IB Economics Definitions

A beggar-thy-neighbour policy

An approach to trade policy where one country attempts to grow its economy while harming its neighbors or trade partners.

Abnormal profit/economic profit

When the total revenue of a firm is greater than the total or economic cost.

Absolute advantage

Greater production can take place by a country using the same quantity of factors of production as another country; a country can produce a good or service more cheaply than another country as they can use their factors of production more efficiently in production.

Absolute poverty

The inability of an individual or a family to afford a basic standard of goods and services, which is defined in relation to a nationally or internationally determined poverty line.

Actual growth

Growth that occurs due to reduction of unemployment or improvement in efficiency of resource use, resulting in the movement of a point in the PPC to a point closer to the PPC in the north-east direction.

Actual output

The total amount of goods and services that an economy is producing at a certain moment in time.

Administrative barriers

Non-tariff barriers designed to stop or slow imports.

Adult literacy rate

A measure of the percentage of the population older than 15 years that is literate at a specific point in time

Ad valorem tax

An indirect tax that adds a percentage of the price to the sale of a good.

Adverse selection

A type of asymmetric information where one party has more information about the quality of the product than another party. This results in an underallocation of resources to the good or service.

Aggregate demand

The total quantity of goods and services demanded by all buyers in an economy (consumers, firms, the government, and foreigners) over a particular time period at different possible price levels, ceteris paribus.

Aggregate supply

The total quantity of goods and services produced in an economy over a particular time period at different price levels, ceteris paribus.

Aid

Assistance given to a country that is not provided through normal market forces

Allocative efficiency

An allocation of resources that produces at the socially optimal combination and quantity of goods and services or when social surplus is maximised.

Allocative inefficiency

A situation in which community surplus is not maximised.

Anchoring

The use of irrelevant information, often being the first piece of information, as a reference to make decisions.

Anthroprocene

The current geological age in which humans are the dominant influence on climate and the environment.

Appreciation

When the forces of demand and supply increase the price of a currency, becoming worth more in the context of a managed exchange rate system

Appropriate technology

Technology that is small-scale, energy efficient, environmentally friendly, locally autonomous, labour-intensive, and affordable

Asymmetric information

A type of market failure where buyers and sellers do not have equal access to information, usually resulting in the underallocation of resources to the production of goods and services.

Auditing

Official financial inspection of a company or its accounts

Austerity

A government program aimed at decreasing government debt by decreasing government spending and raising taxes to move closer to a balanced budget.

Automatic Stabilisers

Factors that automatically, without any actions by the government, work toward stabilising the economy by reducing short-term fluctuations in the business cycle. Two important automatic stabilisers are progressive income taxes and unemployment benefits.

Availability heuristic

The use of information most recently and readily available which is not necessarily more reliable than previously available information.

Average costs

Costs per unit of output calculated by dividing the total cost by the number of units of output produced.

Average product

The average output produced per unit of a variable factor of production.

Average revenue

The revenue per unit sold calculated by dividing total revenue by the number of units of output sold.

Average tax rate

The percentage of income that an individual pays in taxes.

Bailout

Financial support provided to firms or countries facing bankruptcy

Balance of payments

A record of all economic transactions between the residents of a country and the residents of all other countries usually for a time period of a year. The three main components are the current account, the capital account, and the financial account.

Balance of trade in goods

The value of exports of goods minus the value of imports of goods over a specific time period (usually a year).

Balance of trade in services

The value of exports of services minus the value of imports of services over a specific time period (usually a year).

Bankruptcy

A legal proceeding that occurs when a person or business is unable to repay their outstanding debts

Barriers to entry

Anything that can prevent a firm from entering an industry and beginning production which results in limiting the degree of competition in the industry.

Barter

The exchange of goods and services without using money

Base-eroding and profit-shifting

A situation where a business uses tax exemptions and loopholes or shifts its profits to low or no tax jurisdictions to avoid tax

Behavioural economics

A branch of economics, mainly influenced by psychology, which is based on the idea that human behaviour is more complex than the assumptions of rational consumer choice.

Biases

A term in psychology that refers to systematic errors in thinking or evaluating.

Big Mac Index

An index published by The Economist magazine to informally measure the purchasing power parity among countries by comparing the equivalent Big Mac prices in relation to the different exchange rates.

Bilateral trade agreement

Legally binding contract between two countriesUsed to increase economic and political cooperation and facilitate international tradeUsually they mutually agree to remove tariffs and non-tariff barriers on products traded

Biocapacity

Earth's bioproductive land and sea

Biodiversity

The variety of plant and animal life in a particular region or in the entire world

Biosphere

The region of Earth's surface and atmosphere occupied by living organisms

Black market/parallel market

A market where buying and selling transactions are unrecorded, and are usually illegal.

Bonds/government bonds

Intended to raise funds to finance a range of projects from infrastructure to war. After a predetermined period of time, the government would repay the loan, including interest.

Boom

A stage of the business cycle referring to the peak of the business cycle when consumer and producer confidence is high, the economy is growing, and unemployment is falling.

Bounded rationality

The idea that consumers are only rational within limits which could be the consumers' insufficient information, the costliness of obtaining information, and the limitations of the human mind to process large amounts of information.

Bounded self-control

The idea that people exercise self-control only within limits which sometimes makes them unable to make rational decisions.

Bounded selfishness

The idea that people are selfish only within limits which cannot be explained by the assumption of self-interested behaviour of the rational consumer.

Breaking even

A point at which the total revenue a firm receives is equal to the total costs and the firm is not receiving abnormal profits.

Budget deficit

The situation where government tax revenues are less than government expenditures over a specific time period (usually a year).

Budget surplus

The situation where government tax revenues are greater than government expenditures over a specific time period (usually a year).

Burden

Who pays the tax; ie. regressive taxes are felt more by the poor than by the rich

Bureaucracy

Excessively complicated administrative procedures.

Business confidence

A measure of the degree of optimism among firms in an economy about the future performance of firms and the economy.

Business cycle

Fluctuations in the growth of real output or GDP consisting of alternate periods of expansion and contraction.

Bust

The bottom stage of the business cycle when consumer and producer confidence are low, the economy is stagnant, and unemployment is at its peak.

Buy National Campaign

A campaign encouraging consumers to buy goods produced domestically instead of those imported from abroad

By-product

A secondary product produced in the production of something else.

Cantril Ladder

A scale to measure subjective well-being

Capital

One of the factors of production which refers to all manufactured resources including physical capital, human capital, and natural capital.

Capital account

A record of all the transfers of ownership capital and other assets between countries.

Capital account surplus

A surplus on the capital account which arises when the money flowing in from the ownership of capital and other assets is greater than the money flowing overseas

Capital controls

Limits on the amount of money that can be brought into or out of a country; often reduced to capital flight

Capital expenditures

In reference to government expenditures, it is the government's public investment or production of physical capital.

Capital flight

An outflow of funds from a country which is often due to negative changes in the economic, social, or political conditions

Capital gains

The profit a firm makes from selling an asset

Capital goods

The tools and machinery necessary for the production of other goods

Capital transfers

A transaction related to the transfers of ownership of fixed assets, transfers of funds linked to the buying and selling of fixed assets, or debt forgiveness.

Carbon tax

A tax per unit of carbon emissions of fossil fuels which is used to reduce the levels of carbon dioxide emitted from burning fossil fuels.

Cartel

A group of stakeholders in the market — usually businesses — who collude to improve their profits and dominate the market.

Caste discrimination

A form of discrimination that divides populations into hierarchical groups based on birth

Central Bank

A financial institution responsible for regulating the country's financial system and commercial banks, and for carrying out monetary policy.

Centrally planned economy

A rationing system where all economic decisions are taken at the centre by the government. There is no private property; all resources are owned by the state.

Ceteris paribus

A Latin expression meaning "other things being equal" which assumes that all other variables other than those under investigation are constant or unchanging.

Change

A key concept that refers to the idea that the economic world is in a constant state of change which occurs in technologies, institutions and societies, as well as in the economy's structure.

Child labour

Work that deprives children of their potential and dignity, and is harmful to their mental and physical development

Choice

A key concept that refers to the idea that because resources are scarce and many needs and wants cannot be satisfied, choices must be made, which results in opportunity costs.

Choice architecture

The design of particular environments in which people make choices based on the idea that decision-makers are influenced by the way in which options are presented to them.

Circular economy

An economic model based on the principles of designing out waste and pollution by keeping products and materials in use with the intention of making economic growth more sustainable and preserving the environment.

Circular flow of income model

A model showing the flow of resources from households to firms, the flow of products from firms to households, the consumers' income arising from the sale of their resources, and the firms' revenue arising from the sale of their products.

Civil law system

Legal system based on comprehensive and regularly updated legal codes

Close complements

Goods that are usually consumed together, such that one good has little use without the other.

Close substitutes

Goods that have very similar characteristics and uses to consumers so that they switch between them easily.

Club goods

a type of good in economics, sometimes classified as a subtype of public goods that are excludable but non-rivalrous, at least until reaching a point where congestion occurs.

Cognitive bias

A way that human thinking and decision-making deviates from rationality.

Collateral

Something pledged as security for the repayment of a loan, which will be forfeited in the event of a default.

Collective learning

The ability to preserve information, share it with one another, and pass it to the next generation. It is a source of increasing complexity.

Collective self-governance

A solution to the use of common pool resources where the users take control of the resources and use them in a sustainable way.

Collusion

An agreement, usually illegal, among firms to fix prices or to divide the market between them in order to limit competition and maximise profit.

Collusive oligopoly

A collusion of businesses which results in an operation similar to a monopoly.

Commercial bank

A financial institution whose main functions are to hold deposits for their customers, to make loans to their customers, to transfer funds from one bank to another, and to buy government bonds.

Commodity

A primary good that is an important input to production such as oil, iron ore, and timber.

Common Agricultural Policy (CAP)

A policy framework implemented by the EU to support the farming industry through subsidies and direct payments.

Common law system

A legal system with legal codes, but which also relies heavily on precedents from judicial rulings to define the law.

Common market

Most integrated out of trading blocs

Member nations agree to reduce and remove barriers to trade and ensure free flow of products between member states.It also has FACTOR MOBILITY so that all factors of production (Land, Labour, Capital, Enterprise) can flow freely between member states

Common pool resources

Rivalrous but non-excludable resources which may lead to environmental unsustainability when depleted.

Comparative advantage

When a country can produce a given amount of output at a lower opportunity cost than another country. This may be due to a greater quantity of factors of production or a better quality of factors of production.

Competition

Occurs when there are a large number of buyers and sellers acting independently so that no one individual seller has the ability to influence the price at which the product is sold in the market.