This is when governments give a guarantee to savers that if their bank goes bankrupt, the government will pay them all or some of their savings. The government offers bank deposit protection to increase the confidence in the banking system. If people felt banks could go bankrupt during a financial crisis – then they could …
Definition Third World Debt: Third world debt is the external debt that governments in developing countries owe to foreign banks and foreign governments. Many of the countries with third world debt, gained their independence post-1945. Some countries like Indonesia acquired debts from the colonial rulers (Dutch) but for most countries their debt accumulated during the 60s, …
Definition of Capital Flight – When a large number of people in a country move capital and assets from one country to another. Usually in response to a political and/or economic crisis. For example, on news that the banks of Iceland were bankrupt, many investors took their savings out of Iceland and into other countries. …
Definition of the Accelerator Effect The accelerator effect states that investment levels are related the rate of change of GDP. Thus an increase in the rate of economic growth will cause a correspondingly larger increase in the level of investment. But, a fall in the rate of economic growth will cause a fall in investment …
Definition of Bertrand Competition A market structure where it is assumed that there are two firms, who both assume the other firm will keep prices unchanged. Therefore, each firm has an incentive to cut prices, but this actually leads to a price war. If products are perfect substitutes this assumes the price will be driven …
Definition of Consumer Surplus This is the difference between what the consumer pays and what he would have been willing to pay. For example: If you would be willing to pay £50 for a ticket to see the F. A. Cup final, but you can buy a ticket for £40. In this case, your consumer …
Definition of constant returns to scale When an increase in inputs (capital and labour) cause the same proportional increase in output. Constant returns to scale occur when increasing the number of inputs leads to an equivalent increase in the output. Long run Returns to scale occur in the long run – when both labour and …
Definition of Efficiency Wage Theory / Hypothesis The idea of the efficiency wage theory is that increasing wages can lead to increased labour productivity because workers feel more motivated to work with higher pay. Therefore if firms increase wages – some or all of the higher wage costs will be recouped through increased staff retention …