IB Economics full definitions

abnormal profit

abnormal profit

a type of profit arising when TR > TC; alternatively, when AR>AC, or P>AC

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 g&s, where this standard is absolute and unchanging over time; defined in relation to a nationally or internationally determined poverty line, which determines the minimum income that can sustain a family in terms of its basic needs

abuse of market power

occurs when firms enagge in activities that restrict competition

actual growth

in the context of PPC model, it’s growth that occurs die to reduction of unemployment or improvement in efficiency of resource use, resulting in a movement of a point inside the PPC to a point closer to the PPC in the northeast direction

Adam Smith

(1723-1790) a Scottish philosopher often referred to as the ‘Father of Economics’ best known for his idea that the self-interested behaviour of decision-makers without gov’t intervention results in competitive markets leading to a more efficient use of resources and increased output

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; may include customs procedures involving inspections and valuation, controls on packaging, and others; often considered to be a kind of ‘hidden’ protection

adverse selection

a type of asymmetric information where one party has more information than the other party about the quality of the product being sold; if the seller has more information (selling a used car), the buyer will reduce demand; if buyer has more info (health) when buying health insurance, the seller will reduce supply; the result in both cases is under-allocation of resources to the g/s

aggregate demand

the total qty of g&s that all buyers and sellers in an economy want to buy over a particular time period, at different possible price levels, cp

aggregate demand curve

a curve used in macroeconomics showing the relationship between the total amount of real output demanded by the 4 components and the economy’s PL over a particular time period, cp

aggregate supply

the total qty of g&s produced in an economy over a particular time period, at different PL, cp

allocative efficiency

an allocation of resources that results in producing the combination of g&s mostly preferred by consumers; the condition for allocative efficiency is given by MSB=MSC; alternatively if social surplus is maximum

allocative inefficiency

the absence of allocative efficiency, when MSB not equal to MSC (or P not equal to MC)

anchoring

part of behavioural economics, involves the use of irrelevant information to make decisions, which often occurs due to its being the first piece of information that the consumer happens to come across

anti-dumping

an argument that justifies trade protection policies; if a country’s trading partner is suspected of practising dumping (selling a good in international markets at a P below the cost of producing it), then the country should have the right to impose trade protection measures to limit imports of the dumped good; dumping is illegal according to international trade rules

appreciation of a currency

an increase in the value of a currency in the context of a floating exchange rate system or managed exchange rate system

appropriate technology

technologies that are well-suited to a country’s particular economic, geographical, ecological and climate conditions; used in connection with labour-abundant developing countries that require labour-intensive technologies

asymmetric information

a type of market failure where buyers and sellers don’t have equal access to information, usually resulting in an under-allocation of resources to the production of g&s, 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 gov’t authorities, work toward stabilising the economy by reducing the short-term fluctuations of the business-cycle; are progressive income taxes and unemployment benefits

availability

the use of information that is most recently available, which people tend to rely on more heavily, though there is no reason that this information is any more reliable than previously available information

average costs

costs per unit of output'; TR / n.o. unis produced

average revenue

revenue per unit of output sold; TR / n.o. units sold

average tax rate

tax paid / total income; expressed in %

balance of payments (BoP)

a record (usually for a year) of all transaction 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)

balance of trade in services

part of the BoP; (value of exports of services - value of imports of services) / 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

behavioural economics

a relatively new branch of economics strongly influenced mainly by psychology, but also by sociology and neuroscience based on the idea that human behaviour is more complex than the assumptions of rational consumer choice

biases

systematic errors in thinking or evaluating; rules of thumb, anchoring, framing, availability

bilateral trade agreement

any trade agreement involving 2 trading partners, usually 2 countries; may involve a trade agreement between 1 country and another group of countries when this gorup acts as a single unit (EU)

bounded rationality

the idea that consumers are rational only within limits, as consumer rationality is limited by 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 in reality exercise self-control only within limits, lacking the self-control required of them to make rational decisions

bounded selfishness

the idea that people are selfish only within limits; the assumption of self-interested behaviour of the rational consumer cannot explain the numerous accounts of selfless behaviour

budget deficit

referring usually to the gov’t’s budget, it’s the situation where gov’t tax revenues are less than gov’t expenditures over a specific period of time

budget surplus

referring usually to the gov’t’s budget, it’s the situation where gov’t tax revenues are greater than gov’t expenditures over a specific period of time

bsuiness confidence

a measure of the degree of optimism among firms in an economy about the future performance of firms and the economy; it’s measured on the basis of surveys of business managers; important determinant of the investment component of AD

business cycle

fluctuations in the growth of real output/real GDP, consisting of alternating periods of expansion and contraction

capital

one of the FoP, which itself has been produced (physical capital), including machinery, tools, equipment; other types of capital include human capital, or the skills, abilities knowledge and levels of good health acquired by people; natural capital, or everything that traditionally has been included in the FoP land; and financial capital, or purchases of financial instruments such as stocks and bonds

capital account

in the BoP, the inflows - outflows of funds for (i) capital transfers (including debt forgiveness and non-life insurance claims), and (ii) the purchase or use of non-produced natural resources (mineral rights, forestry rights, fishing rights and airspace); relatively uninmportant

capital expenditures

with reference to gov’t expenditures, includes public investments, or the production of physical capital, i.e. building roads, airports…

capital flight

the large-scale transfer of privately-owned financial capital (funds) to another country resulting from fear and uncertainty of holding domestic assets

capital gains tax

a tax on profits from financial investments such as stocks and bonds or from buying and selling real estate

capital transfers

a part of the capital account of the BoP, include inflows-outflows for such things as debt forgiveness, non-life insurance claims, and investment

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

ceteris paribus

a latin expression meaning ‘other things being equal;’ all other variables other than those under investigation are assumed to be constant

central bank

a financial institution responsible for regulating the country’s financial system and commercial banks, and carrying out monetary policy

change

one of the key concepts; important in economics in the study of both economic theory as well as in real world events

choice

one of the key concepts; economics is a study of choices, or selecting among alternatives, due to the scarcity of resources

choice architecture

the design of particular ways or environments in which people make choices, based on the idea that consumers make decisions in a particular context and that choices of decision-makers are influenced by how options are presented to them

circular economy

the idea that goods should be produced in such way, that they can be repaired rather than thrown out; they would be made out of biological materials so that once discarded they can go back to the biosphere and prevent pollution of the planet

circular flow of income

a flow of income in an economy where the value of output produced is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output

circular flow of income model

a model showing the flow of resources from consumers to firms, and the flow of products from firms to consumers, as well as money flows consisting of consumers’ income revenues arising from thee sale of their products

classical economics

economic ideas of the 19th century; main feature was the idea that markets working on their own according to the principles of S and D could solve all major economic problem, including unemployment and recession, and allocate resources efficiently

collective self-governance

a solution to the use of cpr where the users take control of the resources and use them in a sustainable way; runs counter to the idea of the tragedy of the commons

collusion

an agreement among firms to fix prices, or divide the market between them, so as to limit competition and maximise profit; usually involves firms in oligopoly

collusive oligopoly

the type of oligopoly where firms agree to restrict output or fix the price to limit competition, increase market power and increase profits

command and control

government laws and regulations that everyone must follow

commercial bank

a financial institution whose main functions are to hold deposits for their customers, to make loans to their customers, to transfer funds by cheque from one bank to another, and to buy gov’t bonds; regulated by the CB

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; they continue to have a common external policy, and agree to eliminate all restrictions on movements of any FoP within them; EU, EEC,

common pool resources (cpr)

resources not owned by anyone, don’t have a P, available for anyone to use without payment; their depletion or degradation leads to environmental sustainability

comparative advantage

arises when a country has a lower relative cost, or opportunity cost, in the production of a good than another country

competition

occurs when there are many buyers and sellers acting independently, so that no one has the ability to influence the P at which the product is sold in the market

competitive market

a market composed of many buyers and sellers acting independently, none of whom has any ability to influence the price of the product

competitive market equilibrium

the equilibrium that emerges at the point where the DC intersects the SC in a free competitive market

competitive supply

in the case of 2 goods, refers to production of one or the other by a firm; the 2 goods compete which each other for the same resources

complementary goods

2 or more goods that tend to be used together; if 2 goods are complements, an increase in the P of one will lead to a decrease in the demand of the other

composite indicator

a summary measure of more than 1 indicator, often used to measure economic development; HDI

concentration ratio

a measure of how much an industry’s production is concentrated among the industry’s largest firms; measures the % of output produced by the largest firms in an industry, and is used to provide an indication of the degree of competition/degree of market power in an industry; the higher the ratio, the greater the degree of market power

consumer confidence

a measure of the degree of optimism of consumers about their future income and the future of the economy; measured on the basis of surveys of consumers; important determinant of the consumption component of AD

consumer price index (CPI)

a measure of the cost of living for the typical household; compares the value of a basket of g&s in one year with the value of the same basket in a base year; inflation and deflation are measured as a % change in the value of the basket from one year to another

consumer surplus

refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid; in a diagram, it’s shown by the area under the DC and above the P paid by consumers up to qty purchased

consumption

spending by households on g&s

contracting out

a practice often undertaken by the gov’t when it makes an agreement with a private firm to carry out an activity that the gov’t was previously doing itself

contractionary fiscal policy

refers to fiscal policy usually pursued in an inflation, involving a decrease in gov’t spending or an increase in taxes

contractionary monetary policy

refers to monetary policy usually pursued in an inflation, involving an increase in IR, intended to lower investment and consumption spending

corporate income tax

tax on the profits of corporations, which are firms that have formed a legal body called a ‘corporation’ that’s legally separate fro

corporate indebtedness

the degree to whcich corporations have debts

corporate social responsibility

the practice of some corporations to avoid socially undesirable activities, such as polluting activities, employing children, or employing workers under unhealthy conditions; as well as undertaking socially desirable activities, such as support for human rights and donations to charities

cost-push inflation

a type of inflation caused by a fall in AS, usually resulting from increases in CoP, shown in the AD-AS model as a leftward shifts of the AS curve

costs of production (CoP)

payments by firms to obtain and use FoP in their production process

credit items

in the BoP, refer to payments received from other countries, entering the BoP accounts with a plus sign; represent an inflow of foreign exchange into a country

credit rating

an assessment of the ability of a borrower to pay back loans, usually carried out by agencies qualified to do this; a high credit rating received by a gov’t means that it’s expected to be able to pay back its loans in full and on time without difficulties

crowding out

refers to the possible impacts on real GDP of increased gov’t spending financed by borrowing; if increased gov’t borrowing results in a higher rate of interest, this could reduce private investment spending, reversing the impacts of gov’t’s expansionary fiscal policy

current account balance

the sum of credits + debits in the current account of BoP

current account deficit

occurs when the current account balance has a negative value, meaning that debits are larger than credits

current account

in the BoP, this includes the balance of trade (recording exports - imports of goods) + the balance on services (recording exports of services - imports of services), + inflows - outflows of income and current transfers; the most important part of the current account in most countries is the balance of trade

current account surplus

occurs when the current account balance has a positive value, meaning that credits are larger than debits

current expenditures

in the gov’t budget, refers to gov’t spending on day-to-day items that are recurring and items that are consumed as a g/s is provided; include wages and salaries (for all gov’t employees); spending for supplies and equipment for the day-to-day operation of gov’t activities; provision of subsidies; and interest payments on gov’t loans

current transfers

an item in the current account of the BoP. refers to inflows and outflows of funds for items including gifts, foreign aid and pensions

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; members of a customs union also act as a group in all trade negotiations and agreements with non-members

cyclical unemployment

a type of unemployment that occurs during the downturns of the business cycle, when the economy is in a recessionary gap; the downturn is seen as arising from declining or low AD - demand deficient

debit items

in the BoP, refer to payments made to other countries, entering the BoP accounts with a minus sign; represent an outflow of foreign exchange from a country

debt relief

the cancellation or forgiveness of all or a portion of a country’s debt

debt servicing

the payments that must be made to repay the principal - interest

default choice

choice made by default, which means doing the option that results when one does not do anything

deferred consumption

occurs when consumers postpone spending, such as if they expect the PL to fall

deficit

in general, this is the deficiency of something compared with something else; (i) in the BoP, a ‘deficit’ in an account occurs when the credits are smaller than the debits; (ii)in the case of the gov’t budget, a deficit occurs when gov’t revenues are smaller than gov’t expenditures

deflation

a continuing/sustained decrease in general PL

demand

indicates the various quantities of a good that consumers are willing and able to buy at different prices during a particular time period, cp

demand curve (DC)

a curve showing the relationship between the P of a good and the qty of the good demanded, cp

demand management

policies that focus on the demand side of the economy, attempting to influence AD to achieve the goals of price stability, full employment and economic growth