IB Economics HL – Core Definitions

These flashcards cover key economic concepts, definitions, and mechanisms essential for understanding IB Economics at the HL level.

Market equilibrium

The price and quantity at which quantity demanded equals quantity supplied.

Price mechanism

The system where prices adjust due to changes in supply and demand, allocating resources automatically.

Consumer surplus

The difference between what consumers are willing to pay and what they actually pay.

Producer surplus

The difference between the minimum price producers are willing to accept and the price they receive.

Allocative efficiency

When resources are allocated such that social surplus (consumer surplus + producer surplus) is maximized; marginal benefit equals marginal cost.

Productive efficiency

Producing at the lowest possible cost (minimum average cost).

Circular flow of income

A model showing the flow of goods, services, and money between households and firms.

Leakages

Income leaving the circular flow, such as savings, taxes, and imports.

Injections

Income entering the circular flow, including investment, government spending, and exports.

GDP

The total value of all final goods and services produced within an economy in a given time period.

GNI/GNP

Gross Domestic Product plus net income from abroad.

Aggregate demand (AD)

Total spending on domestic goods and services at different price levels, represented by the formula AD = C + I + G + (X - M).

Aggregate supply (short-run)

Total output firms are willing to produce at different price levels when input prices are fixed.

Aggregate supply (long-run)

Output when all resources are fully flexible, vertical at full employment level of output.

Macroeconomic equilibrium

The intersection of aggregate demand and aggregate supply that determines the equilibrium price level and real output.

Inflationary gap

When actual output exceeds potential output.

Deflationary gap

When actual output is below potential output.

Full employment level of output

The output where the economy uses all resources efficiently.

Demand-side policies

Policies aimed at influencing aggregate demand to achieve macroeconomic objectives.

Fiscal policy

Government changes to spending and taxation to influence aggregate demand.

Monetary policy

Central bank controls interest rates and money supply to influence aggregate demand.

Expansionary policy

Policy that increases aggregate demand, involving lower interest rates, increased government spending, and decreased taxes.

Contractionary policy

Policy that reduces aggregate demand, involving higher interest rates, decreased government spending, and increased taxes.

Supply-side policies

Policies that increase long-run aggregate supply by improving productivity and efficiency.

Interventionist supply-side policies

Government spending on training, education, infrastructure, and research & development.

Market-based supply-side policies

Policies such as reducing taxes, deregulation, privatization, and reducing minimum wages/unemployment benefits.

Inflation

A sustained increase in the general price level.

Deflation

A sustained decrease in the general price level.

Disinflation

A fall in the rate of inflation, meaning prices rise more slowly.

Consumer Price Index (CPI)

A measure tracking the price change of a selected basket of goods and services.

Cost-push inflation

Inflation caused by rising production costs that shifts short-run aggregate supply to the left.

Demand-pull inflation

Inflation caused by increases in aggregate demand.

Economic growth

An increase in real GDP over time.

Potential growth

An increase in the economy’s productive capacity represented by a rightward shift in long-run aggregate supply.

Actual growth

Growth resulting from moving closer to potential output.

Exchange rate

The value of one currency in terms of another.

Appreciation

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

Depreciation

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

Fixed exchange rate

An exchange rate in which the government sets and maintains a specific value of its currency.

Managed float

An exchange rate mostly determined by market forces but occasionally influenced by government or central bank.

Economic development

Improvements in living standards, quality of life, and the reduction of poverty, which is broader than economic growth.

Poverty cycle

A self-perpetuating cycle where low incomes lead to low investment in human and physical capital, maintaining low incomes.

Institutional barriers

Weak governance, corruption, and political instability preventing economic growth.

International barriers

Trade restrictions, dependence on primary commodities, and volatility in export prices affecting development.

Domestic barriers

Low education levels, poor health, lack of infrastructure, and inequality hindering growth.

Import substitution

A strategy of protecting domestic industries by reducing imports.

Export-led growth

A strategy promoting exports to drive economic growth.

Microfinance

Small loans directed towards low-income individuals to promote entrepreneurship.

Foreign direct investment (FDI)

Investment by multinational corporations to promote capital accumulation and employment.

Aid

Foreign assistance provided for development projects.

Fair trade

Ensuring higher and more stable incomes for small producers in developing countries.