IB SL Economics Definitions

Actual and potential growth

Actual growth refers to increases in real GDP; potential growth refers to the outward expansion of the PPF

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Ad valorem tax

Indirect tax expressed as a percentage of the price of a product, e.g. VAT

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Administrative obstacles (regulatory barriers)

Govt regulations that result in a lower level of imports into a country; these are often spurious, and function as a disguised form of protectionism (e.g. pollution standards)

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Aggregate demand

Total planned spending of four groups (C + I + G + (X - M)) on the output economy at various possible price levels per period of time

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Aggregate supply

Total of firms' individual supply curves (planned output of g/s) at various possible price levels per period of time

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Aid

Flows of capital (grants or loans) from developed to developing countries that are non-commercial from the PoV of the donor and for which the terms are concessional, i.e. interest rate is lower than the market rate and repayment period is longer

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Allocative efficiency

Exists when 'just the right amount' from society's PoV has been produced, requiring that, for the last unit produced, price is equal to its marginal cost

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Anti-dumping duties

Tariffs on 'dumped' imports that pull the price closer to prices charged by domestic firms to avoid injury to domestic industry, where dumping = sale of g/s below cost in export markets

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Appreciation

An increase in the ER within a floating ER regime

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Balance of payments

Record of all the transactions of a country with the rest of the world over a period of time, broken down into the current and capital account

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Barrier to entry

Anything that deters entry of a new firm into a market, e.g. a patent

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Bilateral aid

Aid from one govt to another through some kind of national aid agency

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Budget deficit

Where govt spending exceeds tax revenues (G > T)

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Buffer stocks

Policy aimed at stabilising the price of commodities (coffee, cocoa, tin, etc.); target price is set, and manager buys & stocks good if price tends to fall or sells from stocks if price tends to rise

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Business/trade cycle

Short-run fluctuations of real GDP around its long-run trend, caused by the booms and busts of a traditional market economy

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Capital

Produced means of production (tools, machinery, equipment, etc.)

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Capital account of BoP

Records portfolio/FDI into and out of a country over a period of time

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Capital flight

Financial capital exiting a country (legally or illegally) and flowing into safer or more profitable financial centres

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Capital flows

Investment flows per period of time into and out of a country, including portfolio and FDI

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Centrally planned economy

Economy where the state determines prices and output of g/s

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Ceteris paribus

All other factors remaining constant

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Circular flow model

Economic model showing major interrelationships and flows, real and monetary, between major decision-making units of an economy

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Commodities

Primary products used as inputs in the manufacturing process and traded in international markets (e.g. coffee, cotton, tin, etc.)

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Commodity agreements

Agreements between producers to coordinate commodity exports to stabilise prices, either in the form of a production quota system (e.g. International Coffee Agreement) or a buffer stock system

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Commodity concentration of exports

One or very few products responsible for large percentage of export revenues (e.g. copper and nitrates for Chile)

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Common market

Form of economic integration whereby members move forward to establish not only free trade of g/s but also free movement of the factors of production

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Consumption externality

When the consumption of a good imposes costs or creates benefits for third parties for which the latter do not get compensated or do not pay for

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Convertible currencies

A country's currency is convertible if it may be freely used in international transactions by citizens of any country

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Cost-push inflation

Inflation resulting from adverse supply shocks shifting aggregate supply to the left; rising commodity prices are usually responsible (especially oil prices)

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Cross-price elasticity of demand

The responsiveness of the demand for good X to a change in the price of good Y

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Current account of BoP

Records the value of visible and invisible exports and imports (i.e. including trade in services, net investment income and current transfers) of g/s of a country in a period of time (current account surplus if X > M and deficit when M > X)

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Customs unions

Form of regional economic integration whereby two or more countries abolish tariffs and other barriers between them and establish a common external barrier towards non-member countries

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Cyclical (or demand-deficient or Keynesian) unemployment

Unemployment that is a result of insufficient aggregate demand; cyclical unemployment rises as an economy moves deeper into recession

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Deflation

Where average level of prices is decreasing through time (implying negative inflation rates)

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Deflationary gap

When equilibrium real output falls short of the level corresponding to the full employment level of output as a result of insufficient aggregate demand

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Demand

The quantity of a product that consumers are willing and able to purchase per time period at a specific price, ceteris paribus

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Demand-pull inflation

Inflation resulting from aggregate demand rising faster than aggregate supply

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Demand-side policies

Policies aimed at influencing the level of AD in order to affect growth, employment and inflation (i.e. fiscal and monetary policies)

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Demerit goods

Consumption of such goods creates significant negative externalities on society so govts try to decrease/prohibit their consumption (e.g. alcohol, tobacco, illegal drugs)

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Depreciation

Decrease in the ER within a floating ER system

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Devaluation

Decrease in the ER within a fixed ER system

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Differentiated product

Products which are similar but not identical across sellers in an industry, considered by consumers as close but imperfect substitutes

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Direct taxation

Taxation on income and wealth

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Diversification (of exports)

Policy initiative to move away from the commodity concentration of exports, instead trying to export a bigger variety of g/s

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Economic development

A sustainable increase in living standards that implies increased per capita income, better education and health (life expectancy) as well as environmental protection (Human Development Index)

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Economic union

Form of regional economic integration where members of a customs union decide to integrate further by harmonising taxation and other economic policies and even establishing a common currency (e.g. Eurozone)

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Elasticity

Responsiveness of an economic variable to change in some other economic variable (e.g. price elasticity of demand)

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Entrepreneurship

Willingness and ability of certain individuals to organise the other three factors of production (land, labour and capital) and take risks

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Equilibrium

Where quantity demanded per period equals quantity supplied

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Exchange rate (ER)

Price of a currency expressed in terms of another currency, i.e. number of units of a foreign currency required to buy a unit of the domestic currency

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Export-led/outward-oriented growth

Growth strategy stressing export markets in the belief that resulting increase in AD, FOREX earnings and faster transfer/diffusion of technology will accelerate the growth and development process of developing countries

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Export subsidy

Payment granted by govt to domestic firms to strengthen their competitiveness against foreign producers n

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Externalities

When an economic activity (consumption/production) creates benefits or imposes costs for uninvolved third parties for which they do not pay for or get compensated

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Factor endowments

Quantity and quality of factors of production (land, labour, human capital, physical capital and entrepreneurship) an economy has at its disposal

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Fair trade (organisations)

Fairtrade is a certification designed to allow socially conscious consumers to identify goods (usually coffee, cocoa, honey, etc.) which meet certain minimum standards for 'ethical production'

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Fiscal policy

Manipulation of the level of government spending (G) and of taxation (T) in order to affect AD; if G increases and/or T decreases, FP is expansionary (intended to reflate an economy in or falling into recession) and contractionary if otherwise

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Fixed ER system

When ER is set at a level or within a range by the govt and is then maintained through central bank intervention (through buying and selling the currency in the FOREX market and/or manipulating the interest rate)

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Flat rate tax

Tax (usually on income) that is a constant percentage of the tax base

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Floating ER system

When ER is determined solely through the interaction of demand and supply for the currency with no govt (central bank) intervention

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Foreign direct investment (FDI)

When multinational corporations establish a new firm or acquire controlling interest in an existing firm in a foreign country, distinct from portfolio investment as in FDI the investor has control over the asset

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FOREX reserves

Value of FOREX holdings held at the central bank of a country

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Free good vs. economic good

Economic goods are goods whose production involves the sacrifice of scarce factors of production, whereas free goods do not have an opportunity cost (e.g. sea water)

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Free market economy

Economy in which markets (interaction of buyers and producers) determine prices and output

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Free trade

International trade that is not subject to any type of trade barrier

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Free trade area (agreement)

FTAs are formed when two or more countries abolish tariffs (and other barriers) between them while maintaing existing barriers to non-members

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Frictional unemployment

Form of employment when people are between jobs, unavoidable because people constantly move between jobs in search of better opportunities; better/faster information concerning labour market can lower this type of unemployment

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Full employment (Yfe)

Situation where there is equilibrium in the labour market and thus any unemployment remaining is not demand-deficient (number of job vacancies = number of job seekers)

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Globalisation

Process of increasing worldwide interconnectedness reflected in greater trade and cross-border investment flows, the proliferation of MNCs and the existence of faster/cheaper communication (internet, cell phones) and transportation

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Government failure

When govt policies aiming at correcting a market failure fail to do so as a result of unintended consequences, measurement problems and bias

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Grant aid

Aid funds that need not be repaid to the donor country

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Gross Domestic Product (GDP)

Value of all final g/s produced within an economy over a year

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Gross National Product

GNP = GDP plus income from abroad, minus income paid abroad

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Homogeneous product

Product that consumers consider identical (perfect substitutes) across all firms of an industry

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Human capital

Education, training and experience embodied in the labour force of an economy

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Human development

Expanding people's choices and the level of wellbeing they achieve (material consumption as well as better health and education)

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Import substitution/inward-oriented growth

Growth strategy in which domestic production is substituted for imports to shift production away from primary sector and industrialise

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Incidence of taxation

Who ends up paying a tax; an indirect tax imposed on a firm may be partially/wholly paid by consumers

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Income elasticity of demand

Responsiveness of demand to a change in income

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Income, expenditure and output method

Methods of measuring overall economic activity (output method includes all g/s produced within a period of time; income method sums incomes that this production process generates; expenditure method sums spending on purchase of final g/s produced)

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Indebtedness

External foreign debt of a country within a development framework, including money owed to foreign govts, multilateral institutions and commercial banks

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Indirect taxation

Tax on goods or on expenditure on a 'per unit' basis or as a percentage of the price

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Infant industry argument

Argument that the only way a developing country can create a competitive domestic industrial sector is if it blocks all competing imports with prohibitive tariffs until it becomes sufficiently efficient

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Inferior goods

Goods for which demand decreases following a rise in consumers' income

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Inflation

Sustained increase in the general price level accompanied by a fall in the purchasing power of money

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Informal markets

Markets in which activity is not formally registered (parallel markets)

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Infrastructure

Road system, rail system, harbours, airports and telecommunications that a country has which facilitate economic activity as they lower production and transaction costs

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Interest

Payment made for using borrowed money over a period of time

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Labour

Human efforts used in the production of g/s

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Land

Natural resources that an economy is endowed with

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Law of demand

As price per unit of product increases, quantity demanded per time period decreases, ceteris paribus

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Law of supply

As price per unit of product increases, quantity that a firm is willing to supply per period increases, ceteris paribus

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Luxury goods

Goods with high income elasticity of demand

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Managed ER system

Floating system in which authorities (CBs) intervene whenever they consider the movement of ER undesirable

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Marginal utility

Extra satisfaction a consumer gets from consuming an extra unit of a good

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Market clearing price

Market price = equilibrium price (i.e. where Qd = Qs)

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Market failure

When market forces fail to allocate scarce resources efficiently, leading to an overproduction/overconsumption or underproduction/underconsumption of a good; typical cases are monopoly power; externalities; public, merit and demerit goods

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Market success

When market forces achieve allocative efficiency

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Maximum price (price ceiling)

Price set by the govt below the equilibrium-determined price aiming at protecting low-income consumers (e.g. rent prices in New York)

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Merit goods

Goods whose consumption create significant positive externalities to society (e.g. basic education, basic health care, etc.)

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Microcredit schemes

Very small loans to the very poor in developing countries used to help them start or grow small business and meet emergencies

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Mixed economy

Economy where decisions are determined by both market forces and the state

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Monetary policy

The manipulation of interest rates in order to affect aggregate demand and thus inflation, output and employment

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Monopolistic competition

Very many small firms, no entry or exit barriers and a differentiated product

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Monopoly

One firm, a 'unique' product and high entry barriers

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Multilateral aid

Aid dispensed through multilateral organisations such as the IMF or World Bank

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Multinational (or transnational) corporations (or enterprises)

Firms that own profit-generating assets in more than one country; a result of FDI

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Multiplier effect

The Keynesian idea that a rise in injections (G, I, X) will lead to a greater increase of national income. Fiscal policy is thus a powerful tool to lift an economy out of a recession

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Non-governmental organisations

Organisations usually independent of govts, typically aiming at designing and implementing development-related projects. An example is Oxfam which is concerned with poverty alleviation

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Normal goods

Goods for which demand increases following an increase in consumer income

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Normative statement

A value judgement, opinion; usually spotted by words such as 'ought to be', 'fair', 'unfair', etc.

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Official aid

Aid from govts or multilateral institutions

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Oligopoly

Few interdependent firms, either a homogeneous or differentiated product and entry barriers

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Opportunity cost

Value of next best alternative sacrificed

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Positive and negative externalities

Arises when a consumption/production activity creates an external benefit to a third party for which it does not get compensated

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Poverty cycle

Vicious cycle in which low incomes are responsible for poor savings which are able to finance limited investments leading to low income levels

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Price-elastic demand

Where a change in price leads to a proportionally greater change in Qd

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Price elasticity of demand

Responsiveness of demand to a change in price

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Price elasticity of supply

Responsiveness of supply to a change in price

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Price support

Minimum price

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Primary/secondary/tertiary sector

Primary sector refers to agriculture, mining, forestry and fishing; secondary refers to manufacturing and construction; tertiary refers to services

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Private sector

Households and firms

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Production possibilities frontier

Shows the max amount of good Y an economy is able to produce for each amount of X at given level of technology, where scarce resources are fully and efficiently employed

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Progressive, proportional and regressive taxations

Progressive when higher-income households pay proportionally most; proportional where high- and low-income households pay proportionally the same; regressive when high-income households pay proportionally least

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Protectionism

Policies restricting flow of imports into a country and/or creating an artificial advantage to exporting firms

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Public goods

Display non-rivalry (marginal production costs = 0) and non-excludability (non-paying consumers cannot be prevented from accessing it), e.g. lighthouses

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Public sector

The government

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Quota

Quantitative limit on an imported good

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Real GDP

GDP after adjusting for inflation

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Real wage unemployment

When real wage is above equilibrium rate (due to national minimum wage or trade unions); sticky money wages

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Rent

Income for the services of a piece of land collected by its owner

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Revaluation

Increase in ER in a fixed ER system

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Scarcity

Having seemingly unlimited human wants and needs in a world of limited resources

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Seasonal unemployment

Unemployment due to seasonal variations of demand, e.g. when construction workers are unemployed due to extremely cold weather

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Soft loans

Loans granted on concessional terms (interest rate lower than market interest rates and repayment period longer)

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Specialisation

Factor of production employed in the production of only one good

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Speculation

Buying/selling FOREX to profit from differences in its price

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Structural unemployment

Persistent form of unemployment that results from the mismatch of available skills of the unemployed and the skills demanded by vacant positions in the job market

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Subsidy

Payment made by the govt to firms aiming at lowering costs and price and thus raising production/consumption of the product plus firm revenues

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Sustainable development

Development that meets the needs of the present generation without decreasing the ability of future generations to meet their own needs, e.g. development without environmental degradation

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Tariff

Indirect tax on imported goods that causes the level of domestic production to rise, reduces domestic consumption and restricts volume of imports; generates govt revenue

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Terms of trade (TOT)

Ratio of average price of exports over average price of imports

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Tied trade

Aid that has to be used to buy the donor's products; considered a factor partly explaining weak link between aid and development

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Trade balance

X - M; surplus if X > M and deficient if X < M

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Trading blocs

Economic integration where a group of countries decrease trade barriers between them while maintaining barriers to non-members, e.g. FTA, customs union, common market, economic union

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Transfer payments

Payments from govt to individuals that do not reflect contribution to current production, i.e. pensions and unemployment benefits

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Underemployment

When individuals are employed but working less than they would want and in positions below their skills

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Under-provision and over-provision of merit and demerit goods

When market forces lead to less than socially optimal amount being produced/consumed (merit goods) or to more (demerit goods)

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Unemployment

When individuals able to work actively seek work, and are willing to accept the going wage, but cannot find a job

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Utility

Satisfaction derived from consuming a good

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Voluntary export restraints

Similar to a quota only that exporting firms 'agree' to limit volume of exports

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Wages

Reward of labour

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WTO

International organisation that aims at liberalising trade through conducting multilateral trade negotiations, at regulating trade, and which arbitrates trade disputes

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IB SL Economics Definitions

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