ALL IB Economics SL Terms

Absolute poverty

The inability of an individual or a family to afford a basic standard of goods and services, where the standard is absolute and unchanging over time. Absolute poverty is defined in relation to a nationally or internationally determined 'poverty line', whi

Actual output

The quantity of output actually produced by an economy.

Ad Valorem Taxes

Taxes calculated as a fixed percentage of the price of the good or service; the amount of tax increases as the price of the good or service increases.

Administrative barriers

Trade protection measures taking the form of administrative procedures that countries may use to prevent the free flow of imports into a country.

Aggregate demand

The total quantity of goods and services that all buyers in an economy (Consumers, Firms, the Government, and Foreigners) want to buy over a particular time period, at different possible price levels.

Aggregate demand curve

The curve that shows that relationship between total quantity of goods and services that all buyers in an economy want to buy over a particular time period.

Aggregate supply

The total quantity of goods and services produced in an economy over a particular time period, at different price levels.

Allocative efficiency

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers. Marginal Cost = Marginal Benefit

Anti-dumping

An argument that justifies trade protection policies: if a country's trading partner is suspected of practicising dumping, than the country should have the right to impose trade protection measures (tariffs or quotas) to limit quantities of the dumped goo

Appreciation

Refers to an increase in the value of a currency in the context of a floating (flexible) exchange rate system or managed exchange rate system.

Appropriate technology

Technologies that are well-suited to a country's particular economic, geographical, ecological, and climate conditions.

Automatic stabilisers

Factors that automatically, without any actions by the government, work toward stabilizing the economy by reducing the short term fluctuation of the business cycle. Two important automatic stabilizers are PROGRESSIVE INCOME TAXES and UNEMPLOYMENT BENEFITS

Balance of payments

A record of all transactions between the residents of a country and the residents of all other countries. It shows all payments received from other countries (credits), and all payments made to other countries (debits). It has CURRENT ACCOUNT, CAPITAL ACC

Balanced Budget

Refers to a situation where the government's tax revenues equals the government expenditures.

Bilateral trade agreement

Any trade agreement involving two trading partners.

Budget deficit

It is a situation where the government's tax revenues are less than the government expenditures over a specific period of time.

Budget surplus

It is a situation where the government tax revenues are greater than government expenditures over a specific period of time.

Business cycle

Fluctuations in the growth of real GDP, consisting of alternating periods of expansions and contractions.

Cap and Trade Scheme

A scheme in which a government authority sets a limit or 'cap' on the amount of pollutants that can be legally emitted by a firm, set by an amount of pollution permits (tradable permits) distributed to firms.

Capital account (BALANCE OF PAYMENTS)

Refers to the inflows minus the outflows of funds for capital transfers (including debt forgiveness and non-life insurance claims) and the purchase or use of non-produced natural resources (such as mineral rights, forestry rights, fishing rights, and airs

Carbon tax

A tax per unit of carbon emissions of fossil fuels.

Central Bank

A financial institution that is responsible for regulating the country's financial system and commercial banks, and carrying out monetary policies.

Ceteris Paribus

other things being equal

Circular flow of income model

A model showing the flow of resources from consumers to firms, and the flow of products from firms to consumers, as well as money flows consisting of consumers' income arising from the sale of their resources and firms' revenues arising from the sale of t

Clean technology

Technology that is not polluting, associated with environmental sustainability. Examples: Solar power, wind power, hydropower, and recycling.

Closed economy

An economy that has no international trade. THIS DOES NOT REALLY EXIST IN THE REAL WORLD.

Commercial bank

A financial institution whose main functions are to hold deposits for their customers, to make loans to their customers, to transfer funds by check from one bank to another, and to buy government bonds.

Common access resources

Resources that are not owned by anyone, do not have a price, and are available for anyone to use without payments. Examples: Lakes, rivers, and fishes in open seas. These resources are a threat to sustainability.

Common market

A type of trading bloc in which countries that have formed a customs union proceed further to eliminate any remaining tariffs in trade between them. Example: European Economic Community.

Competitive market

A market composed of many buyers and sellers acting independently, none of whom has any market power.

Competitive supply

A situation where two goods compete for the same resources. Example: A farmer can produce wheat or corn, but producing ore of one means producing less of the other.

Competition

A situation that occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market.

Complement goods

Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other.

Composite indicator

A summary measure of more than one indicator. For example: Human Development Indicator includes income, education and health indicators.

Concessional loans

Loans that are offered as part of FOREIGN AID, made on concessional terms. They are offered at interest rates that are lower than commercial rates, with longer repayment periods.

Conditional assistance

Refers to development assistance provided by bilateral or multilateral development organizations, which is extended to countries on condition that they satisfy certain requirements, usually requiring that the country adopts particular policies.

Consumer Price Index

A measure of the cost of living for the typical household. It compares the value of a basket of goods and services in one year with the value of the same basket in a base year.

Consumer surplus

Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid.

Consumption

Spending by households (consumers) on goods and services (excludes spending on housing).

Contractionary fiscal policy

A fiscal policy that is usually pursued during an inflationary period. It involves decreasing government spending or increasing taxes. Possibly both methods.

Contractionary monetary policy

A monetary policy usually pursued in an inflationary period. It involves increasing the interest rate (to lower investment and consumption spending).

Core rate of inflation

A rate of inflation based on consumer price index that excludes goods with highly volatile (unstable) prices. This is most notable in food and energy prices.

Corporate indebtedness

The degree to which corporations have debts.

Cost-push inflation

A type of inflation caused by a fall in AGGREGATE SUPPLY, resulting from an increase in COSTS OF PRODUCTION.

Costs of production

The total opportunity costs incurred by firms in order to acquire resources for use in production.

Cross-price elasticity of demand (XED)

A measure of the responsiveness of the demand for one good to a change in the price of another good.

Crowding-out

A situation where increasing government spending causes a higher rate of interest, reducing private investment spending. Thus, reversing expansionary fiscal policy (BTW: it's fiscal policy because it's increasing government spending).

Current account (BALANCE OF PAYMENTS)

This includes the balance of trade (exports minus imports of goods), the balance of services (exports of services minus imports of services), inflows minus outflows of income and current transfers.

Customs union

A type of trading bloc, consisting of a group of countries that fulfill the requirements of a free trade area and adopts a common policy towards all non-member. (It's higher than a FREE TRADE AREA, but lower than a COMMON MARKET)

Cyclical unemployment (demand-deficient unemployment)

A type of unemployment that occurs during the downturns of the business cycle, when the economy is in a recessionary gap.

Deciles

Divisions of a population into ten equal groups with respect to the distribution of a variable, such as income. So, basically 10% of the population with the lowest income.

Deflation

A continuing decrease in the general price level

Demand

Indicates the various quantities of good that consumers are willing and able to buy at different possible prices during a particular time period.

Demand curve

A curve showing the relationship between the quantities of a good consumers are willing and able to buy during a particular time period and their respectable prices.

Demand-pull inflation

A type of inflation caused by an increase in AGGREGATE DEMAND.

Demand-side policies

Policies that attempt to change aggregate demand in order to achieve goals of price stability, full employment, and economic growth, and minimize the severity of the business cycle.

Demerit goods

Goods that are considered to be undesirable for consumers and are over-provided by the market.Reasons for over-provision may be that the good has negative externalities. Example: cigarettes.

Depreciation

A decrease in the value of currency in the context of a floating (or flexible) exchange rate system or managed exchange rate system.

Deregulation

Policies involving the elimination or reduction of government regulation of private sector activities, based on the argument that government regulation stifles the competition and increases inefficiency.

Devaluation

A decrease in the value of the currency in the context of a fixed exchange rate system.

Development aid

Foreign aid intended to help economically less developed countries; may involve project aid, program aid, technical assistance, or debt relief.

Direct taxes

Taxes paid directly to the government tax authorities by the taxpayer, including personal income taxes, corporate income taxes, and wealth taxes.

Disinflation

Refers to a fall in the rate of inflation; it involves a positive rate of inflation.

Disposable income

The income of consumers that is left over after the payment of income taxes.

Diversification

Refers to change involving greater variety, and is used to refer to increasing the variety of goods and services produced and/or exported by a country.

Dual economy

Arises when there are two different and opposing sets of circumstances that exist simultaneously, often found in economically less developed countries. For example: Higher class living with lower class.

Dumping

The practice of selling a good in international markets at a price that is below the cost of producing the good.

Economic efficiency

A condition that arises when allocative efficiency is achieved.

Economic growth

Increases in total real output produced by an economy over time.

Economic intergration

Refers to economic interdependence between countries.

Economically less developed countries

Common characteristics: Low levels of GDP per capita, high levels of poverty, large agricultural sectors, and large urban informal sectors.

Economically more developed countries

Common characteristics: High levels of GDP per capita, relatively low levels of poverty, small agricultural sectors, and large industrial and services sectors.

Economics

The study of choices leading to the best possible use of scarce resources in order to best satisfy the unlimited human needs and wants.

Elasticity

A measure of responsiveness or sensitivity of a variable to changes in any of the variable's determinants.

Empowerment

Creation of conditions for equality of opportunities. It involves increasing the political, social, and economic power of individuals or groups of individuals.

Entrepreneurship (FACTOR OF PRODUCTION)

It involves a special human skill that includes the ability to innovate by developing new ways of doing things, to take business risks and to seek new opportunities for opening and running businesses.

Equilibrium

A state of balance such that there is no tendency to change.

Equity

The condition of being fair or just.

Errors and omissions (BALANCE OF PAYMENTS)

An item that is included to account for possible omissions and errors in items that have been included or excluded in order to ensure that the balance of payments balances.

Excess demand (Shortage)

Occurs when the quantity of good demanded is greater than the quantity supplied.

Excess supply (Surplus)

Occurs when the quantity of a good demanded is smaller than the quantity supplied.

Exchange rate

The rate at which one currency can be exchanged for another, or the number of units of foreign currency that corresponds to the domestic currency.

Excise taxes

Taxes imposed on spending on particular goods or services.

Expansionary fiscal policy

Refers to fiscal policies usually pursued in a recession, involving an increase in government spending or a decrease in taxes.

Expansionary monetary policy

Refers to monetary policy usually pursued in a recession, involving a decrease in interest rates, intended to increase investment and consumption spending.

Expenditure approach

A method used to measure the value of aggregate output of an economy, which adds up all spending on final good sand services produced within a country within a given time period.

Expenditure flow

It is the flow of spending from households to firms to buy the goods and services produced by the firms. The expenditure flow is equal to the income flow and the value of output flow.

Export promotion

Refers to a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports. As a trade and strategy, it looks outward towards foreign markets and is based on stronger links between domestic and global economies.

Externality

Occurs when the actions of consumers or producers give rise to positive or negative side-effects on other people who are not part of these actions, and whose interests are not taken into consideration.

Factors of production

All resources or inputs used to produce goods and services. LAND, LABOR, CAPITAL, AND ENTREPRENEURSHIP.

Financial account (BALANCE OF PAYMENTS)

Refers to the inflows minus outflows of funds due to foreign direct investment, portfolio investment, and changes in reserve assets.

Fiscal policy

Manipulations by the government of its own expenditures and taxes in order to influence the level of aggregate demand.

Fixed exchange rate

Refers to an exchange rate that is fixed by the central bank of the country, and is not permitted to change in response to changes in currency supply and demand. Maintaining the value of a currency at its fixed rate requires constant intervention by the c

Foreign aid

Consists of concessional financial flows from the developed world to economically less developed countries, and includes CONCESSIONAL LOANS, and GRANTS.

Foreign debt

Refers to external debt, meaning the total amount of debt (private and public) incurred by borrowing from foreign creditors. The global problem of debt involves large volumes of public debt.

Foreign direct investment

Refers to investments by firms based in one country (the home country) in productive activities in another country (the host country).

Free rider problem

Occurs when people can enjoy the use of a good without paying for it and arises from non-excludability: people cannot be excluded from using the good, because it is not possible to charge a price. It is often associated with public goods, which are a type

Free trade

The absence of government intervention of any kind in international trade, so that trade takes place without any restrictions between individuals or firms in different countries.

Free trade area

A type of trading bloc, consisting of a group of countries that agree to eliminate trade barriers between themselves. Example: North American Free Trade Agreement.

Freely floating exchange rates

An exchange rate determined entirely by market forces (the forces of supply and demand.)

Frictional unemployment

A type of unemployment that occurs when workers are between jobs, workers make leave their job because they have been fired, or because their employers went out of business, or because they are in search of a better job, or they may be waiting to begin a

Full employment

Refers to maximum use of all resources in the economy to produce the maximum quantity of goods and services that the economy is capable of producing, implying zero unemployment.

GDP per capita

Gross domestic product divided by the number of people in the population.

Gini coefficient

A summary measure of the information contained in the Lorenz Curve of an economy. The closer the Gini coefficient is to 1, the greater the income inequality. The closer the Gini coefficient is to 0, the greater the income equality.

GNI per capita

Gross national income divided by the number of people in the population.

Government budget

A type of plan of a country's tax revenues and government expenditures over a period of time.

Government intervention

The practice of government to intervene in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives.

Grant

A type of foreign aid consisting of funds that are in effect gifts (they do not have to be paid).

Green GDP

Gross domestic product which has been adjusted to take account environmental destruction and/or health consequences of environmental problems.

Gross domestic product (GDP)

A measure of the value of aggregate output of the economy. It is the market value of all final good sand services produced within a country during a given time period.

Gross national income (GNI)

A measure of total income received by the residents of the country, equal to the value of all final goods and services produced by the factors of production supplied by the country's residents. GNI = GDP + (income from abroad - income sent abroad).

Hidden unemployment

Unemployment that is not accounted in official unemployment statistics because of such factors as the exclusion of discouraged workers, the practice of considering part time workers as full-time workers, and others.

Household indebtedness

The degree to which households have debt.

Human capital

The skills, abilities, and knowledge acquired by people, as well as good levels of health, all of which make them more productive.

Human development index (HDI)

A composite indicator of development which includes indicators that measure three dimensions of development: income per capita, levels of health and educational attainment.

Humanitarian aid

Foreign aid extended in regions where there are emergencies caused by violent conflicts or natural disasters such as floods, earthquakes and tsunamis, intended to save lives, ensure access to basic necessities and provide assistance with reconstruction.

Import substitution

Refers to a growth and trade strategy where a country begins to manufacture simple consumer goods oriented towards the domestic market in order to promote its domestic industry.

Incentive-related policies (a type of supply-side policy)

Policies involving reduction of varies types of taxes, in the expectation that the tax cuts will change the incentives faced by tax payers. For example, tax cuts may encourage the desire to work and cuts in business taxes may encourage investment.

Income (Part of CURRENT ACCOUNT)

Refers to inflows of wages, rents, interest and profit earned abroad minus the same income factors that are sent abroad.

Income approach

A method used to measure the value of aggregate output of an economy, which adds up all income earned by factors of production in the course of producing all goods and services within a country in a given time period.

Income elasticity of demand (YED)

A measure of the responsiveness of demand to changes in income.

Income flow

Refers to the flow of income of households that are received by selling their factors of production to firms.

Indebtedness

Refers to the level of debt, or the amount of money owed to creditors.

Indirect taxes

Taxes levied on spending to buy goods and services, called indirect because payments of some or all of the taxes by the consumer is paid to the government authorities by the firms.

Industrial policies

Government policies designed to support the growth of the industrial sector of an economy. It may include support for infant industries through tax cuts, grants, low interest loans, and etc, as well as investment in human capital, research and development

Infant industry

A new domestic industry that has not had time to establish itself and achieve efficiencies in production, and therefore may be unable to compete with more mature competitor firms from abroad. This is used as a strong argument for trade protection policies

Inferior good

A good the demand for which varies negatively with income. As income increases, the demand for the good decreases.

Inflation

A continuous increase in the general price level.

Inflation targeting

A type of monetary policy carried out by some central banks that focuses on achieving a particular inflation target, rather than focusing on the goals of low and stable rate of inflation and low unemployment. Common inflation targets are between 1.5% and

Inflationary gap

A situation where real GDP is greater than potential GDP, and unemployment is lower than the natural rate of unemployment.

Infrastructure

Numerous types of physical capital resulting from investments, making major contributions to economic growth and development by lowering costs of production and increasing productivity. Examples: roads, airports, and dams.

Injections (part of the CIRCULAR FLOW OF INCOME MODEL)

Refers to the entry into income flow of funds corresponding to investment, government spending or exports.

Interest

A payment, per unit of time, for the use of borrowed money (borrowers pay interest, lenders receive interest.)

Interest rate

Interest expressed as a percentage.

International Monetary Fund (IMF)

An international financial institution composed of 185 member countries, whose purpose is to make short-term loans to governments on commercial terms in order to stabilize exchange rates, alleviate balance of payments difficulties, and help countries meet

Interventionist Policy

Any policy based on government intervention in the market.

Interventionist supply-side policy

Any policy based on government intervention in the market intended to affect the supply-side of the economy, usually to shift the LRAS curve to the right, increase potential output and achieve long term economic growth.

Investment

Includes spending by firms or the government on capital goods (buildings, machinery, equipment), and all new spending on new construction (housing and other buildings).

Joint supply

Refers to the production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other. Example: Butter and Skimmed milk are both produced from whole milk, producing more

Keynesian aggregate supply curve

An aggregate supply curve that has a flat horizontal section, and upward sloping section and a vertical section.

Labor (FACTOR OF PRODUCTION)

The physical and mental effort that people contribute to the production of goods and services.

Labor market flexibility

May be achieved by reducing or eliminating interference with market forces. Example: Reducing or eliminating minimum wages and labor union activities, or reducing job security.

Labor market reforms

Reforms intended to make labor markets more competitive and flexible, to make wages respond to the forces of supply and demand, to lower labor costs and increase employment by lowering the natural rate of unemployment. Example: Abolishing or reducing mini

Labor market rigidities

Factors preventing the forces of supply and demand from operating in the labor market, and therefore preventing labor market flexibility. Example: Minimum wages, legislation, and job security.

Land (FACTOR OF PRODUCTION)

All natural resources: land and agricultural land, including minerals, oil reserves, underground water, forests, rivers, and lakes.

Law of Demand

A law stating that there is a negative causal relationship between the price of a good and quantity of the good demanded, over a particular time.

Law of Supply

A law stating that there is a positive causal relationship between the price of a good and quantity of the good supplied, over a particular time.

Leakages (CIRCULAR FLOW OF INCOME)

Refers to withdrawals from the income flow of funds corresponding to savings, taxes, or imports.

Lorenz Curve

A curve illustrating the degree of equality of income distribution in an economy. It plots the cumulative percentage of income received by cumulative shares of the population.

Luxuries

Goods that are not necessary or essential; They have an elastic PED and elastic YED.

Macroeconomic objectives

1) Full employment. 2) Low rate of inflation. 3) Economic growth. 4) An equitable distribution of income. 5) Avoidance of balance of payments problems.

Managed exchange rates

Exchange rates that are mostly free to float to their market price levels over long periods of time; however, central banks periodically intervene in order to stabilize them over the short term.

Marginal benefit

The extra or additional benefit received from consuming one more unit of a good.

Marginal cost

The extra or additional cost of producing one more unit of output.

Marginal private benefits

The extra benefit received by consumers when they consume one more unit of a good.

Marginal private costs

The extra costs to producers of producing one more unit of a good.

Marginal social benefits

The extra benefits to society of consuming one more unit of a good.

Marginal social costs

The extra costs to society of producing one more unit of good.

Market

Any kind of arrangement where buyers and sellers of a particular good, service, or resource are linked together to carry out an exchange.

Market demand

Refers to the sum of all individual consumer demands for a good or service.

Market failure

Occurs when the market fails to allocate resources efficiently, or to provide the quantity and combination of goods and services mostly wanted by society. There is either an underallocation or an overallocation.

Market supply

Refers to the sum of all individual firm supplies of a good or service.

Market-based supply-side policy

Any policy based on promoting well-functioning, competitive markets in order to influence the supply-side of the economy, usually to shift the LRAS curve to the right, increase potential output and achieve long term economic growth. It includes labor mark

Market-oriented policy

A policy in which government intervention is limited, economic decisions are made mainly by the private decision-makers and the market has significant freedom to determine resource allocation.

Maximum price (Price ceiling)

A legal price set by the government, which is below the market equilibrium price.

Merit goods

Goods that are held to be desirable for consumers, but which are underprovided by the market. Reasons for underprovision: Good may have positive externalities, or consumer ignorance about the benefits of the good.

Micro-credit

A program to provide credit (loans) in small amounts to people who do not have access to credit.

Microeconomics

The branch of economics that examines the behavior of individual consumer and firm.

Millennium Development Goals

Eight development goals adopted by the Millennium Declaration of 2000, consisting of 18 targets to be achieved by the year 2015. It includes 1) eradicating extreme poverty and hunger, 2) achieving universal primary education, 3) reducing child mortality,

Minimum price (price floor)

A legal price set by the government which is above the market equilibrium price to fall to its equilibrium level determined by a free market.

Minimum wage (price floor)

A minimum price of wage set by governments in the labor market, in order to ensure that low-skilled workers can earn a wage high enough to secure them with access to basic goods and services.

Monetary policy (Type of demand-side policy)

Policy carried out by central bank, aiming to change interest rates in order to influence aggregate demand.

Monetary union

A high form of economic integration, involving the adoption by a group of countries of a single currency. Example: European Union.

Money

Anything that is acceptable as payment for goods and services.

Multilateral development assistance

Lending to developing countries for the purpose of assisting their development on non-concessional terms by multilateral organizations. Example: World Bank and International Monetary Fund.

Multilateral trade agreement

A trade agreement to lower trade barriers between many countries.

Multinational corporation

A firm involving in foreign direct investment.

National income

The total income of an economy, often used interchangeable with the value of aggregate output.

Natural capital

Refers to an expanded meaning of the factor of production land, including everything that is included in land plus additional natural resources occurring naturally in the environment such as air, biodiversity, soil quality, the ozone layer, and the global

Necessities

Goods that are necessary of essential. They have inelastic PED and inelastic YED.

Negative externality (also known as spillover costs)

A type of externality where the side-effects on third parties are negative or harmful.

Negative externality of consumption

A negative externality caused by consumption activities, leading to a situation where MSB<MPB.

Negative externality of production

A negative externality caused by production activities, leading to a situation where MSC >MPC.

Net exports

Refers to the value of exports minus the value of imports.

Nominal GDP

Gross domestic product measured in terms of current (nominal) prices.

Nominal value

Value that is measured in prices that prevail at the time of measurement, and does not account for changes in the price level.

Non-excludable

A characteristics of some goods where it is not possible to exclude someone from using a good, because it is not possible to charge a price. It is one of the characteristics of public goods.

Non-governmental organizations (NGOs)

Non-profit organizations that provide a very wide range of services and humanitarian functions. Activities are 1) Emergency assistance, 2) Promotion of sustainable development, 3) Protection of child health, 4) Health, 5) Provision of technical assistance

Non-price determinants of demand

The variables that can influence demand: Income, Preferences, Prices of related goods (Substitution and Complementary), and Demographic changes.

Non-price determinants of supply

The variables that can influence supply: Costs of factor of production, Price of related goods (Joint Supply and Competitive Supply), Technology, Producer expectations, Taxes, The number of firms, Supply shocks and Subsidies.

Non-price rationing

The apportioning or distributing of goods among interested users/buyers through means other than price, often necessary when there are price ceilings (maximum prices); may include waiting in line (queues) and underground markets; to be contrasted with 'pr

Non-produced, non-financial assets

A part of the capital account of the balance of payments, which includes a variety of items such as mineral rights, forestry rights, fishing rights and airspace.

Non-rivalrous

A characteristic of some goods where the consumption of the good by one person does not reduce consumption by someone else; it is one of the two characteristics of public goods.

Normal good

a good the demand for which varies positively (or directly) with income; this means that as income increases, demand for the good increases.

Normative economics

The body of economics based on normative statements, which involve beliefs, or value judgements about what ought to be. Normative statements cannot be true or false; they can only be assessed relative to beliefs and value judgements. Normative economics f

Official Development Assistance (ODA)

The most important part of foreign aid, referring to foreign aid that is offered by countries or by international organizations composed of a number of countries (it does not include aid offered by non-governmental organizations).

Open economy

An economy that has international trade: (imports and exports) usually appears in connection with economic theories and models as virtually all economies in the real world are open economies (though to varying degrees).

Opportunity cost

The value of the next best alternative that must be given up or sacrificed in order to obtain something else.

Output approach

A method used to measure the value of aggregate output of an economy, which calculates the value of all final goods and services produced in the country within a given time period. According to the circular flow model, it is equivalent to measurement by t

Overallocation of resources

Occurs when too many resources are allocated to the production of a good relative to what is socially most desirable, resulting in its overproduction.

Overvalued currency

A currency whose value is higher than its free-market value; may occur if the exchange rate is fixed (or pegged), or in a managed exchange rate system, but not in a freely floating exchange rater system.

per capita

Per person, or per head. For example, GDP per capita is total GDP divided by the number of people in the population.

Perfectly elastic demand

Refers to a price elasticity of demand value of infinity, and arises in the case of a horizontal demand curve.

Perfectly elastic supply

Refers to a price elasticity of supply value of infinity, and arises in the case of a horizontal supply curve.

Perfectly inelastic demand

Refers to a price elasticity of supply value of zero, and arises in the case of a vertical demand curve.

Perfectly inelastic supply

Refers to a price elasticity of supply value of zero, and arises in the case of a vertical supply curve.

Personal income taxes

Taxes paid by households or individuals in households on all forms of income, including wages, rental income, interest income, and dividends (income from ownership of shares in a company); is the most important source of government tax revenues in many co

Physical capital

One of the factors of production, which is itself produced (it doesn't occur naturally), used to produce goods and services; includes machinery, tools, factories, buildings, road systems, airports, telephone supply lines, etc. Also referred to as 'capital

Portfolio investment

Financial investment, including investment in stocks and bonds. Appears as an item in the financial account of the balance of payments.

Positive causal relationship

A relationship between two variables in which an increase in the value of one causes an increase in the value of the other, i.e. the two variables change in the same direction; also know as a direct relationship.

Positive externality (also known as Spillover Benefits)

A type of externality where the side-effects on third parties are positive or beneficial.

Positive externality of consumption

A positive externality caused by consumption activities, leading to a situation where MSB>MPC.

Positive externality of production

A positive externality caused by production activities, leading to a situation where MSC > MPC.

Potential output

The level of output that can be produced when there is "full employment".

Poverty

The inability of an individual or family to afford an adequate standard of goods and services. It may be relative or absolute.

Poverty cycle

Arises when low incomes result in low savings, permitting low investments (in physical, human, and natural capital), and therefore, low productivity leading to low incomes.

Preferential trade agreement

An agreement between two or more countries to lower trade barriers between them on particular products, resulting in an easier access to the markets of other members for selected products, compared with the access of countries that are not members.

Price control

Setting of minimum or maximum prices by governments so that prices are unable to adjust to their equilibrium level determined by demand and supply.

Price elastic demand

Relatively high responsiveness of demand to changes in price. PED > 1

Price elastic supply

Relatively high responsiveness of supply to changes in price. PES > 1

Price inelastic demand

Relatively low responsiveness of demand to changes in price. PED < 1

Price inelastic supply

Relatively low responsiveness of supply to changes in price. PES < 1

Price support

Minimum prices (price floors) set by governments for agricultural product.

Price as incentives

The ability of prices, and changes in prices, to convey information to consumers and producers that motivates them to respond by offering them incentives to behave in their best-self-interest.

Prices as signals

The ability of prices, and changes in prices, to communicate information to consumers and producers, on the basis of which they make economic decisions.

Primary commodity

Any product that is produced in the primary sector, which includes agriculture, forestry, fishing, and the extractive industries.

Primary products

All products produced in the primary sector of an economy.

Primary sector

A part of an economy that is dominated by agriculture, including fishing and forestry.

Private good

A good that is both rivalrous and excludable.

Privatisation

A transfer of ownership of the public sector (the government) to the private sector (the private owners).

Producer Price Index

Consists of several indices of prices received by the producers of goods at various stages in the production process.

Producer surplus

Refers to the difference between the price received by firms for selling their goods and the lowest price firms are willing to receive to produce the good.

Production possibilities curve

All possible combination of the maximum amounts of two goods that can be produced by an economy, given fixed and unchanging resources and technology.

Productive efficiency

Occurs when firms produce at the lowest possible cost.

Productivity

Refers to the quantity of output produced for each hour of work of the working population.

Profit

A payment per unit of time to owner of entrepreneurship.

Program aid

Foreign aid involving financial support to sectors, such as education, health care, agriculture, urban development, financial sector (credit, banking, insurance), and the environment.

Progressive taxation

As income increases, the fraction of income paid as taxes increases.

Project aid

Foreign aid involving support for specific projects, such as building schools, clinics, hospitals, irrigation systems, or other agricultural infrastructure.

Proportional taxation

Taxation where as income increases, the fraction of income paid as taxes remain constant.

Public debt

Refers to the government's accumulation of budget deficits minus budget surpluses.

Public good

A good that is non-rivalrous and non-excludable.

Purchasing power parity exchange rate

Special exchange rates between currencies that makes the buying power of each currency equal to the buying power of the US $1, and therefore, equaling each other.

Quintiles

Division of population into five equal groups with respect to the distribution of a variable, such as income. Example: The lowest income quintile refers to the 20% of the population with the lowest income.

Quota

A type of trade protection that involves setting a legal limit to the quantity of a good that can be imported over a particular time period.

Real GDP

Gross domestic product measured in constant prices.

Reallocation of resources

Refers to reassigning resources to particular uses, so that the allocation of resources changes and becomes a new allocation.

Recession

An economic contraction, where there is falling real GDP and increasing unemployment of resources, lasting six months or more.

Recessionary gap

A situation where real GDP is less than potential GDP, and unemployment is greater than the natural rate of unemployment.

Redistribution of income

Refers to changing the distribution of income, giving rise to a new distribution.

Regional trade agreement

A trade agreement between several countries that are located within a geographical region. Example: NAFTA.

Regressive taxation

Taxation where as income increases, the fraction of income paid as taxes decreases.

Relative poverty

The inability of an individual or family to afford an adequate standard of goods and services, where the adequate standard is relative and changes over time.

Rent

A payment, per unit of time, to owners of land resources who supply their land to the production process.

Reserve assets

Refers to foreign currency reserves that the central bank maintains and can buy or sell to influence the value of the country's currency exchange rate.

Resources

Factors of production, used by firms as inputs in the production process.

Resource allocation

Assigning available resources, or factors of production, to specific uses chosen among many possible and competing alternatives. It involves answering "What to produce" and "How to produce".

Revaluation (of a currency)

Refers to an increase in the value of the currency in the context of a fixed exchange rate system.

Rivalrous

A characteristic of a good according to which its consumption by one person reduces its availability for another person.

Scarcity

The condition in which available resources are limited.

Seasonal unemployment

A type of unemployment that occurs when the demand for labor in certain industries changes on a seasonal basis because of variations in needs.

Social optimum

Refers to a situation that is best from the social point of view, determined by the achievement of allocative efficiency.

Social safety net

A system of government transfers of cash or goods to vulnerable groups, undertaken to ensure that these groups do not fall below a socially acceptable minimum standard of living.

Social surplus

The sum of consumer and producer surplus.

Spare capacity

Refers to physical capital that firms have available but do not use; arises in recessions.

Specific tax

A tax calculated as an absolute amount per unit of the good or service sold.

Speculation

Buying and selling of something in hope of making profit.

Structural unemployment

A type of unemployment that occurs as a result of technological changes and changing patterns of demand, as well as geographical changes, and labor market rigidities.

Subsidy

An amount of money paid by the government to firms for reasons: to protect infant industries, to support producers' income, or as a form of protection against imports.

Substitute goods

Two or more goods that satisfy a similar need, so that one good can be used instead of the other. If two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other.

Supply

Indicates the various quantities of a good that firms (or a firm) are willing and able to produce and sell at different possible prices during a particular time period.

Supply of money

The amount of money in circulation, determined by the central bank of a country.

Supply shock

Events that have a sudden and strong impact on short-run aggregate supply. Example: A war that destroys physical capital or unfavorable weather on a factor of production.

Supply-side policies

A variety of policies that focus on aggregate supply. There are market-based policies and interventionist policies.

Tariffs

Taxes on imported goods.

Tied aid

The practice whereby donors make the recipients of foreign aid spend a portion of the borrowed funds on the purchase of goods and services from the donor country.

Total revenue

The amount of money received by firms when they sell a good or service. TR = P x Q.

Tradable permits

Permits that can be issued to firms by a government or international body, and that can be traded (bought and sold) in a market, the objective being to limit the total amount of pollutants emitted by the firms.

Trade liberalization

The policy of liberalizing international trade by eliminating trade protection and barriers to trade.

Trade protection

Government intervention in international trade through imposition of trade restrictions to prevent the free entry of imports into a country and protect the domestic economy from foreign competition.

Trading bloc

A group of countries that have agreed to reduce tariff and other barriers to trade for the purpose of encouraging the development of free or freer trade and cooperation between them.

Transfer payments

Payments made by the government to individuals specifically for the purpose of redistributing income.

Underallocation of resources

Occurs when too few resources are allocated to the production of a good relative to what is socially most desirable.

Underemployment

The number of underemployed people, defined as all people above a particular job who have part-time jobs.

Underground market

Refers to a market that arises whenever a buying/selling of a transaction is unrecorded.

Undervalued currency

A currency whose value is lower than its free-market value.

Unemployment

The number of unemployed people, defined as all people above a particular age who are not working and not actively searching for work.

Unemployment rate

The measure of the amount of unemployment in an economy.

Unit elastic demand

Refers to a price elasticity of demand value of one.

Unit elastic supply

Refers to a price elasticity of supply value of one.

Urban informal sector

That part of an urban economy that lies outside the formal economy, consisting of economic activities that are unregistered and legally unregulated.

Value of output flow

Refers to the value of output that is sold by firms and purchased by consumers.

Wage

A payment, per unit of time, to those who provide labor.

Welfare

Refers to the well-being of population.

Welfare loss

Refers to a loss of a portion of social surplus that arises when MSB doesn't equal MSC.

World Bank

A development assistance organization, composed of 185 member countries which are its joint owners, that extends long-term credit to developing country governments for the purpose of promoting economic development and structural changes. It consists of tw

World Trade Organization

An international organization that provides the institutional and legal framework for the trading system that exists between member nations worldwide, responsible for liberalizing trade, operating a system of trade rules and providing a forum for trade ne

Coase theorem

The proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own.

Ability to pay principle

The idea that taxes should be levied on a person according to how well that person can shoulder the burden.

Taxation

The action of the taxing authorities levying a tax.

Value added tax

A type of consumption tax that is placed on a product whenever value is added at the stage of production and at final sale.

Corrective tax

A tax designed to induce private decision makers to take account of the social costs that arise from a negative externality.

Marginal tax rate

The extra taxes paid on an additional dollar of income.

Average tax rate

Total taxes paid divided by total income.

Lump-sum tax

A tax that is the same amount for every person.

Common good

Goods that are rivalrous and non-excludable

Benefit principle

The idea that people should pay taxes based on the benefits they receive from government services.

Transaction cost

The costs that parties incur in the process of agreeing to and following through on a bargain.

Marginal external cost

Change in total cost incurred by households or firms, associated with a unit-change in the consumption or output of other households or businesses.

Regulation

The policies involving government regulation of a private sector's activities, based on the argument that governments can help/improve the economy's performance.

Property rights

The ability of an individual to own and exercise control over scarce resources.