm's average revenue is equal to the price of the product.
Under perfect competition average revenue (AR) is equal to marginal revenue (MR) since the firm can sell any quantity at the market price for the good.
(more)
Under monopoly a firm can only sell an additional quantity of output if it lowers the price of its output.  Average revenue is therefore higher than marginal revenue.

 

 

average tax rate
The average tax rate is the total amount of income taxes paid as a percentage of the taxpayer's income.  

Related concepts: [marginal tax rate] 

 

average variable cost (AVC)
Average variable cost is the total variable cost divided by the total product.  It normally falls, reaches a minimum and then increases.

(more)