IB Economics Definitions HL (Revision Dojo)

Abnormal profit

When a firm's AR is greater than its AC

Absolute advantage

When a country can produce the same quantity of a good or service using fewer resources or more units using the same amount of resources

Administrative barriers

Trade protection measures taking the form of administrative procedures to prevent free flow of imports into a country. May include customs procedures as well as health, safety, and environmental standards

Adverse selection

When one of the sides has more knowledge about the quality of the product than the other

Aggregate demand

Total real output that buyers are willing to purchase in an economy over a certain time period at all price levels, ceteris paribus

Aggregate supply

Total output produced in an economy over a certain period of time at all price levels, ceteris paribus

Allocative efficiency

Situation where the market produces the socially desirable level of output and MSB = MSC, maximising social surplus

Appreciation

Sustained increase in the value of a currency

Asymmetric information

Buyers and sellers don't have the same access to information

Automatic stabilizers

Built-in institutional features that automatically reduce the effect of the short-term business cycle fluctuations without the need for government intervention

Average tax rate

Amount of tax paid a proportion of an individual's income

Balance of payments

A record of a country's economic transactions with all other countries over a specific time period

Bond

Signed certificate representing a loan given by the holder to the borrower in exchange for regular interest payments and the promise to repay the full amount at a set date

Business cycle

Short-term fluctuations of real GDP around its long-term trend; characterized by phases of expansion and contraction

Capital

Human-made FOPs used to produce goods and services

Capital account

Sum of the balance of capital transfers and transactions in non-produced, non financial assets

Capital flight

Occurs when money or other assets flow out of a country to "seek a haven" in another country

Carbon tax

Pigouvian tax imposed by the government on firms using fossil fuel per unit emitted

Choice architecture

The way in which choices are presented by design and environment influence decisions made by stakeholders

Circular flow of income

An income flow in an economy where the value of the output produced is equal to the total income earned from its production, also equivalent to the expenditures spent on purchasing said output

Circular flow of income model

A model illustrating the flow of resources from households to firmsL the movement of goods and services from firms to households, and the monetary flows including household income generated from selling resources and firm revenue from selling product

Collective self-governance

Situation where common pool resources are givern to the control of individuals to manage it in a sustainable manner. Rules and regulations are set by consumers to forego the short-term and prevent the depletion of resource due to overconsumption

Common markets

A form of trading bloc that builds on customs union by allowing the free movement of goods, services, and FOPs among countries

Comparative advantage

A country having lower opportunity costs in the production of a good compared to another country

Competitive supply

Goods are services that compete against each other since they are alternate uses of resources required to produce them

Complementary goods

Goods that tend to be used together therefore influencing eachothers' supply and demand curves jointly.

Concentration ratio

Measures the market share controlled by the large firms in the market

Consumer Price Index (CPI)

Measure of the cost of living by comparing value of a basket of goods/services in a given year to a base year

Consumer surplus

The difference between the highest price that consumers are willing and able to pay and what they actually pay

Contractionary fiscal policy

Fiscal policy aimed at decreasing aggregate demand through less government spending and an increase in direct taxation

Cost-push inflation

Inflation that is caused by an increase in costs of FOPs (supply shock) which reduces aggregate supply and pushes the price up

Credit rating

Determined by international agencies that rank countries based on how probably they are to repay their loans completely and on time

Current account

Sum of the balance of trade in goods and services, income, and current transfers

Customs union

Type of trading bloc that is fitting of an FTA, but also adopts a common policy towards non-member countries

Cyclical unemployment

Demand-deficient unemployment that occurs during a recession

Debt relief

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

Deflation

Sustained decrease in the average price levels of an economy over time

Demand

The relationship between the quantities of goods and services that consumers are willing and able ti buy at different price levels over a certain time period, ceteris paribus

Demand-pull inflation

Inflation caused by an increase in aggregate demand that exceeds aggregate supply at the full employment level

Demerit good

Goods that are not socially desirable and often over consumed and over produced, leading to externalities

Diversification

Process of expanding the range of products, services, or markets to reduce risk and better economic stability

Dumping

Sale of goods and services internationally at a price lower than the cost to produce it

Economic barriers

Structural challenges that prevent countries from achieving sustainable economic growth and development

Economic Development

Multidimensional concept involving the sustained increase in living standards: implies higher level of income, greater access, better education, better health, and a better environment for growth

Economic growth

Sustained increase in a country's real GDP over time

Economic inequality

Degree of differences between individuals in their ability to satisfy their needs and wants due to monetary constraints

Economic integration

Economic interdependence between countries usually involving an agreement to phase out or eliminate trade barriers between them

Economics

Study of choices leading ot the best use of scarce resources in order to satisy humanity's unlimited needs and wants

Economies of scale

Reductions in the AC that arise when a firms increases its output by scaling up all its inputs in the long run

Efficiency

Using scarce resources in the best possible way to avoid welfare loss

Entrepreneurship

Unique human skills to innovate, take risks, and pursure new opportunities when running a business

Equality

Even distribution of resources, opportunities, and outcomes among society

Equity

The concept or idea of fairness

Exchange rate

The value of one currency in terms of another currency

Expansionary fiscal policy

Fiscal policy aimed to stimulate aggregate demand through an decrease in direct taxation and/or a increase in government spending

Expenditure reducing policies

Policies that aim to reduce overall spending in the economy

Externality

The benefits or costs experienced by third parties not involved or compensated when a good or service is produced or consumed

Factors of Production (FOPs)

Resources or inputs used to produce goods and services like land labour, capital, and entrepreneurship

Financial account

Sum of foreign direct investment (FDI), portfolio investment, reserve assets, and official borrowing

Fiscal policy

Policy aimed at influencing aggregate demand through changes in direct taxation and/or government spending

Fixed exchange rate

Central bank maintains the currency's value at a predetermined level

Floating exchange rate

System in which the value of a currency is solely influenced by market forces of supply and demand (free from government intervention)

Foreign aid

Flows of grants or loans from developed to developing countries that are non-commercial and for which the terms are concessional

Foreign Direct Investment (FDI)

When a firms establishes a facility in a foreign country and acquires at least 10% in an existing foreign firm

Free trade

International trade that is not subject to any kind of trade barriers, such as tariffs or quotas

Free Trade Area

An agreement between two or more countries to phase-out or eliminate trade barriers between them, still keeping individual trade policy towards non-member countries

Frictional unemployment

Occurs when people are temporarily between jobs or entering the workforce for the first time

Gini coefficient

A measure of the income inequality in a country expressed as a ratio from 0 (perfect income equality) to 1 (perfect income inequality). Can be calculated using the Lorenz Curve

Gross domestic product (GDP)

Final value of all goods and services produced within an economy over a certain period of time

Gross national income (GNI)

The sum of GDP and net national income from abroad

Human development index (HDI)

An indicator constructed by the U.N. to measure the level of development for a country through a combination of income, education, and life expectancy.

Happy planet index (HPI)

An index combining four elements show how efficient residents of different countries are using environmental resources to lead long, happy lives

Human capital

Skills, abilities, good health, and knowledge utilized by people to increase their productivity

Humanitarian aid

Aid given to alleviate short-term suffering, consisting of food aid, medical aid, and emergency relief aid

Income elasticity of demand (YED)

A measure of the responsiveness of quantity demand to a change in income

Indirect taxes

Taxes on expenditure to buy goods and services

Infant industry

Refers to a new industry that should be protected from foreign competition until it is large enough to achieve economies of scale

Inferior goods

Goods for which quantity demanded tends to decrease as consumer income increases

Inflationary gap

When the actual real output of an economy exceeds the full-employment level resulting in unemployment being lower than the natural rate

Informal economy

Refers to the part of the economy that is not officially recorded, regulated, or taxed

Infrastructure

Physical capital typically financed by governments that is essential for economic activity: includes telecommunication, electricity, and sanitation

Injections

Spending on domestic output that does not come from households

Interest rate

Cost of borrowing money or the reward for saving money over a period of time expressed as a percentage

International monetary fund (IMF)

A international financial institution of 189 countries to improve cooperation and stability through monitoring, policy, loans, and advice in the face of balance of payments difficulties

International trade

Trade that involves the exports and imports of goods or services between countries

Interventionist supply-side policies

A set of policies to increase an economy's productive capacity (achieve economic growth) which relies more on the role of the government

Investment

Spending on capital goods such as machines, tools, equipment, and factories

Joint supply

Producing one good automatically leads to the production of another

Keynesian multiplier

The idea that na increase in any injection will lead to an even greater increase in real GDP due to spending rounds generated from the additional income

Labour

Physical and mental contribution of workers to the production process

Land

Natural resources on Earth

Laissez-faire

The idea that if market forces are left alone, the outcome will be efficient

Law of diminishing marginal returns

Short-run law of production stating that as more units of the variable factor (labor) are added to a fixed factor (capital), there is a point where the marginal product starts to decrease

Law of diminishing marginal utility

The idea that as an individual consumes additional units of a goodd, the additional satisfaction enjoyed decreases

Leakages

Income not spent on domestic goods and services (savings, taxes, imports)

Long-run aggregate supply (LRAS)

Aggregate supply independent of the price level due to fixed amount of resources or technology which is vertical at the level of potential output. Can only be increase by improvements in quanity or quality of FOPs and technology

Long-run Phillips curve

A curve showing that there is no long-term trade-off between inflation and unemployment as there exists a natural rate of unemployment at the level of potential output

Lorenz curve

A curve representing income inequality by graphing cumulative percent of income owned by people against the cumulative share of households

Luxury goods

Goods and services not essential to consumers therefore having price elastic demand (PED>1) and income elastic demand (YED>1)

Managed exchange rate

Exchange rate is mainly determined by market forces, but occasionally the central bank intervenes to keep it close to a desired level