Transaction demand for money is the quantity of money that economic agents want to hold with the intent of spending for goods and services.

In a two sector economy consisting of households and firms, the national income equation in the model for the time period of t is written as:

Yt = Ct + St (8.4)

where Yt=GDP, Ct=Consumption and St=Saving. Since the economy is a closed one, the equilibrium in this simple closed economy requires investment is equal to savings, which is shown in equation (8.5) as:

It = St

Barter is the direct exchange of goods or services for another without using any medium of exchange.

The aggregate demand curve is the curve showing the relationship between the general price level and the level of production. In order to obtain the aggregate demand curve, we should examine how the quantity of production responds to the price level changes. In other words, we should find an answer for that question: “When prices increase, what is going to happen to the quantity of production? Increase, decrease or unchanged?”

Economic growth is simply defined as the percentage increase in the value of economic activity from a period to another period of time. Generally, the time period is taken as quarterly, semi-annually and annually in the calculations of the changes in economic activity. For the measurement of the value of the economic activity, generally the gross domestic product (GDP) of the country is used as a proxy.

Turkey suffers from inflation problem for at least 25 years.

New protectionism refers to usage of the non-tariff restrictions.

At the autarky, the production possibilities frontier and the consumption possibilities frontier of an economy are identical. In other words, production and consumption points are the same and they are both on the same frontier.

In order to explain the negative slope of AD curve, we cannot use the logic that we used to explain the negative slope of individual demand curve. Since money demand increases when prices increase, there is a negative relationship between prices and aggregate demand. In order to work of this process, while money supply is constant, interest rate must increase to ensure the money market equilibrium. Therefore, to understand what aggregate demand curve tells us, we should understand the interaction between real and financial sectors of the economy.

Balance of payments deficit refers to the situation where the net result of the “Current Account + Capital and Financial Account + Official Reserves Account + Statistical Discrepancy Account” equation is negative.

Economic development is a broader concept than economic growth. Economic growth is the percentage change in GDP of a country from a year to another year. However, economic development reflects social and economic progress and requires economic growth. Economic growth is a vital and necessary condition for development, but it is not a sufficient condition as it cannot guarantee development. Economic development, besides economic growth, includes the improvements in the standard of living through the creation of jobs, the support of innovation and new ideas, the creation of higher wealth, and the creation of an overall better quality of life.

Indirect channel between quantity of money and economy works via interest rate. Increase in money supply reduces equilibrium interest rate, reduction in interest rate increases investment expenditures. Increasing investment spending raises both aggregate expenditures and equilibrium level of income.

In order to assess the effect of decreases in money supply and government spending or the increase in tax rates on the production, we need to reverse the process we have described above. In this case the aggregate demand curve will shift to the left and the amount of production at each price level will decrease.

Banks create money by collecting deposits from people and using them to make loans and investments. This money created in form of demand deposits as a result of banks’ credit transactions is called as deposit Money.

Financial Account is the main sub-account of the Capital Account and Financial Account under which the foreign direct investments and portfolio investments are recorded. Capital Account constitutes the properties that are not financial, like the patent rights, intellectual property rights and licenses, etc.

Factor abundance is the factor of production which exists in a greater proportion and with a relatively lower price in one country than the other country.

All growth models mentioned emphasize the importance of saving rate in economic growth. So, there is a need for the government policies to improve the saving rates. Saving rate can be increased by raising the real interest rate. Increase in real interest rate encourages savers for saving. However, it should be noticed that the empirical study results show that the response of saving to changes in the real interest rate seems to be small. Another way to increase national saving is to increase government saving.

External Equilibrium refers to the balance of payments equilibrium.

Consumption, taxes, import and saving are usage forms of created income.

The standard theory of international trade does not explain the reason of the differences in the relative commodity prices in autarky. This weakness of the standard theory is accomplished by the Heckscher-Ohlin theory. The Heckscher-Ohlin theory explains the reason of the differences in the relative commodity prices in autarky by using the factor intensity and factor abundance.