'Confusing' Economic Terms That Are Often Being Used in Paper 3 (9708/32) (CIE) (CAIE)

Economic terms that have the same meaning:

1. Capital formation/ capital stock/ investment - rise in capital goods such as buildings, equipment and machines

2. Budget deficit/ fiscal deficit/ public sector borrowing requirement (PSBR, used in the UK in the past)/ public sector net cash requirement (PSNCR, currently being used in the UK) - where government spending exceeds tax revenue and hence there is a need to borrow

3. Reflationary policy/ expansionary policy - measures to increase the aggregate demand

4. Law of diminishing marginal return/ law of variable proportions - a situation in which output will begin to increase at a slower/ diminishing rate as more workers are being added to a fixed capital 

5. Withdrawals/ leakages - outflows of money from the circular flow of income such as savings (S), taxation (T) and imports (M) 

6. Managed float/ dirty float - an exchange rate system in which the value of a particular currency is allowed to fluctuate against another but within a predetermined range

7. GST (Goods and services tax)/ VAT (Value added tax) - a charge which is levied by the government on each stage of production process

8. NRU (Natural rate of unemployment)/ supply-side unemployment - refers to structural, real-wage, seasonal and frictional unemployment

9. price control/ maximum price - the highest legal price for a particular good or service above which it cannot increase

10. MFC (marginal factor cost)/ MCL (marginal cost of labour) - wage costs incurred when one extra worker is hired

11. AFC (average factor cost)/ ACL (average cost of labour) - total wage costs per worker

12. GDP at market value/ GDP at current price/ nominal GDP - value of all final output within an economy which is calculated using prices of that reporting year

13. MV/ PT/ GDP - M is money supply while V is velocity of circulation of money, the number of times in which the money exchanges hand from one person to another. Multiply both and you will get total expenditure. P is price level and T is number of transactions. Multiply both together and you will get total value of output. Since total expenditure = total value of output, they must also equal to total income and hence GDP

Economic terms that are often thought to be the same but they aren't:

1. natural monopoly vs. monopoly - Natural monopoly is when the ideal number of firm in an industry is one. Usually, such industries have very high fixed costs and therefore cannot possibly tolerate competition. Otherwise, costs per unit will increase as it cannot sufficiently enjoy economies of scale. Monopoly has two possible definitions. It is the sole producer for a good or service. As such it owns 100% of the market share (traditional definition). Another definition is that, when a firm controls at least 25% of the market share (legal definition that is widely used)

2. budget deficit vs. national debt - One is when government spending exceeds tax revenue. National debt on the other hand implies accumulated deficit over the years. While budget deficit is probably a couple of percent of GDP, national debt could be as large as 200% (probably more) of GDP

3. means-tested benefits vs. universal benefits - Benefits that are available for those whose income falls below certain level e.g. cash aid. Universal benefits refer to benefits that are available for everyone, regardless of age, gender and socioeconomic status

4. mpc (marginal propensity to consume) vs. apc (average propensity to consume) - Former means, how much of an increase in a dollar of income that will be spent away. For example, mpc = 0.64 means, of every $1 dollar increase in disposable income, 64 cents will be consumed. Latter refers to the percentage of income that is being spent. So, if apc = 0.64, it means 64% of disposable income is being spent

5. mps (marginal propensity to save) vs. aps (average propensity to save) - In the same fashion, mps means, how much of a dollar increase in disposable income which will be saved. So, if mps = 0.36, that means, of every $1 increase in disposable income, 36 cents will set aside as savings. On the other hand, aps is defined as, percentage of income which will be saved. So, if aps = 0.36, it simply means, 36 percent of disposable income will be saved

6. NRU (natural rate of unemployment) vs. NAIRU (Non-accelerated inflation rate of unemployment). Both are not quite the same although they are related. If NRU = 4%, then this is the rate of unemployment in which the inflation rate will not accelerate. Any efforts e.g. expansionary fiscal or monetary policy to reduce NRU will eventually cause inflation rate to accelerate (and hence the name)

7. Law of diminishing marginal return vs. returns to scale - One refers to production in the short-run and the other into the long-run. In the short-run, capital is fixed, The only way to increase output is by hiring more workers. So, as more workers are being added to a fixed capital, we can observe how the output changes. It initially increases with a faster rate. Eventually the rate in which it increases will diminish, and hence the name. Returns to scale is the observation on how the output changes as both capital and labour are increased proportionately. If output increases faster than inputs, we get increasing returns to scale for instance

8. multiplier vs. credit/ money multiplier - Multiplier means, the number of times that the national income will increase from an initial amount of injection. Credit multiplier is, how an initial deposit can lead to a bigger final increase in money supply

9. GDP vs. GNP - value of all final goods and services that are being produced within the borders of an economy over a period of time. GNP is the value of all final goods and services that are being produced by factors of production which belong to an economy over a period of time. GDP may include output/ earnings by foreign workers but GNP does not

10. Government failure vs. market failure - One is when government interventions lead to misallocation of resources. The other is, when operations of market forces lead to misallocation of resources

11. terms of trade vs. balance of trade - Former is, average export prices/ average import prices x 100. Latter refers to the value of exports of goods and services minus the value of imports of goods and services

12. trade deficit vs. budget deficit - One is a withdrawal (W) because M > X. The other is an injection (J) because G > T

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