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Microeconomics
the study of the behavior of individual markets
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Macroeconomics
the study of how the economy as a whole works
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Ceteris paribus
an assumption that all other variables are being held equal, when a single variable is being altered in an economic model
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Positive economics
objective and based on facts
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Normative economics
based upon opinion/ subjective
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Scarcity
limited availability of economic resources relative to society's unlimited demand for goods and services
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land
physical factor of production. natural resources
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Labor
human factor of production. physical and mental contribution of the existing workforce to production
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capital
factor of production that is made by humans and is used to produce goods and services. It occurs as a result of investment.
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Entrepreneurship
Factor of production involving the organization of the other factors of production and also involves risk-taking.
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Opportunity cost
Next best alternative foregone when an economic decision is made.
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Free goods
goods that are unlimited in supply and have no opportunity cost. Unlimited supply at market price zero
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Economic good
Good of service that is relatively scarce and has a price. An opportunity cost is involved when it is consumed.
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Utility
The satisfaction of pleasure that an individual derives from the consumption of a good or service.
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Production possibilities curve (PPC)
shows the maximum combinations of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently.
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Actual output
the production of goods and services in an economy achieved in a given time period
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potential output
the possible production that would be achieved in an economy if all available factors were employed.
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actual growth
occurs when previously unemployed factors of production are brought into use. It is represented by a movement from a point within a PPC to a new point nearer to the PPC.
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potential growth
occurs when the quantity and/or quality of factors of production within an economy is increased. It is represented by an outward shift of the PPC
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Economic growth
The growth of real output in an economy over time. It is usually measured as growth in real gross domestic product (GDP).
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Economic development
Broad concept involving improvement in standards of living, reduction in poverty, improved health and improved education. Increased freedom and economic choice may also be included.
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sustainable development
Economic development that meets the needs of the present without compromising the ability of future generations to meet their needs.
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Free market economy (market economy)
An economy where the means of production are privately held by individuals and firms. Demand and supply determine what to produce, how to produce it and for whom to produce.
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Planned economy (command economy)
An economy where the means of production are owned by the state. The state determines what to produce, how to produce it, and for whom to produce.
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Transition economy
An economy in the process of moving from a centrally planned economic system towards are more market-oriented economic system.
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Market
where buyers (consumers) and sellers (producers) come together to establish an equilibrium price and quantity for a good or service. It does not need to be an actual place.
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Demand
the willingness and ability to purchase a quantity of a good or service at a certain price over a given time period.
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law of demand
as the price of the good or service rises, the quantity demanded decreases, ceteris paribus
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demand curve
graphical representation of the law of demand. It is (usually) a downward-sloping curve (or line) illustrating the inverse relationship between price and quantity demanded.
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supply
The willingness and ability of a producer to produce a quantity of a good or service at a certain price over a given time period.
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law of supply
as the price of a good rises, the quantity supplied increases, ceteris paribus
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supply curve
graphical representation of the law of supply. It is an upward-sloping curve (or line) illustrating the direct relationship between price and quantity supplied.
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equilibrium price
the market clearing price. Occurs when demand is equal to supply
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maximum price (ceiling price)
It is a price set by the government, above which the market price is not allowed to rise. It may be set to protect consumers from high prices, and it may be used in markets for essential goods, such as rice or house rentals.
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minimum price (floor price)
Price set by the government, below which the market price is not allowed to fall. It may be set to protect producers producing essential products from facing prices that are felt to be too low, such as many agricultural products in the EU
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buffer stock scheme
sets a maximum and a minimum price in a market to stabilize prices.
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Price elasticity of demand (PED)
a measure of the responsiveness of the quantity demanded of a good or service to a change in its price.
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Elastic demand
A change in price of a good or service will cause a proportionally larger change in quantity demanded
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inelastic demand
a change in price of a good or service will cause a proportionately smaller change in quantity demanded
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Cross elasticity of demand (XED)
a measure of the responsiveness of the demand for a good or service to a change in the price of a related good.
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substitute goods
goods that can be used instead of each other. have positive XED
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complement goods
goods that are used together. negative XED
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Income elasticity of demand (YED)
a measure of the responsiveness of demand for a good to a change in income
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normal good
positive income elasticity of demand. as income rises, demand increases
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inferior good
negative income elasticity of demand. as income rises, demand decreases
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Price elasticity of supply (PES)
a measure of the responsiveness of the quantity supplied of a good or service to a change in its price.
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indirect tax
an expenditure tax on a good or service. upward shift in the supply curve, where the vertical distance between the two supply curves represents the amount of the tax. specific tax = parallel shift. ad valorem tax = divergent shift
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market failure
the failure of markets to produce at the socially efficient level of output
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positive externalities
beneficial effects that are enjoyed by a third party when a good or service is produced or consumed
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negative externalities
the bad effects that are suffered by a third party when a good or service is produced or consumed
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public goods
goods or services that would not be provided at all by the market. They have the characteristics of non-rivalry and non-diminshability
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merit goods
goods or services considered as beneficial for people and that would be under-provided by the market thus under-consumed
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demerit goods
goods or services considered to be harmful to people and that would be over-provided by the market thus over-consumed.
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circular flow of income
simplified model of the economy that shows the flow of money through the economy
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gross domestic product (GDP)
total money value of all final goods and services produced in an economy in one year
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gross national product (GNP)
the total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends, and profit)
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net national product (NNP)
GNP minus depreciation (capital consumption)
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Nominal GDP
GDP not adjusted for inflation
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Real GDP
GDP adjusted for inflation
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Per capita GDP
the total money value of all final goods and services produced in an economy in one year per head of the population.
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Human Development Index (HDI)
composite index that brings together measurements of life expectancy at birth, literacy rate, school enrollment rate, and GDP per capita to measure relative development.
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Aggregate demand (AD)
total spending in an economy consisting of consumption, investment, government expenditure, and net exports.
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consumption
spending by households on consumer goods and services over a period of time
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investment
the addition to the capital stock of the economy in the form of factories, offices, machinery and equipment, which is used to produce goods and services
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inflationary gap
the situation where total spending AD is greater than the full employment level of output, thus causing inflation.
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deflationary gap
situation where total spending (AD) is less than the full employment level of output, thus causing unemployment.
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business cycle (trade cycle)
shows fluctuations in the level of economic activity in an economy over time and suggests that the changes are cyclical. There are four stages: depression (slump), recovery, boom, and recession.
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free trade
international trade that takes place without any barriers, such as tariffs, quotas, or subsidies.
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tariff
duty (tax) that is placed upon imports to protect domestic industries from foreign competition and to raise revenue for the government
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quota
an import barrier that sets upper limits on the quantity or value of imports that may be imported into a country
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subsidy
an amount of money paid by the government to a firm, per unit of output, to encourage output and to give the firm an advantage over foreign competitors
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voluntary export restraint (VER)
voluntary agreement between an exporting country and an importing country that limits the volume of trade in a particular product (or products)
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infant industry argument
proposes that new industries should be protected from foreign competition until they are large enough to compete in international markets
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dumping
the selling of a good in another country at a price below its unit cost of production
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anti-dumping
legislation to protect an economy against the import of a good at a price below its unit cost of production
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free trade area (FTA)
exists when an agreement is made between countries, where the countries agree to trade freely among the members of the group, but are able to trade with countries outside the free trade area in whatever ways they wish
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customs union
an agreement between countries, where the countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to import into the customs union
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common market
customs union with common policies on product regulation, and the free movement of goods, services, capital and labor
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Word Trade Organization (WTO)
an international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations
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factor endowments
factors of production that a country has available to produce goods and services
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specialization
exists where a country specializes in the production of goods and services where they have a comparative advantage in production. They will then trade to get the goods and services in which they do not specialize
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balance of payment
record of the value of all the transactions between the residents of a country with the residents of all other countries over a given period of time
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balance of trade
a measure of the revenue received from the exports of tangible goods minus the expenditure on the imports of tangible goods over a given time period
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invisible balance
measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given time period
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current account
a measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest, and dividends) and net transfers of money (foreign aid, grants, remittances)
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capital account
measure of the buying and selling of assets between countries. the assets are often separated to show assets that represent ownership and assets that represent lending
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current account surplus
exists where the revenue from the export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows over a given time period
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current account deficit
exists where revenue from the export of goods and services and income flows is less than the expenditure on the import of goods and services and income flows over a given time period
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expenditure-switching policies
policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services
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expenditure-reducing policies
policies implemented by the government that attempt to reduce overall expenditure in the economy, including expenditure on imports
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exchange rate
the value of one currency expressed in terms of another
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fixed exchange rate
an exchange rate regime where the value of a currency is fixed, or pegged, to the value of another currency, or to the average value of a selection of currencies, or to the value of some other commodity, such as gold
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floating exchange rate
an exchange rate regime where the value of a currency is allowed to be determined solely by the demand for and the supply of the currency on the foreign exchange market
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depreciation
a fall in the value of one currency in terms of another currency in a floating exchange rate system
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appreciation
an increase in the value of one currency in terms of another currency in a floating exchange rate system
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devaluation
decrease in the value of a currency in a fixed exchange rate system
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revaluation
an increase in the value of a currency in a fixed exchange rate system
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deteriorating terms of trade (adverse terms of trade)
exist where the average price of exports falls relative to the average price of imports
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elasticity of demand for exports
measure of the responsiveness of the quantity demanded of exports when there is a change in the relative price of exports
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elasticity of demand for imports
measure of the responsiveness of the quantity demanded of imports when there is a change in the relative price of imports
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poverty cycle
any circular chain of events starting and ending in poverty, such as low income means low savings, means low investment, means low growth, and means low income
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infrastucture
the large-scale public systems, services, and facilities of a country that are necessary for economic activity. They are accumulated through investment, usually by the government
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indebtness
relates to the high levels of debt that developing countries owe to developed countries. The repayments on this debt act as a significant barrier to growth for developing countries
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non-convertible currency
is the currency of a country that is not convertible on the international foreign exchange markets
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capital flight
occurs when money and other assets flow out of a country to seek a "safe haven" in another country
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Harrod-Domar growth model
the rate of growth of GDP is determined by the national savings ration and ration of capital to output in the economy.
Rate of grown in GDP =(savings ratio)/(capital/output ratio)
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structural change or dual sector model
explains how an underdeveloped economy moves from being a traditional agrarian economy to an economy with a larger manufacturing and service sector. The structural change comes about as surplus labor goes from agriculture to manufacturing, the key to this being reinvested profits in manufacturing that lead to a spiral of capital growth, increased demand, and increased profits
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bilateral aid
aid that is given directly from one country to another
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multilateral aid
aid that is given by countries to international aid agencies, and then is distributed by the agencies
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soft loans
loans given to developing countries that have a rate of interest significantly below the unusual market rate
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grant aid
short-term aid provided as a gift that does not have to be repaid (food aid, medical aid, and emergency aid)
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official aid
aid that is provided to a country by another government or an official government agency. bilateral or multilateral
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unofficial aid
aid that is organized by an NGO, such as Oxfam
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Tied aid
consists of grants or loans that are given to a country, but only on the condition that the funds are used to buy goods and services from the donor country
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Export-led growth (outward-oriented) strategies
based on openness and increased international trade. Growth is achieved by concentrating on increasing exports and export revenue, as a leading factor in the AD of the economy. Growth in the international market should be translated into growth in the domestic market over time
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import substitution (inward-oriented) strategies or protectionism
strategies to encourage the domestic production of goods, rather than importing them. It should mean that industries producing the goods domestically should grow, as will the economy, and they then should be competitive on world markets in the future. The strategies encourage protectionism.
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sustainable development
development that meets the needs of the present without compromising the ability of future generations to meet their own needs
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fairtrade
a scheme where products from producers in developing countries can be certified to display the registered Fairtrade mark, thus encouraging consumers to buy them because they know that the producers of the products have been paid a fair price, and the products have been produced under approved condition
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Micro-credit
consists of small loans usually given to enable poor people to start up very small-scale businesses in developing countries
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foreign direct investment (FDI)
long-term investment by multinational corporations in another country
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World Bank
an organization whose main aims are to provide aid and advice to developing countries, as well as reducing poverty levels and encouraging and safeguarding international investment.
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International Monetary Fund (IMF)
an organization working to foster global monetary cooperation, secure financial stability, facilitate international trade, and reduce poverty
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multinational corporation (MNC)
a company that has productive units in more than one country
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Non-governmental organizations (NGOs)
organizations that are not run by specific governments, and that exist to promote economic development and/or humanitarian ideals and/or sustainable development
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commodity pricing agreements
formed when different countries work together to operate a buffer s tock scheme for a commodity, thus achieving stable prices
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