IB Economics Glossary of Subject-Specific Terms

This arises when average revenue is greater than average cost (greater than the minimum return required by a firm to remain in a line of business).

A country has ________ _________ in the production of a good if it can produce more of it with the same resources or, equivalently, if it can produce the same amount using fewer resources compared to another country.

People living below the minimum income necessary to satisfy basic physical needs (food, clothing, and shelter); as of October 2015, the World Bank international poverty line is set at US $1.90 PPP per day.

When a firm acts with the intention to eliminate competitors or to prevent entry of new firms in a market.

Occurs when real output (real GDP) increases through time and is a result of greater or better use of existing resources. In the PPC model it can be illustrated by a movement from a point inside a PPC to another point in the northeast direction.

Trade barriers in the form of regulations that aim to limit imports into a country. These barriers may take the form of product safety standards, sanitary standards or pollution standards but may also include more stringent than necessary application of customs procedures.

A type of market failure involving asymmetric information, where the party with the incomplete information is induced to withdraw from the market. The buyer, for example, of a used car, may hesitate to buy without knowing about the quality of the vehicle. The seller, for example of health insurance, may hesitate to sell a policy without knowing the health of the buyer.

Planned spending on domestic goods and services at different average price levels, per period of time. Consists of consumption, investment and government expenditures plus net exports.

A curve showing the planned level of spending on domestic output at different average price levels.

The planned level of output domestic firms are willing and able to offer at different average price levels.

A curve showing the planned level of output that domestic firms are willing and able to offer at different average price levels.

Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).

When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB MSC.

Refers to situations when people rely on a piece of information that is not necessarily relevant as a reference point when making a decision.

Typically refers to tariffs that aim at raising the artificially low price of a dumped imported good to the level of the higher domestic price. A dumped good is one that is exported at a price below the cost of producing it.

Laws and regulations that are intended to restrict anti-competitive behaviour of firms that are abusing their market power.

When the price of a currency increases in a floating exchange rate system.

Technology that relies mostly on the relatively abundant factor an economy is endowed with.

A type of market failure where one party in an economic transaction has access to more or better information than the other party.

Institutionally built-in features (like unemployment benefits and progressive income taxation) that tend to decrease the short-term fluctuations of the business cycle without the need for governments to intervene.

Total costs per unit of output produced.

Revenue earned per unit sold; _______ _______ is thus equal to the price of the good.

The ratio of the tax paid by an individual over their income expressed as a percentage.

A record of the value of all transactions of a country with the rest of the world over a period of time.

Part of the balance of payments, it is the value of exports of goods of a country minus the value of imports of goods over a given period of time.

Part of the balance of payments, it is the value of exports of services of a country minus the value of imports of services over a given period of time.

Anything that deters entry of new firms into a market, for example, licenses or patents.

A subdiscipline of economics that relies on elements of cognitive psychology to better understand decision-making by economic agents. It challenges the assumption that economic agents (consumers or firms) will always make rational choices with the aim of maximizing with respect to some objective.

Systematic deviations from rational choice decision-making.

An agreement between two countries to phase-out or eliminate trade related barriers.

A term introduced by Herbert Simon that suggests consumers and businesses have neither the necessary information nor the cognitive abilities required to maximize with respect to some objectives (such as utility), and thus choose to satisfice. They therefore are rational only within limits.

The idea that individuals, even when they know what they want, may not be able to act in their interests. Findings of bounded self- control include evidence of procrastination (for example, among students, professionals and others) that may result in self-harm, and submitting to temptation (for example, dieters).

The idea that people do not always maximize self-interest but also have concern for the well- being of others as shown by volunteer work and charity contributions.

When government expenditures exceed government (tax) revenues usually over a period of a year.

A measure of the degree of optimism that businesses have about the economic future.

The short-term fluctuations of real GDP around its long-term trend (or potential output).

Tax levied on the income of a business or corporation.

Physical _______ refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country. Human _______ refers to the education, training, skills and experience embodied in the labour force of a country.

A subaccount of the balance of payments that includes credit and debit entries for non- produced, non-financial assets as well as capital transfers between residents and non-residents.

Occurs when money and other assets flow out of a country to seek a “safe haven” in another country.

A tax on the profits realized from the sale of financial assets such as stocks or bonds.

Include financial or non-financial assets for items including debt forgiveness, investment, non- life insurance claims. They are part of the capital account of the balance of payments.

Taxes levied on the carbon content of fuel. They are a type of Pigouvian tax.

An institution charged with conducting monetary and exchange rate policy, regulating behaviour of commercial banks, and providing banking services to the government and commercial banks.

A Latin expression meaning “other things being equal”.

The design of environments based on the idea that the layout, sequencing, and range of choices available affect the decisions made by consumers.

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.

A simplified illustration that shows the flows of income and expenditures in an economy.

In the case of a common pool resource, such as a fishery, users solve the problem of overuse by devising rules concerning the obligations of the users, the monitoring of the use of the resource, penalties of abuse, and conflict resolution.

A market where firms agree to fix price and/or to engage in other anticompetitive behaviour.

When a group of countries agree not only to free trade of goods and services but also to free movement of capital and labour.

A diverse group of natural resources that are non-excludable, but their use is rivalrous, for example, fisheries.

When a country can produce a good at a lower opportunity cost compared to another country.

A market with many firms acting independently where no firm has the ability to control the price.

Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.

When goods that a firm is producing use the same resources in their production process. The goods thus compete with each other for the use of the same resources.

Goods that are jointly consumed, for example, coffee and sugar.

An indicator that is comprised as an average of more than one economic variable, for example, the HDI.

The proportion of industry sales accounted for by the largest firms; the greater this proportion, the greater the degree of market power of the firms in the industry.

A measure of the degree of optimism that households have about their income and economic prospects.

Small design changes that include positive reinforcement and indirect suggestions that can influence the behaviour of consumers.

The average of the prices of the goods and services that the typical consumer buys expressed as an index number. The ___ is used as a measure of the cost of living in a country and to calculate inflation.

The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.

Spending by households on durable and non- durable goods and on services over a period of time.

Refers to a decrease in government expenditures and/or an increase in taxes that aim at decreasing aggregate demand and thus reducing inflationary pressures.

A policy employed by the central bank involving an increase in interest rates and aimed at decreasing aggregate demand and thus inflationary pressures. Referred to also as tight monetary policy.

The sum of what a corporation owes to banks or other holders of its debt.

A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.

Inflation that is a result of increased production costs (typically because of rising money wages or rising commodity prices) and illustrated by a leftward shift of the SRAS curve.

Refers to transactions within the balance of payments of a country that lead to an inflow of currency (for example, the export of goods); these transactions enter the account with a plus sign.

A grade assigned by certain agencies (such as Moody’s or Standard and Poor’s) on the borrowing risks a prospective issuer of debt (for example, of a bond) presents to lenders.

The idea that expansionary fiscal policy is not very effective in increasing aggregate demand because the increased borrowing needs of the government to finance the increased expenditures could lead to increased interest rates. Thus, reducing private sector investment, consumer spending, and other components of AD.

A subaccount of the balance of payments that records the value of net exports in goods and services, net income and net current transfers of a country over a period of time.

Exists when the sum of net exports of goods and services plus net income plus net current transfers is negative (or simply when debits or outflows are greater than credits or inflows).

Exists when the sum of net exports of goods and services plus net income plus net current transfers is positive (or simply when credits or inflows are greater than debits or inflows).

An entry in the current account that records payments between residents and non-residents of a country without something of economic value being received in return and that affect directly the level of disposable income (for example, workers remittances, pensions, aid and grants, and so on).

An agreement between countries to phase out or eliminate tariffs and other trade barriers and establish a common external barrier toward non-members.

Unemployment that is a result of a decrease in aggregate demand and thus of economic activity; it occurs in a recession.

Refers to transactions within the balance of payments of a country that lead to an outflow of currency (for example, the import of services); these transactions enter the account with a minus sign.

A reduction of the debt burden of developing countries organized by the World Bank and the IMF.

Refers to the repayment of principal and interest on the debt of a person, a firm or a country.

When a choice is made by default, meaning that when given a choice it is the option that is selected when one does not do anything.

A sustained decrease in the average price level of a country.

Arises when the equilibrium level of real output

The relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus.

A curve illustrating the relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus. It is normally downward sloping.

Policies that aim at manipulating aggregate demand through changes in interest rates (monetary policy) or changes in government expenditures and taxation in order to influence growth, employment and inflation.

Inflation that is caused by increases in aggregate demand.

Refers to economic policies that aim at affecting aggregate demand and thus macroeconomic variables such as growth, inflation and employment; demand side policies include fiscal policy and monetary policy.

Goods or services that not only harm the individuals who consume these but also society at large, and that tend to be overconsumed. Usually they are due to negative consumption externalities.

A decrease in the value of a currency in terms of another currency in a floating or managed exchange rate system.

Policies that reduce or eliminate regulations related to the operation of firms so that production costs decrease—resulting in increased competition and higher levels of output.

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

Aid aimed at assisting developing countries in their development efforts. Includes project aid, program aid and debt relief. It is concessional meaning there are low interest rates and long repayment periods.

Taxes on income, profits or wealth paid directly to the government.

The interest rate that a central bank charges commercial banks for short-term loans (also referred to as the refinancing rate).

When the average price level continues to rise but at a slower rate so that the rate of inflation is positive but lower.

When a firm sells abroad at a price below average cost or below the domestic price.

According to the UN these are low-income countries facing severe structural constraints to sustainable development, with low levels of human assets, highly vulnerable to economic and environmental shocks.

A multidimensional concept involving a sustained increase in living standards that implies higher levels of income and thus greater access to goods and services, better education and health, a better environment to live in as well as individual empowerment.

Refers to increases in real GDP over time.

Economic interdependence between countries usually involving agreements between two or more countries to phase-out or eliminate trade and other barriers between them.

_________ is the study of how to make the best possible use of scarce or limited resources to satisfy unlimited human needs and wants.

A multidimensional concept relating to the level of prosperity and quality of living standards in a country.

Falling average costs that a firm experiences when it increases its scale of operations.

In general, involves making the best use of scarce resources. May refer to producing at the lowest possible cost or to allocative efficiency where marginal social costs are equal to marginal social benefits or where social surplus is maximum.

A measure of the responsiveness of an economic variable (such as the quantity demanded of a product) to a change in another economic variable (such as its price or income).

A measure of the responsiveness of the volume of exports to a change in their price.

A measure of the responsiveness of the volume of imports to a change in their price.

A curve showing the relationship between consumers’ income and quantity demanded of a good. It indicates whether a good is normal or inferior.

Refers to the ability of certain individuals to organize the other factors of production (land, labour, capital) and their willingness to take risks.

A state of balance that is self-perpetuating in the absence of any outside disturbance.

The concept or idea of fairness.

Occurs when quantity demanded at some price is greater than quantity supplied.

Occurs when quantity supplied at some price is greater than quantity demanded.

The value of one currency expressed in term of another currency; for example, €1 = US$1.5.

A characteristic that most goods have that refers to the ability of producers to charge a price and thus exclude whoever is not willing or able to pay for it from enjoying it.

Refers to an increase in government expenditures and/or a decrease in taxes that aim at increasing aggregate demand and thus real output and employment.

Monetary policy aiming at increasing aggregate demand through a decrease in interest rates; also referred to as easy monetary policy.

One of three analytically equivalent approaches of measuring GDP that adds all the expenditures made on final domestic goods and services over a period of time by households, firms, the government and foreigners.

Contractionary demand side policies aiming at decreasing national income and thus expenditures on imports so that a current account deficit narrows.

Policies aimed at switching expenditures away from imports towards domestically produced goods and services by making imports more expensive in order to narrow a current account deficit. It includes lowering the exchange rate as well as adopting trade protection.

Goods and services produced in one country and purchased by consumers in another country.

Growth policies aiming at expansion of export revenues as the vehicle of economic growth; often contrasted to import substitution.

The revenues collected by exporting firms.

Payments made by the government to exporting firms on the basis of the number of units exported.

A situation where the value of a country’s exports is balanced by the value of its imports over a period of time, such that a current account surplus or deficit does not persist over long periods.

External costs or benefits to third parties when a good or service is produced or consumed. An externality arises when an economic activity imposes costs or creates benefits on third parties for which they are not compensated or do not pay for respectively.

Resources used in the production of goods and services; include land (natural resources), labour, capital and entrepreneurship.

In the balance of payments this records inflows and outflows of portfolio and FDI funds over a period of time, official borrowing and changes in reserve assets.

An entity such as a business that uses factors of production in order to produce and sell goods and services and earn profits. It is an important decision maker in a market economy.

Productive units that transform inputs (factors of production) into output (goods and services), usually aiming at earning profits.

A demand-side policy using changes in government spending and/or direct taxation to influence aggregate demand and thus growth, employment and prices.

An exchange rate system where the exchange rate is fixed, or pegged, to the value of another currency (or to the average value of a selection of currencies) and maintained there with appropriate central bank intervention.

An exchange rate system where the exchange rate is determined solely by the market demand and market supply of the currency in the foreign exchange market without any central bank intervention.

Refers to flows of grants or loans from developed to developing countries that are non-commercial from the point of view of the donor and for which the terms are concessional (that is, the interest rate is lower than the market rate and the repayment period longer).

In an open economy the term refers to exports and imports.

In behavioural economics, the term refers to the way choices are presented as a simple change of the “frame”, that may affect the choice made. For example, highlighting the positive or the negative aspects of the same choice may lead to different decisions.

Goods such as air or sea water that are not considered scarce and thus do not have an opportunity cost.

An economy where the means of production are privately owned and where market forces determine the answers to the fundamental questions (what/how much, how and for whom) that all economies face.

Arises when individuals consume a good or service without paying for it because they cannot be excluded from enjoying it.

International trade that is not subject any kind of trade barriers, such as tariffs or quotas.

An agreement between two or more countries to phase-out or eliminate trade barriers between them, members of the agreement are free to maintain their own trade policy towards non-members.

Unemployment of individuals who are in- between jobs, as people quit to find a better job or to move to a different location.

A goal of macroeconomic policy that aims at fully utilizing the scarce factor of production labour. Full employment exists when the economy is producing at its potential level of real output and thus there is only natural unemployment (the AD–AS model considers the AD and AS curves together). In the production possibilities curve (PPC model), full employment exists when the economy is producing on the PPC.

The level of output that is produced by the economy when there is only natural unemployment.

A branch of mathematics that studies the strategic interaction of decision-makers that may be individuals, firms, countries, and so on.

A composite indicator that measures gender inequalities in three dimensions of human development, namely reproductive health, empowerment and economic status.

A measure of the degree of income inequality of a country that ranges from zero (perfect income equality) to one (perfect inequality). Diagrammatically it is the ratio of the area between the Lorenz curve and the diagonal over the area of the half-square.

The sum of all past budget deficits minus any budget surpluses; the total amount the government owes to domestic and foreign creditors.

Refers to all spending by the government that is distinguished into current expenditures, capital expenditures and transfer payments.

The value of all final goods and services produced within an economy over a period of time, usually a year or a quarter.

The income earned by all national factors of production independently of where they are located over a period of time; it is equal to GDP plus factor income earned abroad minus factor income paid abroad.

When the production possibilities of a country increase because of more/better resources and/or better technology becoming available; illustrated by a shift outwards of the PPC.

An index that is used to measure economic well- being of a population using several quality of life dimensions.

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.

Goods that are considered identical across firms in the eyes of consumers; examples include mostly primary sector goods like corn, wheat or copper.

The money that households owe.

Groups of individuals in the economy who share the same living accommodation, who pool their income and jointly decide the set of goods and services to consume.

Groups of individuals in the economy who share The education, training, skills, experience and good health embodied in the labour force of a country.he same living accommodation, who pool their income and jointly decide the set of goods and services to consume.

A composite index of development that reflects the three basic goals of development, which are a long and healthy life, improved education, and a decent standard of living. The variables measured are life expectancy at birth, mean years of schooling and expected years of schooling, and GNI per capita (PPP US$).

Aid given to alleviate short-term suffering, consisting of food aid, medical aid, and emergency relief aid usually as a result of a natural catastrophe or war.

A market structure where firms have a degree of market power as they face a negatively sloped demand curve and can thus set price.

When the information about a market or a transaction is incomplete.

The value of imports of goods and services.

The value of goods and services purchased domestically that are produced abroad.

A growth strategy where domestic production is substituted for imports in an attempt to shift production away from the primary sector and industrialize. This strategy requires that the domestic industry is protected from import competition.

Policies that aim at improving economic incentives of individuals and firms.

Prices provide producers and consumers the incentive to respond to price changes. Given a price change, producers have the incentive to change the quantity supplied in accordance with the law of supply, while consumers have the incentive to change the quantity demanded based on the law of demand.

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.

One of the three equivalent ways that GDP can be measured, by adding all the incomes generated in the production process (wages, profits, interest and rent) for a given time period.

The law of demand is explained by the substitution and the income effect. The income effect states that if the price of a good increases then the real income of consumers decreases and, typically, they will tend to buy less of the good—thus working in the same direction as the substitution effect.

The responsiveness of demand for a good or service to a change in income.

Taxes on expenditure to buy goods and services.

A type of interventionist supply-side policies whereby the government chooses to support specific industries through preferential tax cuts, subsidies, subsidized loans and other means as they are considered pivotal in the growth prospects of the economy.

A composite indicator consisting of an average of a country’s achievements in health, education and income all adjusted for the degree of inequality characterizing each.

Refers to a new industry that should be protected from foreign competition until it is large enough to achieve economies of scale that will allow it to be internationally competitive. It is used as an argument in favour of trade protection in developing countries.

Lower quality goods for which higher quality substitutes exist; if incomes rise, demand for the lower quality goods decreases.

A sustained increase in the average level of prices.

The case where equilibrium real output exceeds potential output as a result of an increase in AD.

The percentage change between two periods of the average price level, usually measured through the CPI.

Refers to the part of an economy where activity is not officially recorded, regulated or taxed. The activities of the informal economy are not included in a country’s national income figures.

Physical capital typically financed by governments that is essential for economic activity to take place, including roads, power, telecommunications and sanitation, generating significant positive externalities.

Within the circular flow model these refer to spending on domestic output that does not originate from households and thus includes investment spending by firms, government expenditures and exports.

The cost of borrowing money or the reward for saving money over a period of time expressed as a percentage.

An international financial institution of 189 countries whose objectives include to improve global monetary cooperation and secure financial stability by monitoring the economic and financial policies of its members and providing them with advice and with loans, if they face balance of payments difficulties.

Trade that involves the exports and imports of goods or services between countries.

A set of policies that aim to increase an economy’s productive capacity that relies on a greater role for the government; these include expenditures on infrastructure, education, health care, research and development, and all industrial policies.

Spending by firms on capital goods such as machines, tools, equipment and factories.

Following devaluation or a sharp depreciation, a trade deficit will typically widen before it starts improving thus tracing the letter “J” if plotted against time, because the Marshall- Lerner condition is satisfied only after a period of several months following the decreased value of the currency.

Following devaluation or a sharp Goods jointly produced, for example beef and cattle hides; producing one automatically leads to the production of the other.

An aggregate supply curve that shows the level of real output produced in an economy in relation to the price level. It consists of three sections: a horizontal section, an upward- sloping section and a vertical section. Changes in real GDP or the price level depend on aggregate demand and how close to capacity the economy is operating.

The idea that an increase (or, more generally, a change) in any injection will lead to a greater increase (change) in real GDP or national income because an increase in spending generates additional income that leads to further spending, and thus more income. Its size depends on the size of the withdrawals from the circular flow, as these reflect income not spent on domestic output.

An economic school of thought based upon the works of John Maynard Keynes, challenging the classical (laissez faire) viewpoint and advocating an interventionist role for the government in managing the level of aggregate demand and thus of economic activity.

One of the four factors of production that refers to the physical and mental contribution of workers to the production process.

The labour market is considered flexible if it can adjust fast and fully to changes in labour demand and labour supply conditions.

An organization of workers whose goals include improving working conditions and achieving higher compensation for members. Unions permit workers to negotiate more effectively with employers.

The view that if market forces are left alone unimpeded by government intervention the outcome will be efficient.

One of the four factors of production that refers to the natural resources with which an economy is endowed; also referred to as “gifts of nature”.

Property (ownership) legal rights over land holdings that include rights to possess, occupy and use the land.

A law stating that as the price of a good falls, the quantity demanded will increase over a certain period of time, ceteris paribus.

A short-run law of production stating that as more and more units of the variable factor (usually labour) are added to a fixed factor (usually capital) there is a point beyond which total product continues to rise but at a diminishing rate or, equivalently, marginal product starts to decrease.

The idea that as an individual consumes additional units of a good, the additional satisfaction enjoyed decreases.

A law stating that as the price of a good rises, the quantity supplied will rise over a certain period of time, ceteris paribus.

Income not spent on domestic goods and services. It includes savings, taxes and import expenditure.

Aggregate supply that is dependent upon the resources and technology in the economy, thus being independent of the price level. It is vertical at the level of potential output. It can only be increased by improvements in the quantity and/or quality of factors of production as well as improved technology.

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 at the level of potential output.

The period of time when all factors of production are variable.

The period of time when the prices of all factors of production, especially wages, change to match changes in the price level.

Growth over long periods of time. In the PPC model this is shown by outward shifts of the PPC. When shown in the AD–AS model (the AD–AS model considers the AD and AS curves together), it is shown by rightward shifts in the LRAS curve.

Refers to average growth over long periods of time shown in the business cycle diagram as the line that runs through short-term fluctuations, indicating changes in potential output

A curve showing what percentage of the population owns what percentage of the total income or wealth in the economy. It is calculated in cumulative terms. The further the curve is from the line of absolute equality (along the diagonal), the more unequal the distribution of income.

Occurs when total costs of a firm are greater than total revenues. It is equal to total cost minus total revenue.

Goods that are not considered essential by consumers therefore they have a price elastic demand (PED > 1), or income elastic demand (YED > 1).

The study of aggregate economic activity. It investigates how the economy as a whole works.

An exchange rate that floats in the foreign exchange markets but is subject to intervention from time to time by domestic monetary authorities, in order to prevent undesirable movements in the exchange rate.

Choices made by consumers who are required to state whether or not they wish to take part in an action.

Products or goods that have been produced by workers often working with capital goods.

The extra or additional benefit enjoyed by consumers that arises from consuming one more unit of output.

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

The proportion of extra or additional income that is spent by households on goods and services (consumption).

The proportion of extra or additional income that is spent by households on imported goods and services.

The proportion of extra or additional income that is saved by households.

The proportion of extra or additional income that is paid in taxes, also referred to as the marginal tax rate.

The extra or additional revenue that arises for a firm when it sells one more unit of output.

The extra or additional benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit.

The extra or additional cost to society of producing an additional unit of output, including both the private cost and the external costs.

The proportion of a person’s extra or additional income that is paid in tax, usually expressed as a percentage.

The extra or additional utility derived from consuming one more unit of a good or service.

Any arrangement where buyers and sellers interact to carry out an economic transaction.

A set of policies based on well-functioning competitive markets in order to promote long- term economic growth, shown by increases in long-run aggregate supply.

The extent to which the total sales in a market are accounted for by the largest firms, providing an indication of the degree of market power in the industry. It is measured by the concentration ratio.

The sum of the individual demand curves for a product of all the consumers in a market.

In a market this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or excess supply.

The failure of markets to achieve allocative efficiency. Markets fail to produce the output at which marginal social benefits are equal to marginal social costs; social or community surplus (consumer surplus + producer surplus) is not maximized.

The system in which the forces of demand and supply determine the prices of products. Also known as the price mechanism.

Approaches or policies that are based on the actions of private decision-makers operating in markets with a minimum amount of government intervention.

The ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under perfect competition (or P > MC).

The percentage of total sales in a market accounted for by one firm.

The horizontal sum of the individual supply curves for a product of all the producers in a market.

A condition stating that a depreciation or devaluation of a currency will lead to an improvement in the current account balance if the sum of the price elasticity of demand for exports plus the price elasticity of demand for imports is greater than one.

A price set by a government or other authority that is below the market equilibrium price of a good or service, also known as a price ceiling.

Goods or services considered to be beneficial for people that are under-provided by the market and so under-consumed, mainly due to positive consumption externalities.

The study of the behaviour of individual consumers, firms, and markets and the determination of market prices and quantities of goods, services, and factors of production.

The provision of small loans to poor entrepreneurs who lack access to traditional banking services.

A measure of poverty that is based on the beliefs of people regarding what is essential in order to achieve a minimum acceptable standard of living.

The interest rate that is charged by a central bank when it lends to commercial banks. Also known as discount rate or refinancing rate.

A price set by a government or other authority above the market equilibrium price of a good or service, also known as a price floor.

A requirement by the central bank that sets the minimum amount of reserves that commercial banks must maintain to back their loans.

A type of price floor where the wage rate or the price of labour is set above the market equilibrium wage rate.

An economy that has elements of a planned economy and elements of a free market economy. In reality, all economies are mixed. What is different is the degree of the mix from country to country.

An economic school of thought arguing that the price mechanism along with well-functioning competitive markets are sufficient to lead the economy to full employment. In this school of thought, government intervention is not necessary to manage the level of aggregate demand.

A demand-side policy using changes in the money supply or interest rates to achieve economic objectives relating to output, employment and inflation.

Where two or more countries share the same currency and have a common central bank.

Anything that is generally accepted as a means of payment for goods and services. It usually consists of currency and checking accounts.

The process of creating new money by commercial banks, which occurs when they make loans.

The total amount of money available at a particular time, consisting of currency plus checking accounts.

A market structure where there are many sellers, producing differentiated products, with no barriers to entry.

A market structure where there is only one firm in the industry, so the firm is the industry. There are high barriers to entry.

A type of market failure involving asymmetric information where a party takes risks but does not face their full costs by changing behaviour after a transaction has taken place. It is very common in insurance markets.

An international measure of poverty covering over 100 of the 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.

Assistance provided by multilateral organizations such as the World Bank when they lend to developing countries for the purpose of helping them in their development objectives.

An agreement between many countries to lower tariffs or other protectionist measures, currently carried out within the framework of the WTO.

The income earned by the factors of production of an economy, equal to wages plus interest, plus rents, plus profits.

The services provided by a statistical entity in every country that measure the economy’s national income and output as well as other economic activity.

The statistical data used to measure a nation’s income and output, and perform national income accounting.

A monopoly that can produce enough output to cover the entire needs of a market while still experiencing economies of scale. Its average costs will therefore be lower than those of two or more firms in the market.

The rate of unemployment that occurs when the economy is producing at its potential output or full employment level of output. It is equal to the sum of structural, frictional and seasonal unemployment.

The degree to which a good is necessary or essential. If the increase in demand for a necessity good is less than proportional to the rise in income; then the necessity good is income elastic. If the change in quantity demanded for a necessity good is less than proportional to a change in price; then the necessity good is price inelastic.

Negative effects suffered by a third party whose interests are not considered when a good or service is consumed, so the third party are therefore not compensated.

Negative effects suffered by a third party whose interests are not considered when a good or service is produced, so the third party are therefore not compensated.

Export revenues minus import expenditure.

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).

The total income earned by all the residents of a country (regardless of where their factors of production are located) in a given time period, usually a year, at current prices (not adjusted for inflation).

Interest rates that have not been adjusted for inflation.

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.

A characteristic of a good, service or resource where it is impossible to prevent a person, or persons, from using it.

Organizations that are not part of the government that promote economic development and/or humanitarian ideals and/or sustainable development.

Competition between firms that is based on factors other than price, usually taking the form of product differentiation.

A measure of the net international sales and purchases of non-produced assets (such as land) and intangible assets (such as patents and copyrights).

A characteristic of some goods such that their consumption by one individual does not reduce the ability of others to consume them. It is a characteristic of public goods.

A good where the demand for it increases as income increases.

The minimum return that must be received by a firm in order to stay in business. A firm earns normal profit when total revenue is equal to total cost, or when average revenue or price is equal to average cost.

Deals with areas of the subject that are open to personal opinion and belief, thus not subject to refutation.

Nudges (prompts, hints) are used to influence the choices made by consumers in order to improve the well-being of people and society.

An index to compare well-being across countries, based on several dimensions that the OECD has identified as essential, in the areas of material living conditions and quality of life.

International borrowing by a government, often undertaken to help cover a current account deficit.

Aid that is provided to a country by another government or multilateral agency. It is the most important part of foreign aid.

A market structure where there are a few large firms that dominate the market, with high barriers to entry.

A tool of monetary policy involving the buying or selling of (short-term) government bonds by the central bank in order to increase or decrease the money supply, thus influencing the rate of interest.

The next best alternative foregone when an economic decision is made.

One of the three equivalent ways that GDP can be measured, it adds up the value of final goods and services produced in a given time period.

A currency whose value or exchange rate is greater than its equilibrium exchange rate, usually achieved through central bank intervention; may occur in a pegged or managed exchange rate system.

A table showing all possible outcomes of decisions taken by decision-makers in game theory.

Per person. Per capita values are found by dividing the variable by the size of the population.

A market structure where there is a very large number of small firms, producing identical products, with no barriers to entry or exit, and perfect information. All the firms are thus price takers.

Where all stakeholders in an economic transaction have access to the same information.

Occurs with a horizontal demand curve signifying that any amount can be bought at a particular price. (PED is infinite.)

Occurs with a horizontal supply curve signifying that any amount can be offered at a particular price. (PES is infinite.)

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 is equal to zero.)

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 is equal to zero.)

Taxes paid by individuals or households on their incomes, regardless of the source of the income, such as wages, salaries, interest income or dividends.

A curve showing the relationship between the rate of unemployment and the rate of inflation.

An indirect tax that is imposed to eliminate the external costs of production or consumption.

An economy where the means of production (land and capital) are owned by the state. The state determines what/how much to produce, how to produce, and for whom to produce.

The purchase of financial assets such as shares and bonds in order to gain a financial return in the form of interest or dividends. Appears in the financial account of the balance of payments.

Deals with areas of the subject that are capable of being falsified, or shown to be correct or not.

The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or service is consumed, therefore they do not pay for the benefits they receive.

The beneficial effects that are enjoyed by third parties whose interests are not accounted for when a good or service is produced, therefore they do not pay for the benefits they receive.

Output produced by an economy when it is at full employment equilibrium, or long-run equilibrium according to the monetarist/new classical model.

Arises when the lack of material possessions or money prevent an individual or a family from achieving a minimum satisfactory standard of living.

A level of income determined by a government or international body (such as the World Bank) that is just enough to ensure a family can satisfy minimum needs in terms of food, clothing and housing.

Any circular chain of events starting and ending in poverty—for example, low income leads to low savings, leads to low investment, leads to low growth, leads to low income.

Where a country agrees to give preferential access (for example, reduced tariffs) for certain products to one or more trading partners.

A price imposed by an authority and set below the equilibrium price. Prices cannot rise above this price.

Competition between firms that is based on price, for example, a firm that wants to increase its sales at the expense of other firms will lower its price.

Prices imposed by an authority, set above or below the equilibrium market price.

A price index that removes the impact of changes in the price level when measuring nominal economic variables.

Where a change in the price of a good or service leads to a proportionately larger change in the quantity demanded of the good or service in the opposite direction. (PED is greater than one.)

A measure of the responsiveness of the quantity demanded of a good or service to a change in its price.

A measure of the responsiveness of the quantity supplied of a good or service to a change in its price.

Where a change in the price of a good or service leads to a proportionately larger change in the quantity supplied of the good or service in the same direction. (PES is greater than one.)

The forecasts or views that consumers or firms hold about future price movements that play a role in determining demand.

A price imposed by an authority and set above the market price. Prices cannot fall below this price.

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity demanded of the good or service in the opposite direction. (PED is less than one.)

Where a change in the price of a good or service leads to a proportionately smaller change in the quantity supplied of the good or service in the same direction. (PES is less than one.)

A firm that is able to influence the price at which it sells its product. Includes firms in all market structures except perfect competition.

The system where the forces of demand and supply determine the prices of products. Also known as the market mechanism.

A firm that is unable to influence the price at which it sells its product, being forced to accept the price determined in the market. It includes firm in perfect competition.

Occurs when firms successively cut their prices in an effort to match the price cuts of other firms, resulting in lower profits, possibly losses.

Raw materials that are produced in the primary sector. Examples include agricultural products, metals and minerals.

Anything derived from the factor of production land. Includes agricultural products, metals and minerals.

The sale of public assets to the private sector. May be a type of supply-side policy.

The benefit enjoyed by producers by receiving a price that is higher than the price they were willing to receive.

The process by which firms try to make their products different from the products of other firms in an effort to increase their sales. Differences involve product quality, appearance, services offered and many others.

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.

The greatest capability of an economy to produce, usually measured by maximum possible output of an economy.

A possible objective of firms that involves producing the level of output where profits are greatest: where total revenue minus total cost is greatest or where marginal revenue equals marginal cost.

Taxation where the fraction of tax paid increases as income increases. The average tax rate increases.

The exclusive, legal, authority to own property and determine how that property is used, whether it is owned by the government or by private individuals.

A system of taxation where tax is levied at a constant rate as income rises.

Goods or services that have the characteristics of non-rivalry and non-excludability, for example, flood barriers.

A method used to make the buying power of different currencies equal to the buying power of US$1. PPP exchange rates are used to make comparisons of income or output variables across countries while eliminating the influence of price level differences.

An expansionary monetary policy where a central bank buys (long term) government bonds or other financial assets, in order to stimulate the economy and increase the money supply.

The quantity of a good or service demanded at a particular price over a given time period, ceteris paribus.

An import barrier that set limits on the quantity or value of imports that may be imported into a country.

Occurs when consumers make choices based on the following assumptions: they have consistent tastes and preferences, they have perfect information and they arrange their purchases so as to make their utility as great as possible (maximize it). It is assumed in standard microeconomic theory.

Occurs when firms try to maximize profit. This is an assumption in standard microeconomic theory.

A method used to divide or apportion goods and services or resources among the various interested parties.

The total value of all final goods and services produced in an economy in a given time period, usually one year, adjusted for inflation.

Real GDP divided by the population of the country.

Real GNI divided by the population of the country.

Interest rates that have been adjusted for inflation.

Occurs when real GDP falls for at least two consecutive quarters.

A method used in the natural sciences and social sciences where any proposition must be subjected to an empirical test in order to see if it can be disproven or refuted. If it is disproven or refuted, then the proposition must be rejected.

An agreement between a group of countries usually within a geographical region to lower or eliminate trade barriers.

Taxation where the fraction of tax paid decreases as income increases. The average tax rate decreases. All indirect taxes are regressive.

A comparative measure of poverty according to which income levels do not allow people to reach a standard of living that is typical of the society in which they live. It is defined as a percentage of society’s median income.

The transfer of money by foreign workers to individuals, often family members, in their home country.

Foreign currencies and precious metals held by central banks as a result of international trade. Reserves may be used to maintain or influence the exchange rate for the country’s currency. Reserves appear as an item in the financial account of the balance of payments.

Apportioning available resources or factors of production to particular uses for production purposes.

This is when the choice of a consumer is restricted by the government or other authority.

An increase in the value of a currency in a fixed exchange rate system.

Payments received by firms when they sell their output.

Goods and services are considered to be rivalrous when the consumption by one person, or group of people, reduces the amount available for others.

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.

A business or firm objective to achieve a satisfactory outcome with respect to one or several objectives, rather than to pursue any one objective at the possible expense of others by optimizing (maximizing), for example, profit, revenue or growth. It is essentially a mix of the words “satisfy” and “suffice”.

A proposition stating that the supply of goods creates its own demand.

The limited availability of economic resources relative to society’s unlimited needs and wants of goods and services.

In asymmetric information, the use of a screening process by the participant with less information to gain more information regarding a transaction, and so reduce adverse selection.

Unemployment that arises when people are out of work because their usual job is out of season, for example, agricultural workers during winter months.

Arises when the quantity demanded of a good or services is more than the quantity supplied at some particular price.

The total quantity of real output (real GDP) offered at different possible price levels in the short run (when wages and other resource prices are constant).

The period of time when the prices of factors of production, especially wages, are considered fixed.

The period of time when at least one factor of production is fixed.

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.

Periods of growth of real GDP followed by periods of contraction, which are part of the business cycle.

In asymmetric information, the participant with more information sending a signal revealing relevant information about a transaction to the participant with less information, to reduce adverse selection.

The sum combination of consumer surplus and producer surplus.

A company 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.

This occurs where there is allocative efficiency, or where the marginal social cost of producing a good is equal to the marginal social benefit of the good to society. Alternatively, 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 for the last unit produced).

Academic studies of human societies and how people in society interact with each other.

Refers to when a firm or country focuses on the production of one or a few goods or services. This forms the basis of theory of comparative advantage in international trade.

Refers to a process where something is bought or sold with a view to making a short term profit, for example, currency speculation where currencies are bought or sold so that a profit can be made when the exchange rate changes.

An individual or group of individuals who have an interest, or stake, in an economic activity or outcome.

A kind of long-term unemployment that arises from a number of factors including: technological change; changes in the patterns of demand for different labour skills; changes in the geographical location of industries; labour market rigidities.

An amount of money paid by the government to a firm, per unit of output, to encourage production and lower the price to consumers.

An amount of money paid by the government to a firm, per unit of output, to encourage production and provide the firm an advantage over foreign competition.

Goods that can be used in place of each other, as they satisfy a similar need.

When the price of a product falls relative to other product prices, consumers purchase more of the product as it is now relatively less expensive. This forms part of an explanation of the law of demand.

Quantities of a good that firms are willing and able to supply at different possible prices, over a given time period, ceteris paribus.

A curve showing the relationship between the price of a good or service and the quantity supplied, ceteris paribus. It is normally upward sloping.

Government policies designed to shift the long- run aggregate supply curve to the right, thus increasing potential output in the economy and achieving economic growth.

An excess of something over something else. It occurs: when quantity supplied is greater than quantity demanded at a particular price, when tax revenues are greater than government spending (budget surplus), and on an account when credits are greater than debits in the balance of payments. See also “consumer surplus” and “producer surplus”.

Refers to the preserving the environment so that it can continue to satisfy needs and wants into the future. Relates to the concept of “sustainable development”.

Refers to a level of government debt such that the borrowing government can make its payments of interest and debt repayment while at the same being able to meet the economy’s growth objectives.

Refers to the degree to which the current generation is able to meet its needs today but still conserve resources for the sake of future generations.

A tax that is placed on imports to protect domestic industries from foreign competition and to raise revenue for the government.

All the costs of a firm incurred for the use of resources to produce something.

The amount of revenue received by a firm from the sale of a particular quantity of output (equal to price times quantity sold).

Permits to pollute, issued by a governing body, that sets a maximum amount of pollution allowable. These permits may be traded (bought or sold) in a market for such permits.

In international trade it occurs when higher cost imports are replaced by lower cost imports due to the formation of a trading bloc or a trade agreement.

In international trade it occurs when lower cost imports are replaced by higher cost imports due to the formation of a trading bloc or a trade agreement.

The process of reducing barriers to international trade.

Government intervention aiming to limit imports and/or encourage exports by setting up trade barriers that protect from foreign competition.

A group of countries that have agreed to reduce protectionist measures like tariffs and quotas between them.

A situation with common pool 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.

Payments made by the government to vulnerable groups in a society, including older people, low income people, unemployed and many more. The objective is to transfer money from taxpayers to those who cannot work, to prevent them from falling into poverty.

A currency whose value or exchange rate is lower than its equilibrium exchange rate, usually achieved through central bank intervention; may occur in a pegged or managed exchange rate system.

When a person (who is above a specified age and is available to work) is actively looking for work, but is without a job.

Payments, usually made by the government, to people who are unemployed (and actively seeking employment).

The number of unemployed workers expressed as a percentage of the total workforce.

In international trade this refers to practices of countries trying to gain an unfair advantage through such methods as undervalued exchange rates.

Occurs when 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 = 1).

A regular cash payment given to all persons in an economy that is independent of any other source of income they may have. It is intended to reduce poverty and income inequality.

The UN set out 17 global goals including those that aim to end all forms of poverty, fight inequalities and tackle climate change.

A measure of the satisfaction derived from consuming a good or service.

Payment received by the factor of production labour, which is a certain amount per unit of time.

The total value of all assets owned by a person, firm, community, or country minus what is owed to banks or other financial institutions.

A measure of average prices over a period of time that gives a weight to each item according to its relative importance in the consumers’ budgets. It is used to measure changes in the price level.

A loss of a part of social surplus (consumer plus producer surplus) that occurs when there is market failure so that marginal social benefits are not equal to marginal private benefits.

An international organization that provides loans and advice to economically less developed countries for the purpose of promoting economic development and reducing poverty.

An international body that sets the rules for global trading and resolves disputes between its member countries. It also hosts negotiations concerning the reduction of trade barriers between its member nations.