446 terms

IB Economics HL

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abnormal profit (supernormal profit)
positive economic profit, arising when total revenue is greater than total economic costs
implicit costs + explicit costs
absolute advantage
the ability of a country to produce a good using fewer resources than another country
absolute poverty
the inability of an individual or a family to afford a basic standard of goods and services, where this standard is absolute and unchanging over time.
actual output
the quantity of output actually produced by an economy.
ad valorem taxes
taxes calculated as a fixed percentage of the price of the good or service
administrative barriers
trade protection measures taking the form of administrative procedures that countries may use to prevent the free flow of imports into a country
aggregate demand
the total quantity of goods and services that all buyers in an economy including consumers, firms, the government and foreigners want to buy over a particular time period, at different possible price levels, ceteris paribus
aggregate demand curve
the curve that shows the relationship between total quantity of goods and services that all buyers in an economy want to buy over a particular time period (x axis) against the price level (y axis)
aggregate supply
the total quantity of goods and services produce in an economy over a particular time period, at different price levels, ceteris paribus
allocative efficiency
P = MC
an allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers.
anti-dumping
an argument that justifies trade protection policies: if a country's trading partner is suspected of practising dumping, then the country should have the right to impose trade protection measures to limit quantities of the dumped good
appreciation (currency)
an increase in the value of a currency in the context of a floating exchange rate system
appropriate technology
technologies that are well-suited to a country's particular economic, geographical, ecological and climate conditions.
asymmetric information
a type of market failure where buyers and sellers do not have equal access to information, usually resulting in an underallocation of resources to the production of goods and services, as parties to a transaction with less access to information try to protect themselves against the consequences of the information asymmetry
automatic stabilisers
factors that automatically, without any action by government authorities, work toward stabilising the economy by reducing the short term fluctuations of the business cycle.
Progressive income taxes, unemployment benefits
average costs
costs per unit of output
total cost/quantity of units of output produced
average fixed costs
fixed cost per unit of output
total fixed cost/quantity of units of output produced
average product
the total quantity of output of a firm per unit of variable input
total product/quantity of units of variable input
average revenue
revenue per unit of output sold
total revenue/number of units of output produced
average tax rate
tax paid/total income x100%
average total costs
total cost per unit of output
total cost/number of units of output
average fixed costs+average variable costs
average variable costs
variable cost per unit of output
variable cost/number of units of output
balance of payments
a record of all transactions between the residents of a country and the residents of all other countries, showing all payments received from other countries (credits) and all payments made to other countries (debits). Sum of all credits must equal to sum of all debits in the course of a year
balance of trade in goods
part of the balance of payments, the value of exports of goods minus the value of imports of goods over a specific period of time (usually a year)
balance of trade in services
part of the balance of payments, the value of exports of services minus the value of imports of services over a specific period of time (usually a year)
balance on capital account
the sum of inflows minus outflows of funds in the capital account of the balance of payments
balance on current account
the sum of inflows minus outflows of funds in the current account of the balance of payments
balance on financial account
the sum of inflows of funds minus outflows in the financial account of the balance of payments
balanced budget
referring usually to the government's budget, it is the situation where government tax revenues are equal to government expenditures over a specific period of time (usually a year)
barriers to entry
anything that can prevent a firm from entering an industry and beginning production, as a result limiting the degree of competition in the industry
bilateral trade agreement
any trade agreement involving two trading partners, usually two countries
break-even point
the point of production of a firm where its total revenue is exactly equal to its total costs (economic costs) and it is therefore earning normal profit, no economic profit.
break-even price
a price at which the firm breaks even, meaning that its total revenues are just equal to its total costs (economic costs)
budget deficit
referring usually to the government's budget, it is the situation where government tax revenues are less than government expenditures over a specific period of time (usually a year)
budget surplus
referring usually to the government's budget, it is the situation where government tax revenues are greater than government expenditures over a specific period of time (usually a year)
business confidence
a measure of the degree of optimism among firms in an economy about the future performance of firms and the economy; it is measured on the basis of surveys of business managers
business cycle
fluctuations in the grown of real output or real GDP consisting of alternating periods of expansion/contraction
cap and trade scheme
a scheme in which a government authority sets a limit on the amount of pollutants that can be legally emitted by a firm, set by an amount of pollution permits (tradable permits) distributed to firms
capital
one of the factors of production, which itself has been produced; also known as physical capital, including machinery, tools, equipment, buildings
capital account
in the balance of payments, refers to the inflows minus outflows of funds for capital transfers, the purchase or use of non-produced natural resources
capital expenditures
with reference to government expenditures, these include public investments, or the production of physical capital (roads, airports, schools, hospitals)
capital liberisation
free movement of financial capital in and out of a country, occurring through the elimination by the government of exchange controls
capital transfers
a part of the capital account of the balance of payments, including inflows minus outflows for debt forgiveness, non-life insurance claims and investments
carbon tax
a tax per unit of carbon emissions of fossil fuels, considered by many countries as a policy to deal with the problem of climate change
cartel
a formal agreement between firms in an industry to undertake coordinated actions to limit competition
formed in collusive oligopoly
central bank
a financial institution that is responsible for regulating the country's financial system and commercial banks and carrying out monetary policy
ceteris paribus
"other things being equal"
circular flow of income model
a model showing the flow of resources from consumers (households) to firms, and the flow of products from firms to consumers, as well as money flows consisting of consumer income arising from the sale of their resources and firms revenues arising from the sale of their products
clean technology
technology that is not polluting, associated with environmental sustainability
closed economy
an economy that has no international trade
collusion
an agreement among firms to fix prices, or divide the market between them, to limit competition and maximize profit
collusive oligopoly
the type of oligopoly where firms agree to restrict output or fix prices, in order to limit competition, increase monopoly power and profits
commercial bank
a financial institution whose main functions are to hold deposits for their customers, make loans for their customers, to transfer funds by cheque from one bank to another and to buy government bonds
common access resources
resources that are not owned by anyone, do not have a price, and are available for anyone to use without payment
common market
a type of trading bloc in which countries that have formed a customs union proceed further to eliminate any remaining tariffs in trade between them
comparative advantage
arises when a country has a lower relative cost, or opportunity cost, in the production of a good than another country
competitive market
a market composed of many buyers and sellers acting independently, with no influence on the price of the product
competitive supply
in the case of two goods, refers to production of one or the other by a firm; in other words the two goods compete with each other for the same resources
competition
occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the price at which the product is sold in the market
complements (complementary goods)
two or more goods that tend to be used together
an increase in the price of one will lead to a decrease in the demand of the other
composite indicator
a summary measure of more than one indicator, often used to measure economic development
concentration ratio
a measure of how much an industry's production is concentrated among the industry's largest firms
measures the percentage of output produced by the largest firms in an industry; provides an indication of the degree of competition or degree of monopoly power in an industry; the higher the ratio, the greater the degree of monopoly power
concessional loan
loans that are offered as part of foreign aid, made on concessional terms
conditional assistance
development assistance provided by bilateral or multilateral development organisations, which is extended to countries on condition that they satisfy certain requirements, usually requiring that they adopt particular policies
constant returns to scale
the situation where the output of a firm changes in the same proportion as all its inputs
a percentage increase in all inputs causes the outputs to increase by the same percentage
consumer confidence
a measure of the degree of optimism of the consumers about their future income and the future of the economy; measured on the basis of surveys consumers
consumer price index
a measure of the cost of living for the typical household, comparing the value of a basket of goods and services in one year with the value of the same basket in a base year
consumer surplus
the difference between the highest prices consumers are willing to pay for a good and the price actually paid
consumption
spending by households on goods and services
contractionary fiscal policy
fiscal policy usually pursued in an inflation, involving a decrease in government spending or an increase in taxes
contractionary monetary policy
monetary policy usually pursued in an inflation, involving an increase in interest rates, intended to lower investment and consumption spending
tight monetary policy
core rate of inflation
a rate of inflation based on a consumer price index that excludes goods with highly volatile prices
corporate indebtedness
the degree to which corporations have debs
corporate social responsibility
the practice of some corporations to avoid socially undesirable activitie as well as undertaking socially desirable activities
cost-push inflation
a type of inflation caused by a fall in aggregate supply, in turn resulting from increases in costs of production
costs of production
the total opportunity costs for firms in order to acquire resources for use in production
explicit costs and implicit costs
credit items
in the balance of payments, payments received from other countries, entering the balance of payments accounts with a plus sign
inflow of foreign exchange into a country
cross-price elasticity of demand (XED)
a measure of the responsiveness of the demand for one good to a change in the price of another good
percentage change in the quantity of one good demanded/percentage change in the price of another good
XED>0
goods are substitutes
XED<0
goods are complements
crowding-out
the possible impacts on real GDP of increased government spending financed by borrowing
increased government spending = increase in interest rate = reduce private investment spending
current account
in the balance of payments, includes the balance of trade plus the balance on services plus inflows minus outflows of income and current transfers
current account deficit
when the current account balance has a negative value, meaning that debits are larger than credits
current account surplus
when the current account balance has a positive value, meaning that credits are larger than debits
current expenditures
in the government budget, government spending on day-to-day items that are recurring and items that are used up or consumed as a good or service is provided
current transfers
in the current account of the balance of payments, the inflows and outflows of funds for items
customs union
a type of trading bloc, consisting of a group of countries that fulfil the requirements of a free trade area and in addition adopt a common policy towards all non-member countries
cyclical unemployment
a type of unemployment that occurs during the downturns of the business cycle, when the economy is in a recessionary gap
caused from low or decreasing aggregate demand
debit items
in the balance of payments, payments made to other countries
deciles
devision of a population into ten equal groups with respect to the distribution of a variable, such as income
decreasing returns to scale
the situation where the output of a firm changes less than in proportion to a change in all its inputs
a percentage increase in all inputs causes output to increase by a smaller percentage
deflation
a sustained decrease in the general price level
demand
indicates the various quantities of a good that consumers are willing and able to buy at different possible prices during a particular time period, ceteris paribus
demand curve
a curve showing the relationship between the quantities of a good consumers are willing to and able to buy during a particular time period, and their respective prices, ceteris paribus
demand management
policies that focus on the demand side of the economy, attempting to influence aggregate demand to achieve the goals of price stability, full employment and economic growth
demand-pull management
policies that focus on the demand side of the economy, attempting to influence aggregate demand to achieve the goals of price stability, full employment and economic growth
demand-pull inflation
a type of inflation caused by an increase in aggregate demand
demand-side policies
policies that attempt to change aggregate demand in order to achieve the goals of price stability, full employment and economic growth and minimize the severity of the business cycle
demerit goods
goods that are considered to be undesirable for consumers and are overprovided by the market
depreciation
decrease in the value of a currency in the context of a floating exchange rate system
deregulation
policies involving the elimination or reduction of government regulation of private sector activities, based on the argument that government regulation stifles competition and increases inefficiency
deterioration in the terms of trade
a decrease in the value of the terms of trade index
determinants of aggregate demand
consumption spending, investment spending, government spending and net exports
C+I+G+Xn
devaluation
a decrease in the value of a currency in the context of a fixed exchange rate system
development aid
foreign aid intended to help economically less developed countries
direct investment
in the balance of payments, the inflows or outflows of funds for the purpose of foreign direct investment
direct taxes
taxes paid directly to the government tax authorities by the taxpayer, including personal income taxes, corporate income taxes and wealth taxes
diseconomies of scale
increases in the average costs of production that occur as a firm increases its output by varying all its inputs
disinflation
fall in the rate of inflation
disposable income
the income of consumers that is left over after the payment of income taxes
distribution of income
how much of an economy's total income different individuals or different groups in the population receive
diversification
change involving greater variety
dual economy
when there are two different and opposing sets of circumstances that exist simultaneously, often found in economically less developed countries
dumping
the practice of selling a good in international markets at a price that is below the cost of producing it
economic costs
the sum of explicit costs and implicit costs, or the total opportunity costs for a firm for its use of resouces
economic development
broad-based rises in the standard of living and well-being of a population, particularly in economically less developed countries
economic efficiency
a condition that arises when allocative efficiency is achieved
economic growth
increases in total real output (GDP) produced by an economy over time
economic integration
economic interdependence between countries, usually achieved by agreement between countries to reduce or eliminate trade protection and other barriers between them.
economic profit
firm's total revenue minus total economic costs
if positive, abnormal profit earned
if negative, firm is making a loss
economically less developed countries
countries that have a per capital GNI below a particular level
economically more developed countries
countries that have a per capital GNI above a particular level
economics
the study of choices leading to the best possible use of scare resources in order to best satisfy unlimited human needs and wants
economies of scale
decreases in the average costs of production that occur as a firm increases its output by varying all its inpurts
elasticity
measure of the responsiveness or sensitivity of a variable to changes in any of the variable's determinants
empowerment
creation of conditions for equality of opportunities involves increasing the political, social, and economic power of individuals or groups of individuals
entrepreneurship
one of the factors of production, involving a special human skill that includes the ability to innovate by developing new ways of doing things, to take business risks and to seek new opportunities for opening and running a business
equilibrium
a state of balance such that there is no tendency to change
equilibrium level of output
the level of output where the aggregate demand curve intersects the aggregate supply curve
equilibrium price
the price determined in a market when quantity demanded is equal to quantity supplied, and there is no tendency for the price to change
equilibrium quantity
the quantity that is bought and sold when a market is in equilibrium
equity
the condition of being fair of just
errors and omissions
in the balance of payments, an item that is included to account for possible omissions and error in items that have been included or excluded, in order to ensure that the balance of payments balances
excess demand
occurs when the quantity of a good demanded is greater than the quantity supplied, leading to a shortage of the good
excess supply
occurs when the quantity of a good demanded is smaller than the quantity supplied, leading to a surplus
exchange rate
the rate at which one currency can be exchanged for another, or the number of units of foreign currency that correspond to the domestic currency
excise taxes
taxes imposed on spending on particular goods or services
excludable
a characteristic of goods according to which it is possible to exclude people from using the good by charging a price for it
expansionary fiscal policy
fiscal policy usually pursued in a recession, involving an increase in government spending or a decrease in taxes
expansionary monetary policy
monetary policy usually pursued in a recession, involving a decrease in interest rates, intended to increase investment and consumption spending
expenditure approach
a method used to measure the value of aggregate output of an economy, which adds up all spending on final goods and services produced within a country within a given time period.
expenditure flow
the flow of spending form households to firms to buy the goods and services produced by the firms
expenditure-reducing policies
policies that involve reducing expenditures in the domestic economy so as to bring about a decrease inc imports in order to correct a current account deficit
including contractionary fiscal and monetary policies
expenditure-switching policies
policies that involve switching consumption away from imported goods and towards domestically produced goods, in order to correct a current account deficit
including trade protection policies and depreciation
explicit costs
costs of production that involve a money payment by a firm to an outsider in order to acquire a factor of production that is not owned by the firm
export promotion
a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports
externality
occurs when the actions of consumers or producers give rise to positive or negative side-effects on other people who are not part of these actions, and whose interests are not taken into consideration
factor endowments
the factors of production that a country possesses
factors of production
all resources or inputs used to produce goods and services
land, labor, capital, entrepreneurship
financial account
in the balance of payments, inflows minus outflows of funds due to foreign direct investment, portfolio investment and changes in reserve assets
fiscal policy
manipulations by the government of its own expenditures and taxes in order to influence the level of aggregate demand
fixed costs
costs that arise from the use of fixed inputs, which do not change as output increases or decreases
only arising in the short run, or the period of time when there is at least one fixed input
fixed exchange rate
an exchange rate that is fixed by the central bank of a country, and is not permitted to change in response to changes in currency supply and demand
fixed exchange rate system
an exchange rate system where exchange rates are fixed by the central bank of each country
foreign aid
consists of concessional financial flows from the developed world to economically less developed countries, and includes concessional loans and grants
foreign debt
refers to external debt, meaning the total amount of debt incurred by borrowing from foreign creditors
foreign direct investment (FDI)
refers to investment by firms based in one country (home country) in productive activities in another country (host country)
foreign exchange
refers to foreign national currencies
formal collusion
an agreement between firms to limit output or fix prices, in order to restrict competition
free entry and exit
the condition in which firms face no barriers to entering or exiting an industry, characteristic of the market structures of perfect competition and monopolistic competition
free rider problem
occurs when people can enjoy the use of a goods without paying for it, and arises from non-excludability
free trade
the absence of government intervention of any kind in international trade, so that trade takes place without any restrictions or barriers between individuals or firms in different countries
free trade are
a type of trading bloc, consisting of a group of countries that agree to eliminate trade barriers between themselves, it is the most common type of integration area, and involves a lower degree of economic integration than a customs union or common market
each country retains the right to pursue its own trade policy towards non-member countries
freely floating exchange rate
floating exchange rate
flexible exchange rate
an exchange rate determined entirely by market forces, or the forces of supply and demand
no government intervention to influence value of the exchange rate
freely floating exchange rate system
an exchange rate system where exchange rates are determined entirely by market forces
frictional unemployment
a type of unemployment that occurs when worker are between jobs
workers are fired, employer is out of business, search for better job
full employment
maximum use of all resources in the economy to produce the maximum quantity of goods and services that the economy is capable of producing, implying zero unemployment
game theory
a mathematical technique analyzing the behavior of decision-makers who are dependent on each other, and who use strategic behavior as they try to anticipate the behavior of their rivals
GDP per capita
gross domestic product divided by the number of people in the population
gini coefficient
a summary measure of the information contained in the Lorenz curve of an economy, defined as the area between the diagonal and the Lorenz curve, divided by the entire area under the diagonal
the larger the gini coefficient and closer to 1, the great the income inequality
GNI per capita
gross national income divided by the number of people in the population
governance
the way of governing, and the exercise of power in the management of an economy's economic and social resources, in order to achieve particular objectives such as economic growth and developement
government budget
a type of plan of a country's tax revenues and government expenditures over a period of time (usually a year)
government intervention
the practice of government to intervene in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives
government spending
spending undertaken by the government, as part of its fiscal policy or as part of an effort to meet particular economic and social objectives
grant
a type of foreign aid consisting of funds that are in effect gifts
green GDP
gross domestic product which has been adjusted to take into account environmental destruction an/or health consequences of environmental problems
gross domestic product (GDP)
a measure of the value of aggregate output of an economy; the market value of all final goods and services produced within a country during a given time period (usually a year)
gross national income (GNI)
the measure of the total income received by the residents of a country, equal to the value of all final goods and services produced by the factors of production supplied by the country's residents regardless of where the factors are located
growth maximization
a possible goal of firms, that differs from the goal of profit maximization assumed by standard microeconomic theory, involving the achievement of the highest possible growth, for various reasons such as achieving economies of scale, diversifying, achieving market power
hidden unemployment
unemployment that is not counted in official unemployment statistics because of factors as the exclusion of discouraged workers, considering part-time workers as full-time workers
homogeneous product
a product that is completely standardized and not differentiated
household indebtedness
the degree to which housholds have debts
human capital
the skills, abilities and knowledge acquired by people, as well as good levels of health, all of which make them more productive
human development index (HDI)
a composite indicator of development which includes indicators that measure three dimensions of development: income per capita, levels of health and educational attainment
humanitarian aid
foreign aid extended in regions where there are emergencies caused by violent conflicts or natural disasters
intended to save lives, ensure access to basic necessities and provide assistance with recontruction
implicit costs
costs of production involving sacrificed income arising from the use of self-owned resources by a firm
import substitution
a growth and trade strategy where a country begins to manufacture simple consumer goods oriented towards the domestic market in order to promote its domestic industry
improvement in the terms of trade
an increase in the value of the terms of trade index
incentive-related policies
policies involving reduction of various types of taxes, in the expectation that the tax cuts will change the incentives face by tax-payers
income
in the current account of the balance of payments, inflows of wages, rents, interest and profits earned abroad minus the same income factors that are sent abroad
income approach
a method used to measure the value of aggregate output of an economy, which adds up all income earned by the factors of production in the course of producing all good and services within a country in a given time period
income elastic demand
relatively high responsiveness of demand to changes in income
YED>1
income elastic demand
YED<1
income inelastic demand
income elasticity of demand
a measure of the responsiveness of demand to changes in income, measured by the percentage change in quantity demanded/percentage change in price
income flow
the flow of income of households that they receive by selling their factors of production to firms
income inelastic demand
relatively low responsiveness of demand to changes in income
increasing returns to scale
the situation where the output of a firm changes more than in proportion to a change in all its inputs
a percentage increase in all inputs causes output to increase by a larger percentage
indebtedness
the level of debt or the amount of money owed to creditors
indirect taxes
taxes levied on spending to buy goods and services, called indirect because, whereas payment of some or all of the tax by the consumer is involved, they are paid to the government authorities by the suppliers, indirectly
industrial policies
government policies designed to support the growth of the industrial sector of an economy
infant industry
a new domestic industry that has not had time to establish itself and achieve efficiencies in production, may therefore be unable to compete with more mature competitor firms from abroad
inferior good
a good the demand for which varies negatively with income
inflation
a sustained increase in the general price level
inflation targeting
a type of monetary policy carried out by some central banks that focuses on achieving a particular inflation target, rather than focusing on the goals of low and stable rate of inflation and low unemployment
inflationary gap
a situation where real GDP is greater than potential GDP, and unemployment is lower than the natural rate of unemployment
infrastructure
numerous types of physical capital resulting from investments, making major contributions to economic growth and development by lowering costs of production and increasing productivity
injections
the entry into income flow of funds corresponding to investment, government spending or exports
interest
a payment, per unit of time, for the use of borrowed money
interest rate
interest expressed as a percentage
international monetary fund (IMF)
an international financial institution composed of 185 member countries, whose purpose is to make short-term loans to governments on commercial terms in order to stabilize exchange rates, alleviate balance of payments difficulties and help countries meet their foreign debt obligations
interventionist policy
any policy based on government intervention in the market
interventionist supply-side policy
any policy based on government intervention in the market intended to affect the supply-side of the economy, usually to shift the LRAS curve to the right, increase potential output and achieve long term economic growth
investment
includes spending by firms or the government on capital goods
J-curve effect
a curve that plots the balance of trade on the vertical axis and time on the horizontal axis, showing that a country with a devaluing/depreciating currency may see a worsening in its trade balance in the period immediately following the devaluation or depreciation
joint supply
production of two or more goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other
Keynesian aggregate supply curve
an aggregate supply curve that has a flat section and upward sloping section and a vertical section
Keynesian multiplier
the ratio of real GDP divided by a change in an of the components of aggregate spending
kinked demand curve
a model developed to explain price inflexibility of oligopolistic firms that do not collude
labor
a factor of production, which includes the physical and mental effort that people contribute to the production of goods and services
labor market flexibility
the operation of market forces in the labor market
may be achieved by reducing or eliminating interference with market forces
labor market reforms
reforms intended to make labor markets more competitive and flexible, to make wages respond to the forces of supply and demand, to lower labor costs and increase employment by lowering the natural rate of unemployment
labor market rigidities
factors preventing the forces of supply and demand from operating in the labor market, and therefore preventing labor market flexibility
land
a factor of production which includes all natural resources: land and agricultural land, as well as everything that is under or above the land, such as minerals, oil reserves, underground water, forests, rivers and lakes
law of demand
a law stating that there is a negative causal relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus
as the price of the good increases, the quantity of the good demanded falls
law of diminishing returns
a law that states that as more and more units of a variable input are added to one or more fixed inputs, the marginal product of the variable input at first increases, but there comes a point when the marginal product of the variable input begins to decrease
law of supply
a law stating that there is a positive causal relationship between the price of a good and quantity of the good supplied, over a particular time period, ceteris paribus
as the price of the good increases, the quantity of the good supplied also increases
leakages
the withdrawal from the income flow of funds corresponding to savings, taxes or imports
long run
in microeconomics, it is a time period in which all inputs can be changed, where there are no fixed inputs
in macroeconomics, it is the period of time when prices of resources change along with changes in the price level
long-run aggregate supply (LRAS) curve
a curve showing the relationship between real GDP produced and the price level when wages change to reflect changes in the price level, ceteris paris
long run average total costs
the lowest possible average costs that can be attained by a firm for any level of output when all the firm's inputs are variable (in the long run)
long-run average total cost curve
a curve that shows the lowest possible average cost that can be attained by a firm for any level of output when all of the firm's inputs are variable
long-run equilibrium level of output
the level of output (real GDP) that results when the economy is in long run equilibrium, occurring when the aggregate demand and short-run aggregate supply curves intersect at a point on the long run aggregate supply curve
long term growth trend
the line that runs through the business cycle curve, representing average growth over long periods of time
Lorenz curve
a curve illustrating the degree of equality of income distribution in an economy
loss
refers to the difference between economic costs and total revenue of a firm when economic costs are greater than revenues
luxuries
goods that are not necessary or essential
price elastic demand and income elastic demand
macroeconomic objectives
objectives of policy makers in the macroecononomy
full employment, low rate of inflation, economic growth, and equitable distribution of income and external balance
macroeconomics
the branch of economics that examines the economy as a whole by use of aggregates, which are wholes or collections of many individual units
managed exchange rates
exchange rates that are for the most part free to float to their market levels over long periods of time, with central banks periodically intervening in order to stabilize them over the short term
managed exchanged rate system
the exchange rate system in use since 1973
marginal benefit
the extra or additional benefit received from consuming one more unit of a good
marginal cost
the extra or additional cost of producing one more unit of output
marginal private benefits (MPB)
the extra benefit received by consumers when they consume one more unit of a good
marginal private costs (MPC)
the extra costs to producers of producing one more unit of a good
marginal product
the extra or additional output that results from one additional unit of a variable input
marginal propensity to consume
the fraction of additional income spent on domestically produced goods and services
marginal propensity to import
the fraction of additional income spent on imports
marginal propensity to save
the fraction of the additional income that is saved
marginal propensity to tax
the fraction of additional income that is paid as taxes
marginal revenue
the additional revenue arising from the sale of an additional unit of output
marginal social benefits (MSB)
the extra benefits to society of consuming one more unit of a good
marginal social costs (MSC)
the extra costs to society of producing one more unit of a good
marginal tax rate
the tax rate paid on additional income
market
any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out exchange
market demand
the sum of all individual consumer demands for a good or service
market equilibrium
occurs where quantity demanded is equal to quantity supplied, and there is no tendency for the price or quantity to change
market failure
occurs when the market fails to allocate resources efficiently, or to provide the quantity and combination of goods and services mostly wanted by society
results in allocative inefficiency
market power
the control that a seller may have over the price of the product it sells
market structure
the characteristics of a market organization that determine the behavior of firms within an industry
market supply
refers to the sum of all individual firm supplies of a good or service
market-based supply-side policy
any policy based on promoting well-functioning, competitive markets in order to influence the supply-side of the economy, usually to shift the LRAS curve to the right, increasing potential output and achieving long term economic growth
market-oriented policy
a policy in which government intervention is limited, economic decisions are made mainly by the private decision-makers and the market has significant freedom to determine resource allocation
Marshall-Lerner condition
a condition stating when depreciation or devaluation of a country's currency will lead to an improvement in that country's balance of trade, the sum of the price elasticities of demand for imports and exports must be greater than 1 for the trade balance to improve
maximum price
a legal price set by the government, which is below the market equilibrium price
merit goods
goods that are held to be desirable for consumers, but which are underprovided by the market
micro-credit
a programme to provide credit (loans) in small amounts to people who do not ordinarily have access to credit
microeconomics
the branch of economics that examines the behavior of individual decision-making units, consumers and firms
Millennium Development Goals (MDGs)
8 development goals adopted by the Millennium Declaration of 2000 consisting of 18 targets to be achieved by the year 2015
minimum price
a legal price set by the government which is above the market equilibrium price
minimum wage
a minimum price of labor set by governments in the labor market, in order to ensure that low-skilled workers can earn a wage high enough to secure them with access to basic goods and services
monetarist/new classical model
two different models of the macroeconomy, both based on the importance of the price mechanism in coordinating economic activities, the concept of competitive market equilibrium and thinking about the economy as a harmonious system that automatically tends toward full employment
monetary policy
policy carried out by the central bank, aiming to change interest rates in order to influence aggregate demand
monetary union
a high form of economic integration, involving the adoption by a group of country of a single currency, such as some of the EU that have adopted the euro
money
anything that is acceptable as payment for goods and services
monopolistic competition
one of the four market structures
large number of firms, substantial control over market price, product differentiation and no barriers to entry
monopoly
one of the four market structures
a single or dominant large firm in the industry, significant control over price, produces and sells unique product with no close substitutes and high barriers to entry
monopoly power
occurs whenever a firm has the ability to control the price of the product it sells
multilateral development assistance
lending to developing countries for the purpose of assisting their development on non-concessional terms by multilateral organizations
multilateral trade agreement
a trade agreement between many countries
multinational corporation (MNC)
a firm involved in foreign direct investment (FDI)
a firm based in one country (home) and that undertakes productive investments in another country (host)
national income
the total income of an economy, often used interchangeably with the value of aggregate output, particularly in the context of macroeconomic models
national income statistics
statistical data used to measure an economy's national income and output as well as other measures of economic performance
nationalization
a transfer in ownership of a firm away from the private sector and toward government ownership
natural capital
an expanded meaning of the factor of production land, including everything that is included in land plus additional natural resources occurring naturally in the environment
natural monopoly
a single firm that can produce for the entire market at a lower average cost than two or more smaller firms
natural rate of unemployment
unemployment that occurs when the economy is producing at its potential of full employment level of output, and is equal to the sum of structural, frictional and seasonal unemployment
necessities
goods that are necessary or essential
price inelastic demand, income inelastic demand
negative externality
a type of externality where the side-effects on third parties are negative or harmful
negative externality of consumption
a negative externality caused by consumption activities, leading to a situation where marginal social benefits are less than marginal private benefits
MSB<MPB
negative externality of production
a negative externality caused by production activities, leading to a situation where marginal social costs are greater than marginal private costs
MSC>MPC
net exports
the value of exports minus the value of imports
nominal GDP
gross domestic product measure in terms of current prices, which are prices prevailing at the time of measurement
nominal value
value that is in money terms, measured in terms of prices that prevail at the time of measurement, and that does not account for changes in the price level
non-collusive oligopoly
a type of oligopoly where firms do not make agreements among themselves in order to fix prices or collaborate in some way
non-excludable
a characteristic of some goods where it is not possible to exclude someone from using a good, because it is not possible to charge a price
one of the two characteristics of public goods
non-governmental organizations (NGOs)
non-profit organizations that provide a very wide range of services and humanitarian functions
non-price competition
occurs when firms compete with each other on the basis of methods other than price
product differentiation, advertising and branding
non-price determinants of demand
the variables other than price than can influence demand, and that determine the position of a demand curve
non-price determinants of supply
the variables other than price than can influence supply, and that determine the position of a supply curve
non-price rationing
the apportioning of distributing of goods among interested buyers through means other than price, often necessary when there are price ceilings
non-produced, non-financial assets
a part of the capital account of the balance of payments, which includes a variety of items such a mineral rights, forestry rights, fishing rights and airspace
non-rivalrous
a characteristic of some goods where the consumption of the good by one person does not reduce consumption by someone else
one of the two characteristics of public goods
normal good
a good the demand for which varies positively with income
as income increases, the demand for the good increases
normal profit
the minimum amount of revenue that a firm must receive so that it keeps the business running
normative economics
the body of economics based on normative statements, which involve beliefs, or value judgements about what ought to be
Official Development Assistance (ODA)
the most important part of foreign aid, referring to foreign aid that is offered by countries or by international organizations composed of a number of countries
oligopoly
one of the four market structures
small number of large firms in the industry, firms have significant control over price, firms are interdependent, products may be differentiated or homogeneous, there are high barriers to entry
open economy
an economy that has international trade
opportunity cost
the value of the next best alternative that must be given up or sacrificed in order to obtain something else
output approach
a method used to measure the value of aggregate output of an economy, which calculates the value of all final goods and services produced in the country within a given time period
overallocation of resources
occurs when too many resources are allocated to the production of a good relative to what is socially most desirable, resulting in overproduction
overvalued currency
a currency whose value is higher than its free-market value
occurring in a fixed exchange rate system
per capita
per person
perfect competition
one of the four market structures
a large number of small firms, no control over price, all firms sell a homogeneous product, no barriers to entry, perfect information and perfect resource mobility
perfectly elastic demand
refers to a price elasticity of demand value of infinity, and arises in the case of a horizontal demand curve
perfectly elastic supply
a price elasticity of supply value of infinity, and arises in the case of horizontal supply curve
perfectly inelastic demand
refers to a price elasticity of demand value of zero, and arises in the case of a vertical demand curve
perfectly inelastic supply
refers to a price elasticity of supply value of zero, and arises in the case of a vertical supply curve
personal income taxes
taxes paid by households or individuals in households on all forms of income, including wages, rental income, interest income, and dividents
Phillips curve
a curve showing the relationship between unemployment and inflation
physical capital
one of the factors of production, which is itself produced, used to produce goods and services
portfolio investment
financial investment, including investment in stocks and bonds
positive economics
the body of economics based on positive statements, which are about things that are, were or will be
positive externality
a type of externality where the side-effects on third parties are positive or beneficial
positive externality of consumption
a positive externality caused by consumption activities, leading to a situation where marginal social benefits are greater than marginal private benefits
MSB>MPB
positive externality of production
a positive externality caused by production activities, leading to a situation where marginal social costs are less than marginal private costs
MSC<MPC
potential output (potential GDP)
the level of output (real GDP) that can be produced when there is full employment
poverty
the inability of an individual or family to afford an adequate standard of goods and services
poverty cycle
arises when low incomes result in low savings, permitting only low investments in physical, human and natural capital, and therefore low productivity of labor and of land, which in turn gives rise to low (if any) growth in income and hence low incomes once again
preferential trade agreement
an agreement between two or more countries to lower trade barriers between them on particular products, resulting in easier access to the markets of other members for the selected products, compared with the access of countries that are not members
price ceiling
a maximum price set by the government for a particular good, meaning that the price that can be legally charged by the sellers of the good cannot be higher than the legal maximum price
price competition
occurs when a firm lowers its price to attract customers away from rival firms, thus increasing sales at the expense of other firms
price control
setting of the minimum or maximum prices by the government so that prices are unable to adjust to their equilibrium level determined by demand and supply
price deflator
a price index used to calculate real GDP from nominal GDP
price discrimination
the practice of charging a different price for the same product when the price difference is not justified by differences in costs of production
price elastic demand
relatively high responsiveness of demand to changes in price
PED>1
price elastic demand
PED<1
price inelastic demand
price elastic supply
relative high responsiveness of supply changes in price
PES>1
price elastic supply
PES<1
price inelastic supply
price elasticity of demand (PED)
a measure of the responsiveness of the quantity of a good demanded to changes in its price, given by the percentage change in quantity demanded divided/percentage change in price
price elasticity of supply (PES)
a measure of the responsiveness of the quantity of a good supplied to changes in its price, given by the percentage change in quantity supplied/percentage change in price
price floor
a minimum price set by the government for a particular good, meaning that the price that can legally charged by the sellers of the goods cannot be lower than the legal minimum price
price inelastic demand
relatively low responsiveness of demand to changes in price
price inelastic supply
relatively low responsiveness of supply to changes in price
price leadership
a type of tacit collusion among oligopolistic firms, where a dominant firm in the industry sets a price and also initiates any price changes, the remaining firms in the industry become price-takers, accepting the price that has been established by the leader
price support
minimum prices set by the government for agricultural products
price taker
a firm that accepts a price at which it sells its product
price war
competitive price-cutting by firms, as each one tries to capture market shares from rival firms
results in lower profits for firms
prices as incentives
the ability of prices, and changes in prices, to convey information to consumers and producers that motivates them to respond by offering them incentives to behave in their best-self-interest
prices as signals
the ability of prices, and changes in prices, to communicate information to consumers and producers, on the basis of which they make economic decisions
primary commodity
any product that is produced in the primary sector, which includes agriculture, forestry, fishing and the extractive industries
primary products
all products produced in the primary sector of an economy
primary secotr
a part of an economy that is dominated by agriculture, also including fishing, forestry and all extractive activities
prisoner's dilemma
a problem in game theory showing that in some situations, although it is in the best interests of decision-makers to co-operate, when each actor acts in their best interests there results an outcome where they are all worse off
private good
a good that is both rivalrous and excludable
privatization
a transfer of ownership from the public sector to the private sector
producer price index (PPI)
consists of several indices of prices received by producers of goods at various stages in the production process
producer surplus
refers to the difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good
product differentiation
occurs when each firm in an industry tries to make its product different from those of its competitors
production possibilities
all possible combinations of the maximum amounts of two goods that can be produced by an economy, given fixed and unchanging resources and technology, when there is full employment of resources and productive efficiency
productive possibilities curve
a curve showing production possibilities
productive efficiency
occurs when firms produce at the lowest possible cost
productivity
the quantity of output produced for each hour of work of the working population
profit
a payment, per unit of time, to owners of entrepreneurship/management
profit maximization
the goal of firms, according to the standard theory of the firm
making profit as large as possible, achieved by producing the level of output where the difference between total revenue and total costs is the largest, or where marginal cost is equal to marginal revenue
programme aid
foreign aid involving financial support to sectors, such as education, health care, agriculture, urban development, the financial sector, the environment
progressive taxation
taxation where, as income increases, the fraction of income paid as taxes increases
project aid
foreign aid involving support for specific projects, such as building schools, clinics, hospitals, irrigation systems, other agricultural infrastructure
proportional taxation
taxation where, as income increases, the fraction of income paid as taxes remains constant
public debt
the government's accumulation of budget deficits minus budget surpluses
the total amount owed by the government to all lendors
public good
a good that is non-rivalrous and non-excludable
purchasing power parity (PPP) exchange rates
special exchange rates between currencies that makes the buying power of each currency equal to the buying power of US$1, therefore equal to each other
quintiles
division of a population into 5 equal groups with respect to the distribution of a variable
quota
a type of trade protection that involves setting a legal limit to the quantity of a good that can be imported over a particular time period
rational economic decision-making
the assumption in economics that all economic decision-makers act in their best self-interest, trying to maximize the satisfaction or benefit they receive from their economic decisions
real GDP
gross domestic product (GDP) measured in constant prices, prices that prevail in one particular year (the base year)
real value
value that has eliminated the influence of changes in the price level
reallocation of resources
reassigning resources to particular uses, so that the allocation of resources changes and becomes a new allocation
recession
an economic contraction, where there is falling real GDP and increasing unemployment resources which last 6 months or more
recessionary gap
a situation where real GDP is less than potential GDP, and unemployment is greater than the natural rate of unemployment
regional trade agreement
a trade agreement between several countries that are located within a geographical region
regressive taxation
taxation where, as income increases, the fraction of income paid as taxes decreases
relative poverty
the inability of an individual or a family to afford an adequate standard of goods and services, where the adequate standard is relative and changes over time
rent
a payment, per unit of time, to owners of land resources who supply their land to the production progress
reserve assets
foreign currency reserves that the central bank maintains and can buy or sell to influence the value of the country's currency exchange rate
resources
factors of production, sued by firms as inputs in the production process
resource allocation
assigning available resources or factors of production, to specific uses chosen among many possible and competing alternatives
returns to scale
the relationship between inputs and outputs, and in particular by how much output changes if all inputs change
revaluation
an increase in the value of a currency in the context of a fixed exchange rate system
revenue maximization
the objective of some firms to maximize revenue
rivalrous
a characteristic of a good according to which its consumption by one person reduces its availability for someone else
satisficing
a goal of firms to achieve satisfactory results, rather than pursue a single maximizing objective
scarcity
the condition in which available resources are limited
seasonal unemployment
a type of unemployment that occurs when the demand for labor in certain industries changes on a seasonal basis because of variations in needs
short run
in microeconomics, it is a time period during which at least one input is fixed and cannot be changed by the firm
in macroeconomics, it is the period of time during which the prices of resources, particularly the price of labor do not change
short-run aggregate supply (SRAS) curve
a curve showing the relationship between the price level and the quantity of real GDP produced by firms when resource prices do not change
shortage
the amount by which quantity demanded is greater than quantity supplied
shut-down price
the price at which a firm that is making losses and will stop producing in the short run
social optimum
a situation that is the best from the social point of view, determined by the achievement of allocative efficiency
social safety net
a system of government transfers of cash or goods to vulnerable groups, undertaken to ensure that these groups do not fall below a socially acceptable minimum standard of living
substitute goods
two or more goods that satisfy a similar need, so that one good can be used in place of another
supernormal profit (abnormal/economic profit)
positive economic profit arising when total revenue is greater than total economic costs
supply
indicates the various quantities of a good that firms are willing and able to produce and sell at different possible prices during a particular time period, ceteris paribus
supply curve
a curve showing the relationship between the quantities of a good that firms are willing and able to produce and sell during a particular time period and their respective prices, ceteris paribus
supply of money
the amount of money in circulation, determined by the central bank of a country
supply shock
events that have a sudden and strong impact on short run aggregate supply (SRAS), leading to SRAS curve shifts
supply-side policies
a variety of policies that focus on aggregate supply, namely factors aiming to shift the long-run aggregate supply (LRAS) curve to the right, in order to achieve long-term economic growth
tacit collusion
cooperation that is implicit or understood between cooperating oligopolistic firms, without a formal agreement, with the objectives to coordinate prices, avoid competitive price-cutting, limit competition, reduce uncertainties and increase profits
tariffs
taxes on imported goods
tax incidence
refers to the burden of a tax, or those who are the ultimate payers of the tax
terms of trade
relates the prices a country receives for its exports to the prices paid for its imports, and is given by the ratio of index of average export prices to index of average import prices times 100
an increase in the value of this ratio indicates improvement in terms of trade
theory of absolute advantage
if countries specialize in and export the goods in which they have an absolute advantage, this results in better resource allocation and increased production and consumption in each country
theory of comparative advantage
as long as opportunity costs in two or more countries differ, it is possible for all countries to gain from specialization and trade according to their comparative advantage
this results in greater global output and consumption
third degree price discrimination
occurs when a firm price discriminates among different consumer groups
tied aid
the practice whereby donors make the recipients of foreign aid spend a portion of the borrowed funds on the purchase of goods and services from the donor country
total costs
the sum of fixed and variable costs
total product
the total quantity of output produced by a firm
total revenue
the amount of money received by firms when they sell a good
price x quantity of the good
tradable permits
permits that can be issued to firms by a government or an international body, and that can be traded in a market, the objective being to limit the total amount of pollutants emitted by the firms
trade creation
the replacement of higher cost products by lower cost imports that results when a trading bloc is formed and trade barriers are removed
trade diversion
the replacement of lower cost products by higher cost imports that results when a trading bloc is formed and trade barriers are removed
trade liberization
the policy of liberalizing international trade by eliminating trade protection and barriers to trade
trade protection
government intervention in international trade through the imposition of trade restrictions to prevent the free entry of imports into a country and protect the domestic economy from foreign competition
trading bloc
a group of countries that have agreed to reduce tariff and other barriers to trade for the purpose of encouraging the development of free or freer trade and cooperation between them
transfer payments
payments made by the government to individuals specifically for the purpose of redistributing income, thus transferring income from those who work and pay taxes towards those who cannot work and need assistance
underallocation of resources
occurs when too few resources are allocated to the production of a good relative to what is socially most desirable, resulting in its underproduction
underemployment
the number of underemployed people, defined as all people above a particular age who have part-time jobs when they would prefer to have full-time jobs or jobs that do not make full use of their skills and education
underground market
refers to a market that arises whenever a buying/selling transaction is unrecorded
unreported legal goods and services or illegal goods and services
undervalued currency
a currency whose value is lower than its free-market value
occurs in a fixed exchange rate system
unemployment
the number of unemployed people, defined as all people above a particular age who are not working and who are actively looking for a job
unemployment rate
a measure of the amount of unemployment in an economy, expressed as a percentage
total number of unemployed people in an economy/labor force x100%
unit elastic demand
price elasticity of demand value of one
unit elastic supply
price elasticity of supply value of one
urban informal sector
part of an urban economy that lies outside the formal economy, consisting of economic activities that are unregistered and legally unreguated
value of output flow
the value of output that is sold by firms and purchased by consumers
equal to expenditure flow or income flow
variable costs
costs that arise form the use of variable inputs, and that vary or change as output increases or decreases
wage
a payment, per unit of time, to those who provide labor
weighted price index
a measure of average prices in one period relative to average prices in a reference period called a base period
goods and services are weighed according to their relative importance
welfare
the well-being of a population
amount of surplus generated in a market
welfare loss
loss of a portion of social surplus that arises when marginal social benefits are not equal to marginal social costs, due to market failure
MSB≠MSC
World Bank
a development assistance organization, composed of 185 member countries which are its joint owners, that extends long-term loans to developing country government for the purpose of promoting economic development and structural change
World Trade Organization (WTO)
an international organization that provides the institutional and legal framework for the trading system that exists between member nations worldwide, responsible for liberalizing trade, operating a system of trade rules and providing a forum for trade negotiations between governments, and settling trade disputes