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Gravity
Definitions from Economics for the IB Diploma by C.Ziogas from the series Oxford IB Study Guides
Terms in this set (219)
Abnormal Profits, Supernormal Profit or Economic Profit
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Absolute advantage
A country is said to have an absolute advantage in the production of a good if it can produce more of it with the same resources; or, the same amount using fewer resources.
Absolute poverty
Measures the number of people living below the minimum income necessary to satisfy basic physical needs, the 2008 World Bank international poverty line is set at $1.25 purchasing power parity (PPP) per day
Accounting or explicit costs
Production costs for which a firm makes explicit monetary payments
Actual and potential growth
Actual growth refers to increases in real GDP through time, potential growth refers to a shift outwards of the production possibilities frontier or curve.
Ad valorem tax
An indirect tax expressed as a percentage of the price of a product, for example VAT.
Administrative trade barriers (or regulatory trade barriers)
Government or administration regulations or requirements that result in a lower level of imports into a country.
Adverse selection
A problem arising when information in a market is asymmetric and the seller knows more about the characteristics of the good being sold than the buyer. The buyer would be better off trading with someone selected at random from the general population than with the seller.
Aggregate Demand (AD)
Total planned spending on domestic goods and services at various possible average price levels per period of time.
Aggregate Supply (AS)
The planned level of output at various possible price levels that firms are willing to offer per period of time.
Aid
Any flow of capital (grants or loans) from developed to developing countries that is non-commercial from the point of view of the donor and for which the terms are concessional (that is, the interest rate is lower than the market rate and the repayment period longer)
Allocative efficiency
Exists when just the right amount from society;s point of view has been produced. It requires that for the last unit produced, price is equal to its marginal cost (MC), or more generally, that marginal social benefit (MSB) is equal to marginal social cost (MSC)>
Anti-dumping duties
Taxes(tariffs) that bring the import price of the good that is being dumped closer to the price charged by domestic firms in order to avoid injury to the domestic industry in the importing country.
Anti-monopoly regulation
Laws and regulations that aim to restrict monopoly power and monopoly practices in markets.
Appreciation
An increase in the exchange rate within a flexible (floating) exchange rate regime.
Appropriate technology
Technology that employs the relatively abundant factor of production of a country.
Asymmetric information
Exists when one side of a market knows more than the other side of the market. E.g. producer than consumer.
Automatic stabilizers
Referes to the income-induced changes of progressive income taxes and of unemployment benefits on the government's budget that tend to stabilize the business cycle.
Average fixed costs (AFC)
Fixed costs on a per unit of output basis, fixed costs divided by the level of output; AFC continually decrease as output increases.
Average household
A fictitious household determined through surveys that possesses the average characteristics of the population and that is used in the construction of the consumer price index (CPI)
Average Product (of labour)
Output per worker and used as a common measure of labour productivity.
Average Revenue (AR)
Total revenues (TR) divided by the output AR is always equal to price and diagrammatically is identical to the demand curve a firm faces.
Average tax rate
The ratio of the tax paid over the tax base, for example income or spending.
Average total costs
The total costs incurred on a per unit of output basis.
Average variable costs (AVC)
Variable costs on a per unit of output basis; variable costs divided by the level of output.
Balance of payments (BoP)
A record of all transactions of a country with the rest of the world over a period of time. It is broken down into the current account, the capital account and the financial account.
Balance of trade
Referes to the difference between the value of exports and the value of imports of goods (physical merchandise) over a period of time (sometimes services are also included).
Balanced budget
When government expenditures (G) are equal to government tax and other revenues/income (T).
Barriers to entry
Anything that deters entry of a new firm into a market, for example a patent.
Basic economic questions
The 'what', 'how' and 'for whom' questions that all economies must somehow answer.
Bilateral agreements
Preferential trade agreements between two countries.
Bilateral aid
Aid from one government to another through some kind of national aid agency.
Birth rate
Te average number of births in a year for every 1000 population.
Bottlenecks (in production)
Used to explain the upward sloping section of the Keynesian aggregate supply (A) curve which refers to the fact as aggregate demand increases some industries being characterized by very low price elasticity supply (PES) reach their capacity level of output before others.
Branding
A type of firm-created barrier to entry which refers to the efforts firms make to establish the brand name image of their goods in order to render demand for those goods more price inelastic and deter entry of new firms.
Break-even output
The level of output for which total revenues (TR) of a firm are equal to the total costs (TC) of production so that abnormal profits are zero.
Break-even price
The price at which a firm is earning zero economic profits (that is, normal profits) which for a perfectly competitive firm is the minimum of its average total costs (ATC).
Budget deficit
Exists if government speeding (G) exceeds government (tax) revenues (T).
Budget surplus
Exists if government (tax and other) income (T) exceeds government expenditures (G).
Business confidence
The degree of optimism or pessimism characterizing businesses which affects their decisions or investment spending.
Business cycle
The short-run fluctuations of real GDP around its long-run trend.
Business taxes
Taxes on firm's profit.
Cap and trade schemes
A solution to pollution externalities that aims at creating a market for pollution permits by limiting ('capping') the number issued (making them scarce and valuable) and then permitting firms to trade these in the open market.
Capital
Produced means of production (tools, machines, equipment, factories, etc.)
Capital account of the balance of payments (BoP)
An account of the BOP which records unilateral transfers of capital, such as the forgiveness of a country's debt by the government of another as well as transfers of non-produced, non-financial assets such as natural resources, contracts, leases and licenses, marketing assets (and goodwill).
Capital flight
Refers to financial capital exiting a country legally or illegally and flowing into safer and more profitable financial centres.
Capital flows
Investment flows per period of time into and out of a country. These include portfolio and foreign direct investment.
Capital gains tax
A tax on the gains from the sale of stocks (shares).
Carbon tax
A tax on polluting emissions that aims at forcing polluters to pay the cost of their action (polluter pays principle); a tax on the carbon content of fossil fuels.
Cartels
Formal collusion of oligopolistic firms agreeing to behave as if they were a monopoly by restricting output in order to fix price at a higher level.
Central Bank
An institution responsible for monetary and exchange rate policy which provides banking services to the government and to commercial banks and which is considered the lender of last resort.
Centrally planned (command) economy
Refers to an economy in which the state (central agency) determines prices and output of goods and services.
Ceteris paribus
All other factors remaining constant.
Circular flow model
An economic model showing the major interrelationships and flows, real and monetary, between the major 'players' (decision-making units) of an economy.
Closed economy
An economy that does not engage in international trade (exports and imports).
Collusive oligopoly
When oligopolistic firms formally or tacitly agree to fix price or to engage in other anti-competitive behavior/practices.
Commodities
Primary sector agricultural and non-agricultural products used as inputs in the manufacturing process and traded in international markets, for example coffee, cotton, tin, zinc and copper.
Commodity agreements
Agreements between producers to coordinate commodity exports in order to stabilize prices. Either a production (export) quota system is operated (such as the International Coffee Agreement) where producers (exporting countries) agree to limit the amount exported, effectively forming a carter; or a buffer stock system (for example cocoa or rubber) may be operated. Commodity agreements usually collapse because of financing problems.
Commodity concentration of exports
When one or very few products are responsible for a large percentage of the export revenues of a developing country, for example copper and nitrates for Chile.
Common-access resources or common-pool resources
Common-access (or pool) resources are resources for which it is difficult to exclude individuals from deriving benefits from their use and which are rival in consumption, for example fishing grounds or forests.
Common market
A form of economic integration whereby members move forward to establish not only free trade in goods and services but also free movement of factors of production.
Comparative advantage
A country is said to have a comparative advantage in the production of good X if it can produce it at a lower opportunity cost (that is, by sacrificing fewer units of good Y) compared with another country.
Competitive supply
If a firm can produce different goods with the same inputs then these goods are in competitive supply.
Complementary goods or complements
Goods that are consumed jointly for example coffee and sugar.
Composite indicators of development
Indicators of development that are based on more than one economic variable, for example the Human Development Index (HDI).
Concessional loans
Loans granted to a country usually by a multilateral institution, for example the IMF with a longer repayment period and with an interest rate below the market rate (known as soft loans).
Constant returns to scale
A production technology where a 1% increase in all inputs leads to a 1% increase in output (so that unit costs are constant).
Consumer confidence
The degree of optimism or pessimism characterizing households which affects their spending decisions.
Consumer expenditures or Consumption
Spending by households on durable and non-durable goods and services per period of time.
Consumer Price Index (CPI)
A weighted average of the prices of the goods and services that typical consumer faces, expressed in index number form.
Consumer surplus
The difference between how much a consumer is willing to pay for a product and the price of the product.
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.
Contractionary fiscal policy
Decrease in government spending and/or increase int axes aimed at decreasing aggregate demand (AD).
Contractionary (or tight)monetary policy
A central bank is employing tight monetary policy if it increases inters rates (decreases the money supply) in order to decrease (or slow down the increase in) aggregate demand.
Core inflation
A measure of inflation that excludes volatile oil and food prices.
Corporate social responsibility
A possible objective of firms that aims at creating and maintaining an ethical and environmentally responsible image for them.
Corporate indebtedness
The total amount of money that firms owe to banks and other holders of their debt and which is considered a factor that may affect their decision to undertake additional investment sending
Cost-push inflation
Inflation resulting from adverse supply shocks shifting aggregate supply (AS) to the left, usually rising commodity prices are responsible especially oil prices.
Credit item (in BOP)
Any item that leads to an inflow of money into a country, for example exports of goods and services of foreigners purchasing domestic bonds.
Cross-price elasticity of demand (XED)
The responsiveness of the demand for a good to a change in the price of another good.
Crowding out
The idea that expansionary fiscal policy was not as effective as Keynesian theory claimed because deficit spending required financing which would lead to increased interest rates and so reduced private sector spending.
Current government expenditures
Spending by government on wages and salaries public sector employees as well as spending on consumables (day-to-day items) such as stationery.
Current account (of the BOP)
Records the value of exports and imports of goods and services of a country in a period of time. A current account surplus exists if the value of exports of goods and services exceeds the value of imports. This applies conversely for a deficit. More precisely, the current account includes visible trade and invisibles. The latter includes trade in services and net investment income as well as net transfers.
Current account deficit
When import expenditures on goods and services exceed export revenues over a period of time; more precisely, when the sum of net exports of goods and services plus net income from investments plus transfers is negative.
Current account surplus
When export revenues exceed import expenditures on goods and services over a period of time; more precisely, when the sum of net exports of goods and services plus net winsome from investments plus net transfers is positive.
Customs union
A form of regional economic integration where two or more countries abolish tariffs (and other barriers) between them and establish a common external barrier toward non-member countries.
Cyclical (Demand-deficient or Keynesian) unemployment.
Unemployment that is a result of insufficient aggregate demand (AD) and of 'sticky' money wages. Cyclical unemployment rises as an economy moves deeper into recession.
Death rate
The average number of deaths in a year for every 1000 population.
Debit item (in BOP)
Any item that leads to an outflow of money from a country, for example imports of goods and services or domestic residents purchasing foreign bonds.
Debt burden
Signifies the impediment to the growth and development process of a country that creates a high external debt.
Debt rescheduling
Refers to agreements between a debtor country and its creditors to defer debt service payments, to extend maturities on all outstanding debt and perhaps even to reduce debt-service obligations in order to provide the debtor with debt relief.
Debt servicing
Payment of interest and principal of debt (of a country or individual).
Decile
One of the ten equal parts of a frequency distribution.
Decreasing returns to scales
A production technology where a 1% increase in all inputs leads to a smaller than 1% increase in output (so that unit costs ruse; diseconomies of scale - DOS).
Deflation
Refers to the case where the average level of prices is decreasing through time. Deflation implies negative inflation rates.
Deflationary gap
A deflationary gap is present if equilibrium (actual) real output falls short of the level corresponding to the full employment level of output as a result of insufficient aggregate demand (AD).
Demand
The relationship between various possible prices and the corresponding quantities that an individual or the market is willing and able to buy per period of time, ceteris paribus. The individual demand refers to an individual consumer whereas the market demand refers to the whole market and diagrammatically it is the horizontal summation of the individual demand curves.
Demand-pull inflation
Inflation resulting from aggregate demand (AD) rising faster than aggregate supply (AS)
Demand-side policies
Policies aimed at influencing the level of aggregate demand (AD) in order to affect growth, employment and inflation. They include fiscal and monetary policy.
Demerit goods
Consumption of such goods creates very significant negative externalities on society so governments try to decrease or prohibit their consumption. Typical examples include alcohol, tobacco and illegal drugs.
Demographic factors
Factors pertaining to the characteristics of a population in a country, for example the average age of a population.
Depreciation (of a currency)
A decrease in the exchange rate within a floating (flexible ) exchange rate system.
Deregulation
Policies that lower or eliminate government regulations on the operations of an industry and which may have a positive supply-side effect on the economy.
Determinants of demand
Factors other than the price of a good that may affect its demand and shift it, such as changes in income, tastes and prices of related goods.
Determinants of supply
Factors other than the price of a good that may affect its supply and shift it, such as changes in the price of inputs or the level of technology available.
Devaluation (of a currency)
A decrease in the exchange rate within a fixed exchange rate system.
Differentiated product
Products which are similar but not identical across sellers in an industry. They are considered as close but not perfect substitutes.
Direct taxation
Taxation on income and wealth.
Diseconomies of scale (DOS)
Referes to increases in average costs (AC) as a result of increased size of the firm.
Disguised (or hidden) unemployment
Unemployment that is not reflected in official unemployment statistics which includes, for example, discouraged workers, involuntary part-time employees and workers forced into early retirement and which causes the official employment statistic to understate the true level of unemployment in an economy.
Disinflation
Rate of inflation decreases which means that prices continue to rise but at a decreasing rate.
Disposable income
Income after subtracting direct taxes and adding transfer payments which can be spent or saved.
Distribution of income
A representation of what proportion of national income is enjoyed by different segments of a population; a frequency distribution showing groups of people classified by levels of national income.
Diversification (of exports)
A policy initiative to move away from commodity concentration of exports. When a country instead of relying on only a few commodities to export, tries to export a bigger variety of goods and services.
Dominant firm
Typically the largest in size firm in an oligopoly which may set prices that other tacitly follow.
Dynamic efficiency
When a firm enjoys economies of scale (EOS), leading to faster rates of innovation (new products and processes).
Economic costs
The value of all resources scarified to produce a good or service.
Economic development
A sustainable increase in living standards that implies increased per capita income, better education and health as well as environmental protection.
Economic good
Goods whose production involves the sacrifice of scarce factors of production.
Economic loss
A firm is making economic losses if its revenues are insufficient to cover all economic (that is, both implicit and explicit) costs; negative economic profits.
Economic models
Simplified representations of economic reality, typically but not necessarily expressed in mathematical form, aiming at facilitating comprehension of a complex economic phenomena at deriving falsifiable hypotheses.
Economic profits
The reward of entrepreneurship. They are defined as the (positive) difference between total revenues (TR) and total economic costs (TC).
Economic union
A form of regional economic integration where members of a customs union decide to integrate further by harmonizing taxation and other economic policies and even establishing a common currency.
Economies of scale (EOS)
Economies of scale exist if average costs decrease as the size (scale) of the firm increases.
Education indicators
Single variable or composite indicators that aim at summarizing an aspect or the level of education of a country, fore example literacy rate or primary education completion rate.
Efficiency
Refers, in general, to non-wasteful use of scarce resources.
Elasticity
The responsiveness of an economic variable to a change in some other economic variable. E.g. PED
Emergency relief aid or Humanitarian aid
Aid provided for humanitarian reasons for countries suffering from a natural disaster (for example an earthquake), famine or war.
Empowerment of women
In the US definition the term has five components: women's sense of self-worth, their right to have and to determine choices, their right to have access to opportunities and resources; their right to have the power to control their own lives, both within and outside home; and their ability to influence the direction of social change to create a more just social and economic order, nationally and internationally.
Entrepreneurship
Willingness and ability of certain individuals to organize the other three factors of production and to take risks.
Equilibrium
A market is considered to be in equilibrium if there is no tendency for change. This will be the case if quantity demanded per period equals quantity supplied and the market clears (that is, quantity demanded equals quantity supplied and so neither excess demand nor excess supply exist).
Equilibrium price
The price at which a market clears (that is, at which quantity demanded equals quantity supplied and so neither excess demand nor excess supply exist).
Equilibrium quantity
The quantity that corresponds to the equilibrium price in a market
Equity
Refers to fairness in the distribution of income.
Excess demand
Excess demand exists when at some price the quantity demanded is greater than the quantity supplied, exerting pressure to increase the price.
Excess supply
Excess supply exists when at some price the quantity supplied is greater than the quantity demanded, exerting pressure to decrease the price.
Exchange rate
The price of a currency expressed in terms of another currency. The number of units of a foreign currency required to buy a unit of domestic currency.
Excise tax
An excise tax is an indirect tax (that is, a tax on goods or on expenditure); strictly speaking it is a tax levied on a specific commodity or good of commodities in contrast to a sales tax which is levied on all commodities.
Exit (from a market)
When a firm or firms shut down and cease operations in a market.
Exit barriers
Costs that a firm incurs upon exit.
Expansionary fiscal policy
Refers to increases in government expenditure and/or decreases in taxes aiming at increasing aggregate demand (AD) and economic activity.
Expansionary (or easy) monetary policy
When the central bank decreases interest rates (or increase the money supply) to increase aggregate demand (AD) in an economy and therefore overall economic activity.
Expectations
The present perception of decision-making units concerning the future state of affairs in an economy, a market or the value of an economic variable.
Expected variables
The future value of a variable as perceived presently.
Expenditure approach
Referes to one of the three ways of measuring national income whereby expenditures bu households, firms, foreigners and the government on domestic goods and services over a period of time are added. (the other two methods are the output and income method)
Expenditure-changing and expenditure-switching policies
Expenditure changing: demand management policies that will lower aggregate demand (AD) and therefore national income and so reduce imports and trade deficit. Expenditure switching: policies that will try to switch expenditure away from imports and towards domestic products by making imports relatively more expensive and therefore undesirable, for example through devaluation or through the imposition of tariffs.
Expenditure flow
Within the circular flow diagram of a closed economy without government it refers to the monetary flow from households to firms that reflects their spending on domestic output per period.
Export promotion
A growth policy that aims at using export demand as the vehicle of growth and that is often contrasted to import substitution.
Export subsidy
A payment granted by a government to domestic firms to strengthen their competitiveness against foreign producers.
Export-led / outward-oriented growth
A strategy stressing export markets in the belief that the resulting increase in aggregate demand (AD) and in foreign exchange earnings, together with the faster transfer and diffusion of technology and all other trade-related efficiency benefits, will accelerate the growth and development process of an economy.
Externalities
When an economic activity creates benefits or imposes costs for third parties for which these do not pay for, or do not get compensated for, respectively.
Factor endowments
The factors of production (land, labour, capital and entrepreneurship) of a country.
Factors of production
The land (natural capital), labour (human capital), physical capital and entrepreneurship an economy has at its disposal.
Fertility rate
The average number of live births per 1000 for all women between 15 and 44 years old.
Financial account
Records the portfolio and foreign direct investment (FDI) into and out of a country over a period of time as well as changes in reserve assets.
Fiscal policy
Refers to the manipulation of the level of government spending and taxation (T) in order to affect aggregate demand (AD).
Fixed costs
Production costs reflecting the use of fixed inputs which are independent of the level of output and exist even if output is zero; their existence signals that the firm operates in short run.
Fixed exchange rate system
A system where the exchange rate is set at a level or within a range by the government and is then maintained there through central bank intervention (specifically, through buying and selling the currency in the foreign exchange market and/or manipulating the interest rate).
Floating (flexible) exchange rate system
A system where the exchange rate is determined solely through the interaction of demand and supply for the currency with no government (central bank) interaction.
Food price controls
Maximum prices imposed by some governments on food items which are set below the free-market equilibrium prices and which aim at protecting the vulnerable.
Foreign debt
The amount of money that a country owes to foreign entities that include foreign governments, commercial banks and multilateral institutions and which is repaid in foreign exchange.
Foreign direct investment (FDI)
When multinational corporations establish a new firm or acquire controlling interest in an existing one in a foreign country. It is distinct from portfolio investment as in FDI the investor has control over the asset.
Foreign exchange reserves
The value of foreign exchange holdings at the central bank of a country.
Free goods
Goods that do not have an opportunity cost, like sea water.
Free market economy
Refers to an economy in which markets alone, in other words the interaction between buyers and sellers, determine prices and output.
Free rider problem
A consequence of non-excludiability in the case of public goods: it refers to the ability of all individuals to benefit from a good or service once it becomes available to one.
Free trade
Refers to international trade that is not subject to any type of trade barriers (protectionism).
Free trade area (agreement)
An agreement that is formed when two or more countries abolish tariffs (and other barriers) between them while maintaining existing barriers to non-members.
Frictional unemployment
Refers to people in between jobs. It is a form of unavoidable unemployment as people are constantly moving between jobs in search of better opportunities. Better and faster information concerning the labour market can lower this type of unemployment.
Full employment
The situation where there is equilibrium in the labour market and so any unemployment remaining is not demand-defficient. Any increase in total output beyond the full employment level will prove inflationary and temporary
Game Theory
A branch of mathematics with many applications in economics that analyses in a stylized form situations where interdependence of outcome exists.
Gini coefficient
A measure of income inequality within a population that ranges from zero (perfect equality) to 1 (or 100) in the case of absolute inequality.
Goals of firms
Profit maximization is the working assumption but several other behavioral assumptions have been also proposed by theorists. Sales (revenue) maximization, growth maximization, satisficing theory, corporate social responsibility as well as managerial theories are among the alternatives.
Government budge (or national budget)
An estimate of government expenditures and government (tax and other) income for a future period)
Government debt or public debt
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Government failure
When government policies aiming at correcting a market failure fail to do so as a result of unintended consequences, measurement problems, biasses, etc.
Government revenue
Also referred to as government income; it includes tax and other revenues a government collects.
Grants (aid)
Flows of financial aid to developing countries that do not have to be repaid to the donor country.
GDP
The value of all final goods and services produced within an economy over a period of time, usually a year.
Green GDP
An attempt to correct GDP by accounting for the detrimental effect of production on the environment. Green GDP is estimated by subtracting from GDP the cost of natural resource and environmental depletion.
Gross National Product or Gross National Income (GNP or GNI)
GDP plus income from abroad mins income paid abroad.
Growth
Refers to increases in the real GDP (total output) of a country through time. Can be distinguished into actual and potential.
Growth maximisation
An alternative to the short-term revenue maximization goal where managers are assumed to seek to maximize the growth in sales revenue (that is, the growth rate of demand for the firm's output) and the capital value of the firm over time.
Health indicators
Single variable or composite indicators that aim at summarizing an aspect or the level of health of a country, for example life expectancy at birth, incidence of tuberculosis pero 100,000 people.
Heavily indebted countries
Developing countries facing an unsustainable debt burden.
Homogeneous product
A product that consumers consider identical (a perfect substitute) across all firms of an industry.
Household indebtedness
The amount of money households owe typically to banks from past borrowing.
Human capital
The education, training and experience embodied in the labour force of an economy.
Human development
Expanding people's choices and the level of wellbeing they achieve: material consumption as well as better health and better education.
Human development index
A composite measure of development that focuses on three dimension: health, education and income. Uses life expectancy; mean years of schooling o people aged 25 and older; expected years of schooling that a child of school entrance age can expect to receive if prevailing patterns of enrollment stay the same; and per capita GNP based on purchasing power parity dollars (PPP$)
Implicit costs
Production costs for which no explicit payment is made by the firm and which include the opportunity cost of using resources the firm owns as well as normal profit, the minimum return required for the firm to remain in business.
Import substitution / inward-oriented growth
A growth strategy in which domestic production is substituted for imports in an attempt to shift production away from the primary sector and industrialize.
Incentive function of prices
Referes to the idea that changes in the relative price of a good will induce producers to offer more or less of it in the market as their profit margin will be affected.
Incidence (burden) of taxation
Refers to who ends up paying a tax (tax shifting). An indirect tax imposed on a firm may eventually be partially or wholly paid by consumers.
Income approach
Refers to one of the three ways of measuring national income whereby incomes earned by all four factors of production (namely, wages, profits, interest and rents) over a period of time are added together to arrive at an estimate of national income or GNP. The other two methods are expenditure and output method.
Income elasticity of demand (YED)
The responsiveness of demand to a change in income.
Income, expenditure and output method
Three conceptually equivalent methods of measuring overall economic activity. The output method includes all final goods and services prodded within a period of time; the income method adds all incomes that this production process generates (wages, rents, interests and profits); the expenditure method sums all the expenditures made for the purchase of these final goods and services produced.
Income flow
Within the circular flow diagram of a closed economy without government it refers to the monetary flow from firms to households that reflects payments by the firms to households for the use of factors of production.
Increasing returns to scale
A production technology where an increase in all inputs by 1% leads to an increase in output by more than 1% ; increasing returns to scale leads to economies of scale (EOS).
Indebtedness
Within a development framework the external (foreign) debt of a country. The money a developing country owes to foreigners including governments, multinational institutions and commercial banks.
Indirect taxation
A tax on goods or on expenditure on a 'per unit' basis or as a percentage of the price.
Industrial policy
A set of interventionist supply-side policies whereby the government supports subsidized loans, preferential tax treatment as well as other methods certain specific industries though to exhibit high growth potential and to create significant positive spoilovers for the whole economy.
Infant industry agreement
The 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.
Inferior goods
Goods for which demand decreases following a rise in consumer's income
Infinitely price elastic demand
A limiting value of price elasticity of demand (PED) which implies that the firm is a price taker and faces a horizontal demand for its product at the going market-determined price.
Infinitely price elastic supply
A limiting value of price elasticity of supply (PES) which implies that the firm is willing to offer as much as the market demands at some price and that the firm is characterized by constant returns to scale so that average costs (AC) are constant and equal to marginal cost (MC).
Inflation
Refers to a sustained increase in the average price level.
Inflation rate
The percentage change in the average price level, measured by some price index, between two time periods, for example if the inflation rate of a country for 2011 is 3.2% it means that prices in 2011 increased on average by 3.2% from 2010. If it is negative it implies deflation, if it is positive but decreasing through time there is disinflation.
Inflationary gap
A gap is present if equilibrium (actual) real output (temporarily) exceeds the level corresponding to the full employment level of output.
Informal markets
Markets in which economic activity is not officially regulated by the government. Street vendors in may cities are typically part of the informal sector of an economy.
Infrastructure
Physical capital, typically financed by governments, which facilitates economic activity as it lowers production and transaction costs and is responsible for the creation of sizable positive externalities The road system, the rail system, harbors, airports and telecommunications that a country has are typical examples.
Injections
Within the circular flow model the term refers to spending on domestic output that is exogenous (that is, independent of the level of domestic income). It includes private investment spending, government spending and exports.
Innovations
Refers to new or improved products or processes as well as new marketing and organizational methods.
Institutional factors
Refers to the laws and regulations of product, labour and capital markets in a country; more generally refers to the legal and regulatory framework within which economic activity is conducted.
Interdependence
In an oligopolistic setting the term refers to the fact that the outcome of any action of a firm depends on the reactions of rival firms.
Interest
The reward of the factor of production capital. The payment made for using borrowed money over a period of time.
Interest rate
The price paid for borrowing money over a specified period expressed as a percentage (or, the reward for lending or parting with money).
International credit rating
An evaluation of a country's credit worthiness (that is, its ability to repay debt) prepared by specialized agencies such as Moody's.
Investment
Spending by firms on capital goods, for example machines, tools, equipment and factories; the change in the stock of capital of an economy through time. Investment expenditures in national income accounts include not only fixed capital expenditures by firms but also inventory investment and residential housing investment.
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