IB Economics Markschemes Definitions
Abnormal profits see supernormal profits
Absolute advantage - this is where a country is able to produce more output than other countries using the same input of factors of production
Absolute poverty is having insufficient income to meet basic human needs, measured at less than US$2.15 (PPP) a day
Actual growth is an increase in real output for an economy over time. It is measured as an increase in real GDP.
Adverse selection - this occurs when a buyer and seller do not have the same information, causing a transaction to take place based upon uneven terms.
Aggregate demand is the total spending in an economy consisting of consumption, investment, government expenditure and net exports.
Aid is …
official aid is provided to a country by another government or governmental organization such as UN or EU.
tied aid is granted on the condition that it is used to buy goods or services from the donor country.
Allocative efficiency exists where price is equal to marginal cost (or marginal social cost) and resources are allocated in such a way that neither too much nor too little is produced from society’s point of view.
Allocative inefficiency - this occurs where the marginal social cost of producing a good is not equal to the marginal social benefit of the good to society. In different words, it occurs where the marginal cost of producing a good (including any external costs) is not equal to the price that is charged to consumers.
Anti-monopoly regulation - policies that are intended to regulate the market share of an individual company in order to enforce competition.
Anti-dumping is government legislation [= the imposition of tariff] against the selling of imported goods at a price below their production costs
Appreciation is an increase of the value of the currency, expressed in terms of another currency, in a floating exchange rate system, or as a result of a movement of market forces.
Asymmetric information - this is where one party in an economic transaction has access to more or better information than the other party.
Automatic stabilizers - the features of government fiscal policy (for example, unemployment benefits and direct tax revenues) that automatically counter-balance fluctuations in economic activity. For example, government spending on unemployment benefits automatically rise and direct tax revenues automatically fall when economic activity is slow.
Average costs is the total cost divided by the quantity produced.
Average tax rate - the proportion of a person’s income that is paid in tax, usually expressed as a percentage.
Balance of payments - It is a 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.
Balance of trade in goods A measure of the revenue received from the exports of tangible (physical) goods minus the expenditure on the imports of tangible goods over a given period of time.
Balance of trade in services A measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given period of time.
Behavioural economics This is a branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision-making by economic actors. It challenges the assumption that actors will always make rational choices with the aim of maximising utility.
Bounded rationality This suggests that most consumers and businesses do not have enough information to make fully-informed choices and so opt to satisfice, rather than maximise their utility.
Bounded self-control In reality, consumers are often not rational in their self-control and do not stop consuming, even when it is sensible to stop. They consume even though the price of the good or service is greater than the marginal utility they gain from consumption.
Bounded selfishness Concern for the well-being of others.
Budget deficit is when (planned) government spending is greater than government revenues.
Business confidence An economic indicator that measures the degree of optimism that business managers feel about the state of the economy and the prospects of their companies/ organizations.
Business cycle is the periodic fluctuations in real national income/output/GDP around the productive potential or long term trend of the economy. Its stages are slump/trough, recovery/expansion, boom and recession.
Capital The factor of production that comes from investment in physical capital and
human capital. Physical capital is the stock of manufactured resources (e.g. factories, roads, tools) and human capital is the value of the workforce (improved through education or better health care).
Capital account A 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.
Capital flight This occurs when money and other assets flow out of a country to seek a “safe haven” in another country.
Capital transfers A measure of net monetary movements gained or lost through actions such as the transfer of goods and financial assets by migrants entering or leaving the country, transfers relating to the sale of fixed assets, gift taxes, inheritance
taxes, and death duties.
Carbon (emissions) taxes Taxes levied on the carbon contents of fuel.
Central banks have the following responsibilities:
- regulator of commercial banks
- banker to the government
- control of interest rates
- control of money supply
- implementing monetary policies
- maintenance of price stability
- control of exchange rate policy
- holder of foreign exchange reserves
- provider and printer of notes and coins
- promoting full employment.
Centrally planned economy is an economic system where resources are allocated by the government or a central planning authority
Ceteris paribus A Latin expression meaning “other things being equal”.
Choice architecture Choice architecture suggests that the decisions that we make are affected by the layout, sequencing, and range of choices that are available.
Circular economy An economic system that looks beyond the linear take-make-dispose model and aims to redefine growth, focusing on society-wide benefits. It is based on three principles: design out waste, keep products and materials in use, and regenerate natural systems.
Circular flow of income A simplified model of the economy that shows the flow of money through the economy.
Coase theorem This theorem states that when an externality is created and there is a conflict due to assigned property rights, the two parties can bargain with each other to reach an efficient outcome regardless of who actually has the initial property
rights. In this theorem, it is assumed that there are no costs associated with the bargaining that takes place between the two parties.
Collusive oligopoly This is where a few firms act together to avoid competition by resorting to agreements to fix prices or output in an oligopoly.
Common access resources - natural resources over which there is no established private ownership—they are non-excludable, but rivalrous.
Common market A customs union with common policies on product regulation, and free movement of goods, services, capital, and labour.
Comparative advantage implies that one country is able to produce a good at a lower opportunity cost than another.
Competitive supply This exists where products are produced by the same factors of production, and so compete for these resources for their production.
Complementary goods are goods that are consumed with each other, or goods that have negative cross-price elasticity of demand.
Concentration ratios Functions showing the percentage of market share (or output) held by the largest X firms in an industry, expressed in the form CRX, where X represents the number of the largest firms. Most commonly, it is expressed as CR4.
Concessional long-term loans are a form of aid with a very low or no rate of interest; repayments are stretched over a long time period, may include a grace period, and may be repayable in local currency.
Consumer confidence An economic indicator that measures the degree of optimism that consumers feel about the state of the economy and their own personal financial situation.
Consumer nudges Positive reinforcement and indirect suggestions used to influence the behaviour and decision making of consumers.
Consumer price index (CPI) A measure of the average rate of inflation which calculates the change in the price of a representative basket of goods and services purchased by the “average” consumer.
Consumer surplus The additional benefit/utility received by consumers by paying a price that is lower than they are willing to pay.
Consumption is spending by individuals and households on domestic consumer goods and services over a period of time.
Contractionary monetary policy A monetary policy designed to decrease aggregate demand and thus the level of economic activity.
Corporate social responsibility An approach taken by firms where they attempt to produce responsibly/ ethically towards the community and environment, demonstrating a positive impact on society.
Cost-push inflation Inflation that is caused by an increase in the costs of production in an economy, i.e. a shift of the SRAS curve to the left.
Credit creation The ability of commercial banks to expand the deposits of money that they receive by lending multiples of the amount, thus increasing the overall money supply.
Crowding out A situation where the government spends more than it receives in revenue and needs to borrow money, forcing up interest rates and “crowding out” private investment and private consumption.
Current account (balance) is a record of the revenues earned from the export of goods and services and the expenditure on imports of goods and services.
current account deficit is when the net flow of money from trade in goods and services, and income flows and/or transfers, is negative, OR when the outflows of money from trade in goods and services, income flows, and/or transfers is larger than the inflows.
current account surplus is where revenues from the exports of goods and services are greater than the spending on the imports of goods and services.
current transfers These are recorded in the balance of payments whenever an economy receives goods, services, income, or financial items without something in return. All transfers not considered to be capital are current.
Customs union is a form of trade agreement where members trade freely amongst themselves and have common external tariffs (common external trade policies) with non-members
Cross elasticity of demand is the responsiveness of the demand for one good to a change in the price of another good.
Crowding out (HL) is a situation where the government spends more (government expenditure) than it receives in revenue (mainly taxation), and needs to borrow money, forcing up interest rates thereby reducing investment and consumption
Cyclical (demand-deficient) unemployment Disequilibrium unemployment that exists when there is insufficient demand in the economy and wages do not fall to compensate for this.
Debt relief (cancellation) The act of eliminating the debt owed by an economically least developed country in order to allow it to achieve development objectives.
Default choices This is when consumers are automatically enrolled in a system, so that the consumer will “make” this choice if he/she takes no action.
Deflation A persistent fall in the average level of prices in an economy.
Deflationary/recessionary gap The situation where total spending (aggregate demand) is less than the full employment level of output, thus causing unemployment.
Demand is the quantity of goods and services that consumers are willing, and able to buy at each possible price (over a given period of time).
Demand management A (Keynesian) policy emphasising the importance of government intervention in managing the level of aggregate demand in the economy, through fiscal and monetary policies.
Demand-pull inflation Inflation that is caused by increasing aggregate demand in an economy, i.e. a shift of the AD curve to the right.
Demerit goods Goods or services considered to be harmful to people that would be over-provided by the market and so over-consumed.
Depreciation is a fall in the value of one currency against another currency in a floating exchange rate system as the result of market forces.
Deregulation A type of supply-side policy where the government reduces the number or type of regulations governing the behaviour of firms.
Devaluation A decrease in the value of a currency in a fixed exchange rate system.
Developing countries are characterized by
- low per capita income
- high rates of poverty
- low standard of living
- low HDI ranking/value
Development aid Aid that consists of grants, concessional long-term loans, project aid, and programme aid.
Disinflation is when the average (general) price level is increasing at a decreasing rate.
Dumping is the selling of a good in another country at a price below its cost of production or below the price in the home market.
Economic development is a broader concept than economic growth involving welfare improvements to the standard of living including health, education and shelter.
Economic growth increased real output for an economy over time and it is measured by an increase in real GDP OR it is an increase in the potential output of the economy where the PPC shifts outwards.
Economic well-being A multi-dimensional concept relating to the level of prosperity and quality of living standards in a country.
Economically least developed countries (ELDC’s) Those countries classified by the UN as being “low income countries confronting severe structural impediments to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets”.
Economics “Economics is the science that studies human behaviour as a relationship between ends and scarce resources which have alternative uses”. Lionel Robbins (1932)
Economies of scale (HL) are a fall in long run unit costs that comes about as a result of a firm increasing its scale of operations.
Efficiency Efficiency is a quantifiable concept, determined by the ratio of useful output to total input.
Elasticity A measure of the responsiveness of something to a change in one of its
determinants.
Elasticity of demand for exports A measure of the responsiveness of the quantity demanded of exports when there is a change in the price of exports.
Elasticity of demand for imports A measure of the responsiveness of the quantity demanded of imports when there is a change in the price of imports.
Engel curve A curve showing the relationship between income and quantity demanded.
Entrepreneurship The factor of production involving organising and risk-taking.
Equilibrium price is the market-clearing price, set where Demand equals Supply.
Equity The concept or idea of fairness.
Excess demand is the situation where (at a given price) quantity demanded exceeds quantity supplied.
Excess supply This occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded.
Exchange rate is the price of one currency expressed in terms of another, preferably with an example.
Expansionary monetary policy A monetary policy designed to increase aggregate demand and thus the level of economic activity.
Expenditure reducing Policies implemented by the government that attempt to reduce overall expenditure in the economy, including expenditure on imports.
Expenditure switching Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services.
Export promotion 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.
Export revenue Value of exports earned by producers
Exports Goods and services produced in one country and purchased by consumers in another country.
External balance The value of exports of goods and services minus the value of imports of goods and services.
Externalities are ….
negative externalities they are costs to a third party caused by the production, or consumption of a good (or service) or that they occur when MSC is greater than MSB in the market for a good or service.
Factors of production are the four types of resources used in the production process: land, labor, capital (and possibly entrepreneurship / management / enterprise).
Fairtrade A scheme where products from producers in economically least developed
countries can be certified to display the registered Fairtrade mark 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 conditions.
Financial account consists of (net) direct investment, (net) portfolio investment, and reserve assets.
Fiscal policy is the use of government spending and taxation to shift the AD curve.
Fixed exchange rate is when a currency’s value is fixed against the value of another currency, a basket of other currencies, or gold.
Floating exchange rate is where the exchange rate (i.e. price of one currency in terms of another) changes according to the market forces of demand and supply.
Foreign aid The international transfer of capital, goods, or services from a country, or international organization, for the benefit of a recipient country and its population.
Foreign direct investment is long-term investment in a foreign country through the establishment of production units by multinational companies in a foreign country, representing at least 10% ownership.
Foreign sector The segment of the circular flow of income that includes exports and imports.
Framing This is the way that choices are described and presented. Changing the framing of a choice may affect tastes and preferences.
Free good is unlimited in supply and has no opportunity cost
Free market economy An economy where the means of production are privately held by individuals and firms. Demand and supply (market forces) determine what/how much to produce, how to produce, and for whom to produce.
Free rider problem This occurs when people who benefit from consuming resources, goods, or services do not have to pay for them, which results in overconsumption.
Free trade exists where there is trade between different countries without government intervention/regulation.
Free trade area/agreement is an agreement whereby there is free trade among member countries, but each member can maintain its own trade barriers in trade with non-member countries
Frictional unemployment Equilibrium unemployment that exists when people have left a job and are in the process of searching for another job.
Full employment level of output The level of output that is produced by the economy when there is only natural unemployment.
GDP or national output is the total value of all final goods and services produced in an economy in a given time period (usually one year).
GDP per capita is the total value of all final goods and services produced in an economy in a year divided by the population (per head)
real GDP or real output is the value of all final domestic goods and services, adjusted for inflation.
Gini Coefficient is a measure of inequality in the distribution of income.
Government (national) debt The total outstanding borrowing of a government, made up of internal debt (owing to national creditors) and external debt (owing to foreign creditors).
Government spending (G) Spending by governments on goods and services.
Gross domestic product (GDP) The total money value of all final goods and services produced in an economy in a given time period, usually one year.
Gross national income (GNI) 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).
Growth in production possibilities This occurs when the PPC curve shifts outwards, caused by an increase in the quantity and/or quality of factors of production.
Happiness Index An index which is used to measure the collective happiness and well-being of a population.
Happy Planet Index An index that combines four elements to show how efficiently residents of different countries are using environmental resources to lead long, happy lives. The elements are well-being, life expectancy, inequality of outcomes, and ecological footprint.
Households Households represent the groups of individuals in the economy who perform two functions. They are the consumers of goods and services and they are the owners and providers of the factors of production that are used to make the goods and services.
Human Development Index (HDI) measures:
- health
- life expectancy (at birth)
- education
- mean years of schooling (for those aged 25 years and above)
- expected years of schooling (for a child of school entrance age, capped at 18 years of age)
- income
- GNI per capita or GDP per capita.
Inequality adjusted HDI (IHDI) measures the same three dimensions but each is adjusted for inequality
Human Opportunity Index (HOI) This index measures how individual circumstances, such as place of residence, gender, and education of the household head, can affect a child’s access to basic opportunities such as water, education, electricity and sanitation. It is created by the World Bank.
Human resources are the labor force of a country.
Humanitarian aid Aid given to alleviate short-term suffering, consisting of food aid, medical aid, and emergency relief aid.
Imperfect competition A market structure showing some, but not all, features of perfect competition.
Imperfect information This exists where some stakeholders in an economic transaction have more access to knowledge than others.
Import expenditure Value of spending on imports.
Imports Goods and services purchased by consumers in one country that have been
produced in another country
Import substitution policies/strategies are designed to encourage the domestic production of goods, rather than importing them. The strategies encourage protectionism.
Incentive effect Prices give producers the incentive to either increase or decrease the quantity that they supply. A rising price gives producers the incentive to increase the
quantity supplied, as the higher price may allow them to earn higher revenues.
Income A flow of earnings from using factors of production to produce goods and
services. Wages and salaries are the factor reward to labour and interest is the
flow of income for the ownership of capital.
Income effect When a decrease in the price of a good or service that is being consumed means that consumers experience an increase in real income, usually allowing them to purchase more of the product. The income effect may be negative.
Income elasticity of demand is the measure of the responsiveness of demand of a good or service to a change in income.
Indebtedness is the amount of money that a country owes to other countries and/or international institutions.
Indirect taxation is an expenditure tax or a tax levied on goods and services imposed by the government.
Infant industries are new industries which do not benefit from economies of scale that need protection to compete with imports.
Inferior goods A good where the demand for it decreases as income increases and more superior goods are purchased.
Inflation is a sustained increase in the general or average level of prices.
Inflation rate The percentage change of a price index over a certain time period**.**
Inflationary gap refers to inflationary pressure created by the current (or SR) equilibrium being above the full employment (or LR) equilibrium.
Informal markets refer to markets in which economic activity is not officially measured/ recorded.
Informal sector is economic activity that is unrecorded (illegal/not taxed) in national income accounts by the government.
Infrastructure involves large-scale public systems (services and facilities) of a country that are necessary for economic activity. They are considered the capital stock of a nation and are usually supplied by the government.
Injections The investment, government expenditure and export revenues that add
spending to the circular flow of income.
Interest rates is the price of capital or the price of borrowed/loaned money or the price of credit or the reward for saving, usually expressed as a percentage.
International Monetary Fund (IMF) An organization working to foster global monetary cooperation, secure financial stability, facilitate international trade, and reduce poverty.
International trade Trade that involves the exchange of goods or services between two countries.
Investment is expenditure by firms on capital equipment and is an injection into the economy.
Inward-oriented policies see import substitution
J-curve The J-curve suggests that in the short term, even if the Marshall-Lerner
condition is fulfilled, a fall in the value of the currency will lead to a worsening
of the current account deficit, before things improve in the long term.
Joint supply Goods which are produced together, or where the production of one good involves the production of another product (for example, as a by-product of
production).
Keynesian multiplier The ratio of an induced change in the level of national income to an original change in one or more of the injections into the circular flow of income (i.e. investment, government spending, or export revenue).
Keynesian revolution An economic school of thought based upon the works of John Maynard Keynes, challenging the classical (laissez faire) viewpoint and advocating the role of government in managing the level of aggregate demand.
Labour The human factor of production. It is the physical and mental contribution of
the existing work force to production.
Labour market flexibility This refers to the speed with which labour markets adapt to fluctuations and changes in production, the economy, or society.
Labour union An organization of workers whose goals include the improvement of working conditions and payments to workers. Unions work on behalf of workers
through negotiations (collective bargaining) with management.
Laissez faire The view that markets should be left alone, with minimal intervention by government.
Land The physical factor of production. It consists of natural resources, some of
which are renewable (for example, wheat) and some of which are nonrenewable (for example, iron ore).
Law of demand As the price of a good falls, the quantity demanded will normally increase.
Law of supply As the price of a good rises, the quantity supplied will normally rise.
Leakages The savings, taxes and import expenditure that remove spending from the
circular flow of income.
Long run aggregate supply (LRAS) Aggregate supply that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity and/or quality of factors of production.
Long-run Phillips curve A curve showing the monetarist view that there is no trade-off between inflation and unemployment in the long run and that there exists a natural rate of unemployment that can only be affected by supply-side policies.
Lorenz curve A curve showing what percentage of the population owns what percentage of the total income in the economy. It is calculated in cumulative terms. The further the curve is from the line of absolute equality (45-degree line), the more
unequal is the distribution of income.
Macroeconomics The study of aggregate economic activity. It investigates how the economy as a whole works.
Managed exchange rates is a system where the exchange rate is determined by market forces, but the government/Central Bank intervenes from time to time in order to keep it within a certain “band” (= range).
Mandated choices Mandated choices are when consumers are required to state whether or not they wish to take part in an action.
Manufactured goods Goods that have been processed by workers.
Marginal costs Marginal costs are the additional costs of producing one more unit of output.
Marginal propensity to consume (MPC) The proportion of each extra amount of income that is spent by households on domestically produced goods and services, (consumption), expressed as a decimal.
Marginal propensity to import (MPM) The proportion of each extra amount of income that is spent by households on imported goods and services, expressed as a decimal.
Marginal propensity to save (MPS) The proportion of each extra amount of income that is saved by households, expressed as a decimal.
Marginal propensity to tax (MPT) The proportion of each extra amount of income that is taken in tax, expressed as a decimal.
Marginal social benefit (MSB) The extra benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit.
Marginal social cost (MSC) The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.
Marginal tax rate The proportion of a person’s additional income that is paid in tax, usually expressed as a percentage.
Marginal utility The extra utility derived from consuming one more unit of a good or service.
Market is the interaction between buyers and sellers in order to exchange goods or services (to make an economic transaction).
Market demand The horizontal sum of the individual demand curves for a product of all the consumers in a market.
Market economy is an economy where resource allocation is determined mainly by market forces of demand and supply.
Market equilibrium The point where the quantity of a product demanded is equal to the quantity of a product supplied. This creates the market clearing price and quantity where there is no excess demand or excess supply.
Market failure The failure of markets to produce at the point where community surplus (consumer surplus + producer surplus) is maximised.
Market mechanism This is the system in which the forces of demand and supply determine the prices of products. Also known as the price mechanism.
Market-oriented policies are the policies that support the allocation of resources by supply and demand (price mechanism) rather than through government intervention in markets.
Market power The ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under perfect competition.
Market supply The horizontal sum of the individual supply curves for a product of all the producers in a market.
Marshall-Lerner condition This condition states that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance if the sum of the elasticity of demand for exports plus the elasticity of demand for imports is greater than one.
Maximum price is the upper limit imposed by the government below which the price may not fall. A maximum price is usually set below the equilibrium to aid relatively poor consumers.
Merit goods are goods or services with strong positive externalities] that would be under-provided by the market and so under-consumed.
Microeconomics The study of the behaviour of individual consumers, firms, and industries and the determination of market prices and quantities of good, services, and factors of production.
Microfinance The provision of small loans to poor entrepreneurs who lack access to traditional banking services.
Minimum price is the lower limit imposed by the government below which the price may not fall. A minimum price is usually set above the equilibrium to aid farmers.
Minimum reserve requirements A requirement by the central bank that sets the minimum amount of reserves that commercial banks must maintain to back their loans.
Mixed economy An economy that has elements of planning and elements of the free market. In reality, all economies are mixed. What is different is the degree of the mix from country to country.
Monetarist/new classical revolution An economic school of thought which argues that changes in the money supply are the most significant determinants of the rate of economic growth and the behaviour of the business cycle. In this school of thought, policy makers should not intervene to manage the level of aggregate demand.
Monetary policy is a demand-side policy with the Central Bank using changes in the money supply or interest rates to affect AD.
Monetary union is a form of economic integration (trade bloc/common market) characterized by a common market, a common currency, a common central bank, and common monetary policy (interest rates)
Money supply The total value of monetary assets available in an economy at a specific time.
Monopolistic competition is a market when there are many buyers and sellers, producing differentiated products, with no barriers to entry.
Monopoly A market structure where there is only one firm in the industry, so the firm is the industry. Monopolies may, or may not, have barriers to entry.
Moral hazard This occurs when a party provides misleading information and changes behaviour after a transaction has taken place.
Multinational corporations are companies that have productive units in more than one country OR that carry out foreign direct investment in another country.
Multidimensional Poverty Index (MPI) An international measure of acute poverty covering over 100 economically least developed countries. It complements traditional income-based poverty measures by capturing the deprivations that each person faces at the same time with respect to education, health and living standards.
Multiplier (HL) is the ratio of the induced change in national income to the increase in the level of injections and it is equal to the reciprocal of the mps + mpt + mpm.
National income The total value of the final output of all new goods and services produced in a country in one year.
Natural rate of unemployment The rate of unemployment that is consistent with a stable rate of inflation. It is the rate where the long run Phillips curve touches the x-axis.
Necessity goods A good where the demand for it increases as income increases, but the increase in demand is less than proportional to the rise in income.
Negative externalities of consumption They are the negative effects that are suffered by a third party when a good or service is consumed.
Negative externalities of production They are the negative effects that are suffered by a third party when a good or service is produced.
Net exports (X-M) Export revenues minus import expenditure.
NGOs are non-government organizations that exist to: promote sustainable economic development and/or humanitarian ideals.
Nominal is the value of an economic variable that has not been adjusted for the effects of inflation.
Nominal gross domestic product The total money value of all final goods and services produced in an economy in a given time period, usually one year, at current values (not adjusted for inflation).
Nominal interest rates Interest rates that have not been adjusted for inflation.
Non-collusive oligopoly This is where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable.
Non-excludable Non-excludability exists when it is impossible to prevent a person, or persons, from consuming a good or service.
Non-government organization (NGO) A non-government organization that exists to promote economic development and/or humanitarian ideals and/or sustainable development.
Non-produced, nonfinancial assets A measure of the net international sales and purchases of non-produced assets, such as land, and intangible assets, such as patents and copyrights.
Normal goods A good where the demand for it increases as income increases.
Normal profit is the amount of revenue needed to cover the total costs of production, including the opportunity costs.
Normative economics This deals with areas of the subject that are open to personal opinion and belief.
Nudge theory This is generally used to describe situations where nudges (prompts, hints) are used to improve the life and wellbeing of people and society.
OECD Better Life Index An index to compare well-being across countries, based on 11 topics that the OECD has identified as essential, in the areas of material living conditions and quality of life.
Official borrowing International borrowing by a government to help to cover a current account deficit.
Official development assistance is aid given from a government or a government (multilateral) agency for the purpose of development and/or welfare
Official foreign aid Aid that is provided to a country by another government or multilateral agency.
(Official) foreign (currency) reserves are reserves of foreign currencies held by the Central Bank or the government of a country.
Oligopoly is a market where few large firms dominate the industry, with at least one other characteristic such as interdependency of firms, high barriers to entry, homogeneous or differentiated product with example, imperfect information.
collusive oligopoly is where a few firms act together to avoid competition by resorting to agreements to fix prices or output.
Open market operations The buying or selling of government securities in the open market in order to increase or decrease the amount of money in the economy.
Opportunity cost is the cost of an economic decision in terms of the next best alternative foregone.
Perfect competition A market structure where there are a very large number of small firms, producing identical products that are incapable of affecting the market supply
curve. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.
Perfect information This exists where all stakeholders in an economic transaction have access to the same knowledge.
Perfectly elastic demand This is where an increase in the price of a good or service leads to a fall in the quantity demanded of the good or service to zero. (PED would be infinity.)
Perfectly elastic supply This is where a fall in the price of a good or service leads to a fall in the quantity supplied of the good or service to zero. (PES would be infinity.)
Perfectly inelastic demand This is where a change in the price of a good or service leads to no change in the quantity demanded of the good or service. (PED would be equal to zero.)
Perfectly inelastic supply This where a change in the price of a good or service leads to no change in the quantity supplied of the good or service. (PES would be equal to zero.)
Phillips curve A curve showing the relationship between the rate of unemployment and the rate of inflation.
Pigouvian taxes An indirect tax that is imposed to eliminate the external costs of negative externalities.
Planned economy An economy where the means of production are collectively owned (except labour). The state determines what/how much to produce, how to produce, and for whom to produce.
Porter hypothesis This hypothesis states that strict environmental regulations can lead to efficiency and encourage innovations for firms that help improve commercial
competitiveness.
Portfolio investment The purchase of financial investments such as shares and bonds in order to gain a financial return in the form of interest or dividends.
Positive discrimination The practice of giving advantage to groups that have been treated unfairly in the past.
Positive economics Positive economics deals with areas of the subject that are capable of being proven to be correct or not.
Positive externalities of consumption The beneficial effects that are enjoyed by a third party when a good or service is consumed.
Positive externalities of production The beneficial effects that are enjoyed by a third party when a good or service is produced.
Poverty The scarcity or the lack of a certain amount of material possessions or money.
Poverty trap/cycle Any circular chain of events starting and ending in poverty, such as low income means low savings means low investment means low growth means low incomes.
Potential growth is an increase in the potential output of an economy through an increase in the quantity/quality of resources
Preferential trade agreement This is where a country agrees to give preferential access (for example, reduced tariffs) to certain products from one or more trading partners.
Price ceiling (maximum price) A price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.
Price controls Prices imposed by an authority, set above or below the equilibrium market price.
Price deflator A coefficient that removes the impact of inflation when measuring economic statistics.
Price discrimination exists when a producer charges a different price to customers for an identical good or service
(Price) elastic demand This is where a change in the price of a good or service leads to a proportionally larger change in the quantity demanded of the good or service. (PED would be greater than one.)
(Price) elastic supply This is where a change in the price of a good or service leads to a proportionally larger change in the quantity supplied of the good or service. (PES would be greater than one.)
Price elasticity of demand is a measure of the responsiveness of quantity demanded to a change in the price of the good.
Price elasticity of supply (PES) A measure of the responsiveness of the quantity supplied of a good or service when there is a change in its price.
Price floor is a price (set by the government) above the equilibrium price, below which the price may not fall.
(Price) inelastic demand This is where a change in the price of a good or service leads to a proportionally smaller change in the quantity demanded of the good or service. (PED would be less than one.)
(Price) inelastic supply This is where a change in the price of a good or service leads to a proportionally smaller change in the quantity supplied of the good or service. (PES would be less than one.)
Price expectations The forecasts or views that consumers hold about future price movements that play a role in determining consumer demand.
Price mechanism The system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.
Primary commodities Raw materials that are produced in the primary sector.
Primary sector Extracts or harvests products directly from the earth in order to produce raw materials or food.
Privatisation A type of supply-side policy where the government sells public assets to the private sector.
Producer surplus The additional benefit received by producers by receiving a price that is higher than the price they were willing to receive.
Product differentiation (HL) is where a producer attempts to distinguish her product from those of competitors, with the aim of making demand less price elastic.
Production possibility curve (PPC) A curve showing 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 and the state of technology is fixed.
Productive capacity The maximum possible output of an economy.
Productive efficiency (HL) exists when production is achieved at lowest cost per unit of output. This is achieved at the point where average total cost is at its lowest value.
Profit maximisation Profit maximisation is producing at the level of output where profits are greatest: where marginal revenue equals marginal cost.
Progressive tax is where the higher the level of income, the higher the percentage of taxation that is paid (or the higher the average rate of taxation).
Property rights give people a legal right to own property/assets.
Proportional tax A system of taxation in which tax is levied at a constant rate as income rises.
Public goods Goods or services which would not be provided at all by the market. They have the characteristics of non-rivalry and non-excludability, for example, flood
barrier.
Public/private partnerships A contractual arrangement between a public agency (federal, state or local) and a private sector firm.
Purchasing power parity (PPP) A theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.
Quantitative easing An expansionary monetary policy where a central bank buys predetermined amounts of government bonds, or other financial assets, in order to stimulate the economy and increase the money supply.
Quantity demanded The willingness and ability to purchase a quantity of a good or service at a certain price over a given time period.
Quantity supplied It is the willingness and ability to produce a quantity of a good or service at a given price over a given time period.
Quasi-public goods Goods which may satisfy the two public good conditions (non-rivalry and nonexcludability) only to a certain extent or only some of the time.
Quotas are import barriers that set limits on the quantity or value of imports into a country.
Rationing An artificial control on the distribution of scarce resources.
Real GDP is the total value of all output (goods and services) produced in an economy (over a given time period) adjusted for inflation (changes in price level)..
Real GDP per person (per capita) Real GDP divided by the population of the country.
Real GNI per person (per capita) Real GNI divided by the population of the country.
Real interest rates Interest rates that have been adjusted for inflation.
Real price is the nominal price of a good or service adjusted for inflation.
Recession is at least two consecutive quarters of negative economic growth.
Regressive taxes is where the proportion of income paid in tax falls as the income of the taxpayer rises or where the average rate of tax falls as income rises.
Relative poverty Relative poverty is a comparative measure of poverty. A person is said to be in relative poverty if they do not reach some specified level of income, for example, 50% of average earnings for the country.
Remittances Remittances are the transfer of money by foreign workers to individuals, often family members, in their home country.
Reserve assets Foreign currencies and precious metals held by governments (central banks) as a result of international trade. Reserves may be held so that the government may maintain a desired exchange rate for the country’s currencies.
Resource allocation is concerned with how resources (land, labor, capital and management) are distributed in an economy.
Restricted choices This is when the choice of a consumer is restricted, but still exists.
Revaluation An increase in the value of a currency in a fixed exchange rate system.
Rivalrous Goods and services are considered to be rivalrous when the consumption by one person, or group of people, prevents others from consuming the good.
Rules of thumb Rules of thumb are mental shortcuts (heuristics) for decision-making to help people make a quick, satisfactory, but often not perfect, decision to a complex
choice.
Satisficing This occurs when entrepreneurs endeavour to cover their opportunity costs, but do not push themselves significantly further, even though they might be
able to earn higher profits. It is essentially a mix of the words “satisfy” and “suffice”.
Say’s Law Say’s Law states that the production of goods creates its own demand.
Scarcity This is the limited availability of economic resources relative to society’s
unlimited demand for goods and services.
Screening The use of a screening process to gain more information regarding a
participant in a transaction, in order to reduce asymmetric information, and so
reduce adverse selection.
Seasonal unemployment Equilibrium unemployment that exists when people are out of work because their usual job is out of season, for example, a ski instructor in the summer.
Short-run aggregate supply (SRAS) Aggregate supply that varies with the level of demand for goods and services and that is shifted by changes in the costs of factors of production.
Short-run Phillips curve A curve showing the inverse relationship between the rate of unemployment and the rate of inflation, which suggests a trade-off between inflation and unemployment.
Signalling The sending of a signal revealing relevant information to a participant in a transaction in order to reduce asymmetric information, and so reduce adverse
selection.
Signalling effect Prices give signal to both producers and consumers. A rising price gives a signal to producers that they should increase their quantity supplied, and signals to consumers that they should decrease the quantity demanded and vice versa.
Social conformity The prevailing social norms or social customs will influence our daily behaviour/choice making.
Social enterprise A company in the social economy, whose main objective is to have a social impact rather than to make a profit for their owners or shareholders. It operates by providing goods and services for the market in an entrepreneurial and
innovative fashion and uses its profits primarily to achieve social objectives.
Social safety net A collection of social welfare services provided by the state, or other institutions, targeted to to vulnerable, resource-deprived households, to prevent them from falling into poverty.
Social sciences Studies of people in society and how they interact with each other.
Social/community surplus The combination of consumer surplus and producer surplus.
Socially optimum output This occurs where the marginal social cost of producing a good is equal to the marginal social benefit of the good to society. In different words, it occurs where the marginal cost of producing a good (including any external costs) is equal to the price that is charged to consumers. (P=MC)
Stakeholder This is someone who has an interest, or stake, in an economic activity.
Standard of living The level of wealth, comfort, material goods, and necessity goods available to a certain socioeconomic class in a country.
Structural unemployment is long term unemployment that occurs when there is a mismatch between the skills of unemployed workers and the jobs available, or that exists as a result of rigidities in the labor market, or a mismatch between the geographical location of the workers and the jobs available, or a permanent fall in the demand for a skill.
Subsidy is a payment made by the government to producers in order to reduce the costs of production, increase output, protect producers from foreign imports, or reduce the price.
Substitutes Goods which can be used in place of each other. For example, Adidas running shoes and Nike running shoes.
Supply curve This shows the relationship between the price of a good or service and the quantity supplied. It is normally upward sloping.
When the price of a product falls, relative to other products, there is an incentive to purchase more of the product, since the marginal utility/price ratio
has improved.
Supernormal profits (HL) refer to a situation where all costs, including opportunity cost, are more than covered by revenue, OR profits that are above the level that is sufficient to keep the firm in an industry.
Supply is the willingness and ability of producers to produce a quantity of a good at a given price (in a given time period).
Supply curve This shows the relationship between the price of a good or service and the quantity supplied. It is normally upward sloping.
Supply-side policies they are policies designed to shift the AS curve to the right. They may include tax cuts, reductions in welfare payments, promotion of training etc.
Sustainability is development that meets the needs of the present generation without compromising the ability of future generations to meet their needs.
Sustainable development is the development needed to meet the needs of the present generation without compromising the ability of future generations to meet their own needs.
Tariff is a tax on imports to protect domestic industries from foreign competition and to raise revenue for the government.
Tastes The subjective, individual preferences of consumers.
Terms of trade deterioration is where the average price of exports falls relative to the average price of imports, or making it more expensive to buy imports, in terms of exports that need to be sold.
Total revenue The aggregate revenue gained by a firm from the sale of a particular quantity of output (equal to price times quantity sold).
Trade cycle: see Business cycle
Trade liberalisation The process of reducing barriers to international trade.
Trade protection Trade protection is an economic policy aiming to limit imports and/or encourage exports by setting up trade barriers.
Tradable permits are permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable. Firms may trade these permits for money.
Tragedy of commons A situation with common access resources, where individual users acting independently, according to their own self-interest, go against the common good of all users by depleting or spoiling that resource through their collective action.
UN sustainable development goals (SDGs) A collection of 17 global goals set by the United Nations to mobilize efforts to end all forms of poverty, fight inequalities and tackle climate change, while ensuring that no one is left behind.
Underemployment is when people are working but they are overqualified for the job they hold, OR when people are employed part time but would like to work full time.
Unemployment is people of working age (those in the labor force) actively seeking work at the current wage rate but cannot find one.
Unemployment benefits Payments, usually made by the government, to people who are unemployed (and actively seeking employment).
unemployment rate is the number of workers without a job, who are willing and able to work, expressed as a percentage of the workforce.
Unitary elastic demand This is where a change in the price of a good or service leads to an equal and opposite proportional change in the quantity demanded of the good or service. (PED would be equal to one.)
Unitary elastic supply This is where a change in the price of a good or service leads to an equal proportional change in the quantity supplied of the good or service. (PES would be equal to one.)
Universal basic income A regular cash payment given to all on an individual basis, without means test or work requirement.
Utility A measure of the satisfaction derived from purchasing a good or service.
Variable costs are the costs of production that change as output changes (or increase as output increases)
Wage is the payment for labor/working
real wage is the payment for labor/working adjusted for inflation.
Wealth The total value of all assets owned by a person, firm, community, or country.
Weighted price index An approach to calculating the change in the price level by giving a weight to each item according to its importance in the consumers’ budgets.
Welfare loss A loss of economic efficiency that can occur when equilibrium for a good or service is not allocatively efficient.
World Bank is an international organization whose main aims are to provide aid and advice to developing countries, as well as reducing poverty levels.
World Trade Organization is an international body that exists:
- to set and enforce rules for international trade
- to provide a forum for negotiating trade liberalization
- to monitor further trade liberalization
- to resolve trade disputes
- to increase the transparency of decision-making processes
- to cooperate with other major international economic
institutions involved in global economic management - to help developing countries benefit fully from the global
trading system.