New Zealand Scholarship Economics flashcards

33 cards. Read the term and the definition here. The deck at the top of this page is optional.

Opportunity cost

The value of the next best alternative forgone when a choice is made. It is measured in real terms and underlies the shape of the production possibility frontier and all trade-off analysis.

Marginal rate of transformation

The slope of the production possibility frontier, showing how much of one good must be sacrificed to produce one more unit of another. It equals the opportunity cost at the margin.

Deadweight loss

The loss of total surplus caused by trades that are beneficial but do not occur, typically from taxes, price controls, monopoly pricing or externalities. It is measured as the triangle between marginal benefit and marginal cost.

Price elasticity of demand

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value exceeds one, meaning quantity responds proportionally more than price.

Tax incidence

The division of a tax burden between buyers and sellers. The burden falls more heavily on the side of the market that is less elastic, because that side has fewer ways to avoid the tax.

Pigouvian tax

A per-unit tax set equal to the marginal external cost of a negative externality. It internalises the external cost, raising marginal private cost to marginal social cost and reducing output to the socially optimal level.

Public good

A good that is both non-rival and non-excludable, such as national defence. Because users cannot be charged, private markets tend to underprovide it, creating a case for public funding.

Common resource

A good that is rival in consumption but non-excludable, such as a fishery. Without property rights or regulation, overuse occurs, an outcome described as the tragedy of the commons.

Lerner index

A measure of market power equal to (price minus marginal cost) divided by price. For a profit-maximising monopolist it equals the reciprocal of the absolute price elasticity of demand.

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer. Specialisation according to comparative advantage raises total output, and gains from trade require terms between the two domestic cost ratios.

Economies of scale

A fall in long-run average cost as output rises, caused by spreading fixed costs and greater specialisation. It is a source of natural monopoly when it persists over the relevant market size.

Ceteris paribus

A Latin phrase meaning all other things held constant. It allows economists to isolate the effect of one variable, distinguishing a movement along a curve from a shift of the curve.

Correlation versus causation

Two variables may move together without one causing the other, through omitted variables, reverse causality or selection. Causal claims require identification strategies such as randomised trials or natural experiments.

Real versus nominal values

Nominal values use current prices; real values are adjusted by a price index to constant prices. Comparing economic series over time requires deflating, otherwise inflation is mistaken for growth.

Present value

The current worth of a future sum, calculated as future value divided by (1 + r) to the power n. It allows costs and benefits occurring at different times to be compared on a common basis.

Sunk cost

A cost already incurred that cannot be recovered. It is irrelevant to forward-looking marginal decisions, so rational agents should ignore it when deciding whether to continue an activity.

Gross domestic product

The market value of all final goods and services produced within a country in a period. It is measured by the expenditure identity Y = C + I + G + (X − M) and is used as a living-standards proxy.

Unemployment rate

The number of unemployed people divided by the labour force, expressed as a percentage. Discouraged workers who stop searching leave the labour force and reduce the measured rate.

Participation rate

The labour force, both employed and unemployed, divided by the working-age population, expressed as a percentage. It captures how many people are economically active rather than the share out of work.

Consumer price index

A weighted average of the prices of a representative basket of household goods and services. Its percentage change is the standard measure of inflation, and core measures exclude volatile items.

Fisher equation

The approximation that the real interest rate equals the nominal interest rate minus expected inflation. It shows how inflation erodes the purchasing power of nominal returns.

Official Cash Rate

The policy interest rate set by the Reserve Bank of New Zealand. Raising it tightens credit conditions, dampens demand and reduces inflation, operating with a lag of several quarters.

Inflation targeting

A monetary policy framework in which the central bank commits to a numerical inflation target. New Zealand targets 1 to 3 percent, with a 2 percent midpoint, and reports against the remit.

Automatic stabilisers

Fiscal features that dampen cyclical swings without discretionary action, such as progressive income tax and unemployment benefits. They raise the budget deficit in downturns and reduce it in booms.

Phillips curve

The inverse short-run relationship between inflation and unemployment. The expectations-augmented version implies no long-run trade-off, since unemployment returns to its natural rate.

Natural rate of unemployment

The unemployment rate consistent with stable inflation, reflecting frictional and structural unemployment. Cyclical policy cannot permanently reduce it without accelerating inflation.

Expenditure multiplier

The change in equilibrium output per unit change in autonomous spending, equal to one divided by (1 minus the marginal propensity to consume) in a simple closed economy.

Current account balance

The sum of the goods and services trade balance, net primary income and net transfers. A persistent deficit implies net capital inflow or rising external liabilities.

Crowding out

A reduction in private investment caused by higher government borrowing raising interest rates. It weakens the expansionary effect of fiscal policy, especially when the economy is near full capacity.

Monetary policy transmission

The channels through which a policy rate change affects the economy: market interest rates, the exchange rate, asset prices, credit availability and inflation expectations. Effects appear with a lag.

Purchasing power parity

The proposition that exchange rates adjust so identical baskets of goods cost the same across countries. PPP-adjusted figures are used for cross-country comparisons of income and living standards.

Model evaluation

Judging a model by internal consistency, realism of assumptions, predictive power and policy usefulness. Simplifying assumptions are acceptable when they preserve the mechanism being analysed.

Marginal analysis

Comparing the extra benefit of one more unit with its extra cost. The optimal decision occurs where marginal benefit equals marginal cost, and sunk costs are ignored.