Glossary of economic key terms – from IBO TSM

Abnormal profit

Arises when average revenue is greater than average cost, exceeding the minimum return required by a firm to remain in business.

Absolute advantage

A country has an absolute advantage if it can produce more of a good with the same resources or the same amount using fewer resources than another country.

Absolute poverty

When individuals live below the minimum income necessary to satisfy basic physical needs, such as food, clothing, and shelter.

Abuse of market power

When a firm acts with the intention to eliminate competitors or prevent new firms from entering a market.

Actual growth

Occurs when real output (real GDP) increases over time due to better use of existing resources.

Administrative barriers

Regulations that limit imports, such as product safety standards and strict customs procedures.

Adverse selection

Market failure due to asymmetric information, leading to one party withdrawing from a market.

Aggregate demand (AD)

Planned spending on domestic goods and services at different average price levels over a period.

Aggregate demand curve

A curve illustrating the planned level of spending on domestic output at various average price levels.

Aggregate supply (AS)

The planned level of output that firms are willing to provide at different average price levels.

Allocative efficiency

Achieved when the right amount of goods and services are produced so that resources are allocated optimally, where price equals marginal cost.

Allocative inefficiency

Occurs when too much or too little of a good is produced, resulting in misallocation of resources.

Anchoring

Relying on irrelevant information as a reference point when making decisions.

Anti-dumping

Tariffs aimed at raising the price of dumped imports to match domestic prices.

Anti-monopoly regulation

Laws intended to restrict anti-competitive behavior by firms abusing market power.

Appreciation

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

Appropriate technology

Technology that relies primarily on the abundant factors that an economy possesses.

Asymmetric information

A market failure where one party has more or better information than the other.

Automatic stabilizers

Built-in features like unemployment benefits that help reduce short-term fluctuations in the business cycle.

Average costs

Total costs divided by the number of units produced.

Average revenue

Revenue earned per unit sold, equal to the price of the good.

Average tax rate

The ratio of tax paid to income, expressed as a percentage.

Balance of payments

A record of all financial transactions of a country with the rest of the world over a specific period.

Balance of trade in goods

The value of a country's exports of goods minus its imports.

Balance of trade in services

The value of a country's exports of services minus its imports.

Barriers to entry

Obstacles that deter new firms from entering a market, such as licenses or patents.

Behavioural economics

A subfield of economics that incorporates elements of psychology to understand decision-making.

Biases

Systematic deviations from rational decision-making.

Bilateral trade agreement

An agreement between two countries to eliminate trade barriers.

Bounded rationality

The concept that consumers and businesses make decisions based on limited information and cognitive abilities.

Bounded self-control

The inability of individuals to act in their own interests due to procrastination or temptation.

Bounded selfishness

The idea that individuals may act in ways that benefit others as well as themselves.

Budget deficit

When government expenditures exceed tax revenues over a specific period.

Business confidence

A measure of the optimism that businesses have about the economic future.

Business cycle

Short-term fluctuations of real GDP around its long-term potential output.

Business tax

Tax levied on the income of corporations.

Capital

Physical capital refers to tools and machinery; human capital refers to the skills and training of the labor force.

Capital account

A subaccount of the balance of payments, recording transactions involving non-produced, non-financial assets.

Capital flight

The movement of assets out of a country to seek safe havens elsewhere.

Capital gains tax

Tax imposed on the profits from the sale of financial assets.

Capital transfers

Financial transactions involving the transfer of assets, including debt forgiveness.

Carbon (emissions) taxes

Taxes imposed on the carbon content of fuels to mitigate environmental damage.

Central bank

An institution responsible for regulating monetary policy and providing banking services to the government.

Ceteris paribus

A Latin phrase meaning 'all other things being equal'.

Choice architecture

The design of environments to influence the decisions made by consumers.

Circular economy

An economic system that aims to minimize waste by designing out waste and keeping products in use.

Circular flow of income

A model illustrating the flows of income and expenditures in an economy.

Collective self-governance

Rules set by users of a common resource to manage overuse and conflicts.

Collusive oligopoly

A market structure where firms agree to fix prices or engage in anti-competitive behavior.

Common market

An economic agreement allowing free trade of goods, services, labor, and capital among member countries.

Common pool resources

Natural resources that are non-excludable but rivalrous in consumption, such as fisheries.

Comparative advantage

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

Competitive market

A market structure with many firms where no single firm can control prices.

Competitive market equilibrium

Occurs when quantity demanded equals quantity supplied in a competitive market.

Competitive supply

Goods that require the same resources in production and thus compete for resources.

Complements

Goods that are usually consumed together, enhancing each other's utility.

Composite indicator

An index that aggregates data from multiple indicators to provide a comprehensive measure.

Concentration ratios

The proportion of market sales attributed to the largest firms within an industry.

Consumer confidence

A measure of the optimism that households have about their economic situation.

Consumer nudges

Small design changes that influence consumer behavior through reinforcement or suggestions.

Consumer price index (CPI)

An index measuring the average change in prices of goods and services consumed by households.

Consumer surplus

The difference between the maximum price consumers are willing to pay and the actual price paid.

Consumption (C)

Household spending on goods and services over a specific period.

Contractionary fiscal policy

Reduction of government expenditures or increase in taxes aimed at decreasing aggregate demand.

Contractionary monetary policy

Increasing interest rates to decrease aggregate demand and curb inflation.

Corporate indebtedness

The total amount that a corporation owes to creditors.

Corporate social responsibility

A corporate initiative to assess and take responsibility for its effects on stakeholders.

Cost-push inflation

Inflation caused by increased production costs, represented by a leftward shift of the SRAS curve.

Credit items

Transactions in the balance of payments that lead to currency inflows.

Credit rating

A score indicating the default risk of a borrower as assessed by credit agencies.

Crowding out

When government borrowing leads to reduced private sector investment due to increased interest rates.

Current account

A balance of payments account recording net exports, net income, and net current transfers.

Current account deficit

A situation where the outflows in the current account exceed the inflows.

Current account surplus

Exists when the inflows in the current account exceed the outflows.

Current transfers

Remittances and aid that do not involve an exchange of economic value.

Customs union

An arrangement where member countries agree to eliminate tariffs among themselves and adopt a common external tariff.

Cyclical (demand-deficient) unemployment

Unemployment resulting from reduced demand during economic downturns.

Debit items

Transactions in the balance of payments that lead to currency outflows.

Debt relief (cancellation)

Reductions in the debt burden of developing countries, often organized by international institutions.

Debt servicing

Refers to the payment of interest and principal on debt.

Default choice

The option selected when no active choice is made by the consumer.

Deflation

A continuous decrease in the average price level.

Deflationary/recessionary gap

Occurs when the equilibrium output is less than potential output due to decreased aggregate demand.

Demand

The willingness and ability of consumers to purchase goods and services at different prices.

Demand curve

Graph that illustrates the relationship between price and quantity demanded.

Demand management

Economic policies designed to influence aggregate demand through fiscal and monetary means.

Demand-pull inflation

Inflation caused by an increase in aggregate demand.

Demand side policies

Policies aimed at influencing aggregate demand to affect growth, inflation, and employment.

Demerit goods

Goods deemed harmful to consumers and often overconsumed due to negative externalities.

Depreciation

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

Deregulation

Reducing or eliminating regulations on firms to stimulate competition and output.

Devaluation

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

Development aid

Assistance aimed at helping developing countries improve their economic conditions.

Direct taxes

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

Discount rate

The interest rate charged by central banks to commercial banks for short-term loans.

Disinflation

A reduction in the rate of inflation.

Dumping

Selling goods in a foreign market at prices lower than in the domestic market.

Economically least developed countries (ELDCs)

Countries identified by the UN as lacking basic economic development.

Economic development

A multidimensional concept involving improvements in living standards and access to resources.

Economic growth

Increases in the production of goods and services over time, measured by real GDP.