IB Economics Glossary

Absolute advantage

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

Absolute poverty

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

Administrative barriers

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

Adverse selection

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

Aggregate demand (AD) (+curve)

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

A curve showing…

Aggregate supply (AS) + curve

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

A curve showing…

Allocative efficiency

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

Anchoring

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

Anti-dumping

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

Anti-monopoly regulation

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

Appreciation

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

Appropriate technology

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

Asymmetric information

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

Automatic stabilizers

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

Average tax rate

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

Balance of payments

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

Balance of trade in goods and services

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

Behavioural economics

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

Bilateral trade agreement

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

Bounded rationality

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

Bounded self-control

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

Bounded selfishness

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

Budget deficit

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

Business cycle

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

Business tax

Tax levied on the income of a business or corporation.

Capital

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

Capital account

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

Capital flight

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

Capital gains tax

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

Capital transfers

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

Carbon (emissions) taxes

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

Central bank

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

Circular economy

An economic system that looks beyond the linear take-make-dispose model and aims to redefine growth, focusing on society-wide benefits. It is based on three principles: design out waste, keep products and materials in use, and regenerate natural systems.

Circular flow of income

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

Collective self-governance

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

Collusive oligopoly

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

Common market

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

Common pool resources

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

Comparative advantage

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

Competitive supply

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

Complements

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

Concentration ratios

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

Consumer/Business confidence

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

Consumer nudges

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

Consumer price index (CPI)

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

Consumer surplus

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

Contractionary fiscal policy

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

Contractionary monetary policy

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

Corporate indebtedness

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

Corporate social responsibility

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

Cost-push inflation

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

Credit items

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

Credit rating

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

Crowding out

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

Current account (deficit negative, surplus positive)

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

Current transfers

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

Customs union

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

Cyclical (demand-deficient) unemployment

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

Debit items

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

Debt relief (cancellation)

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

Debt servicing

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

Deflation

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

Deflationary/recessionary gap

Arises when the equilibrium level of real output is less than potential output as a result of a decrease in AD.

Demand

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

Demand-pull inflation

Inflation that is caused by increases in aggregate demand.

Demand side/management policies

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

Demerit goods

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

Depreciation

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

Deregulation

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

Devaluation

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

Development aid

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

Direct taxes

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

Discount rate

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

Disinflation

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

Dumping

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

Economically least developed countries (ELDCs)

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

Economic development

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

Economic integration

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

Economic well-being

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

Economies of scale

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

Elasticity of demand for exports/imports

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

Engel curve

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

Equity

The concept or idea of fairness.

Exchange rate

The value of one currency expressed in terms of another currency.

Excludable

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

Expansionary fiscal policy

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

Expansionary monetary policy

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

Expenditure approach

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

Expenditure reducing policies

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

Expenditure switching policies

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

Export promotion

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

Export subsidy

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

External balance

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

Externalities

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

Financial account

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

Fiscal policy

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

Fixed exchange rate

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

Floating exchange rate

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

Foreign aid

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

Foreign direct investment (FDI)

When a firm establishes a productive facility in a foreign country or acquires controlling interest (at least 10% of the ordinary shares) in an existing foreign firm.