Cross Price Elasticity of Demand

Cross Price Elasticity of Demand (XED) measures the responsiveness of demand for one good to the change in the price of another good. It is the ratio of the percentage change in quantity demanded of Good X to the percentage change in the price of Good Y. For businesses, XED is an important strategic tool. This elasticity measure can help…
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Production Possibilities Frontier

The best way to show a country’s available resources, along with the maximum two goods produced from those resources, is by calculating the production possibilities frontier (PPF). (Be aware that “production possibilities curve” (PPC) is another way of referring to the production possibilities frontier, referring to the curve shown on a graph of…
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The Crowding Out Effect

The crowding out effect is a prominent economic theory stating that increasing public sector spending has the effect of decreasing spending in the private sector. In other words, according to this theory, government spending may not succeed in increasing aggregate demand because private sector spending decreases as a result and in proportion to…
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Foreign Aid

Foreign aid is defined as the voluntary transfer of resources from one country to another country. This transfer includes any flow of capital to developing countries. A developing country usually does not have a robust industrial base and is characterized by a low Human Development Index (HDI). Foreign aid can be in the form of a loan or a…
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The Circular Flow of Income

The circular flow of income is illustrated in the circular-flow model of the economy, which is one of the most significant basic models within economics. This model shows how different units in an economy interact, breaking things down in a highly simplified manner. It shows how household consumption is a firm’s income, which pays for labor and…
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Lorenz Curve and Gini Coefficient

The distribution of Income in an economy is represented by a Lorenz Curve and the degree of income inequality is measured through the Gini Coefficient. One of the five major and common macroeconomic goals of a government is the equitable (fair) distribution of income. The Lorenz Curve The Lorenz Curve, the actual distribution of income…
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