IB Economics Definitons HL

Abnormal profit

This arises when average revenue is greater than average cost (greater than the minimum return required by a firm to remain in a line of business).

Absolute advantage

A country has an absolute advantage in the production of a good if it can produce more of it with the same resources or, equivalently, if it can produce the same amount using fewer resources compared to another country.

Absolute poverty

People living below the minimum income necessary to satisfy basic physical needs (food, clothing, and shelter); as of October 2015, the World Bank international poverty line is set at US $1.90 PPP per day.

Administrative barriers

Trade barriers in the form of regulations that aim to limit imports into a country. These barriers may take the form of product safety standards, sanitary standards or pollution standards but may also include more stringent than necessary application of customs procedures.

Aggregate demand (AD)

Planned spending on domestic goods and services at different average price levels, per period of time. Consists of consumption, investment and government expenditures plus net exports.

Aggregate supply (AS)

The planned level of output domestic firms are willing and able to offer at different average price levels.

Allocative efficiency

Achieved when just the right amount of goods and services are produced from society's point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).

Allocative inefficiency

When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB MSC.

Anchoring

Refers to situations when people rely on a piece of information that is not necessarily relevant as a reference point when making a decision.

Anti-dumping

Typically refers to tariffs that aim at raising the artificially low price of a dumped imported good to the level of the higher domestic price. A dumped good is one that is exported at a price below the cost of producing it.

Anti-monopoly regulation

Laws and regulations that are intended to restrict anti-competitive behaviour of firms that are abusing their market power.

Appreciation

When the price of a currency increases in a floating exchange rate system.

Asymmetric information

A type of market failure where one party in an economic transaction has access to more or better information than the other party.

Automatic stabilisers

Institutionally built-in features (like unemployment benefits and progressive income taxation) that tend to decrease the short-term fluctuations of the business cycle without the need for governments to intervene.

Average costs

Total costs per unit of output produced.

Average revenue

Revenue earned per unit sold; average revenue is thus equal to the price of the good.

Average tax rate

The ratio of the tax paid by an individual over their income expressed as a percentage.

Balance of payments

A record of the value of all transactions of a country with the rest of the world over a period of time.

Balance of trade in goods

Part of the balance of payments, it is the value of exports of goods of a country minus the value of imports of goods over a given period of time.

Balance of trade in services

Part of the balance of payments, it is the value of exports of services of a country minus the value of imports of services over a given period of time.

Barriers to entry

Anything that deters entry of new firms into a market, for example, licenses or patents.

Behavioural economics

A subdiscipline of economics that relies on elements of cognitive psychology to better understand decision-making by economic agents. It challenges the assumption that economic agents (consumers or firms) will always make rational choices with the aim of maximizing with respect to some objective.

Budget deficit

When government expenditures exceed government (tax) revenues usually over a period of a year.

Business confidence

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

Business cycle

The short-term fluctuations of real

GDP around its long-term trend (or potential output).

Business tax

Tax levied on the income of a business or corporation.

Capital

Physical capital refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country. Human capital refers to the education, training, skills and experience embodied in the labour force of a country.

Capital account

A subaccount of the balance of payments that includes credit and debit entries for non-produced, non-financial assets as well as capital transfers between residents and non-residents.

Capital gains tax

A tax on the profits realised from the sale of financial assets such as stocks or bonds.

Capital transfers

Include financial or non-financial assets for items including debt forgiveness, investment, non-life insurance claims. They are part of the capital account of the balance of payments.

Carbon (emissions) taxes

Taxes levied on the carbon content of fuel. They are a type of Pigouvian tax.

Central bank

An institution charged with conducting monetary and exchange rate policy, regulating behaviour of commercial banks, and providing banking services to the government and commercial banks.

Ceteritus paribus

A Latin expression meaning “other things being equal”.

Circular flow model

A simplified illustration that shows the flows of income and expenditures in an economy.

Collusive oligopoly

A market where firms agree to fix price and/or to engage in other anticompetitive behaviour.

Common market

When a group of countries agree not only to free trade of goods and services but also to free movement of capital and labour.

Common pool resources

A diverse group of natural resources that are non-excludable, but their use is rivalrous, for example, fisheries.

Comparative advantage

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

Competitive market

A market with many firms acting independently where no firm has the ability to control the price.

Competitive market equilibrium

Occurs if in a free competitive market, quantity demanded is equal to quantity supplied.

Complements

Goods that are jointly consumed, for example, coffee and sugar.

Composite indicator

An indicator that is comprised as an average of more than one economic variable, for example, the HDI.

Concentration ratios

The proportion of industry sales accounted for by the largest firms; the greater this proportion, the greater the degree of market power of the firms in the industry.

Consumer confidence

A measure of the degree of optimism that households have about their income and economic prospects.

Consumer nudges

Small design changes that include positive reinforcement and indirect suggestions that can influence the behaviour of consumers.

Consumer price index (CPI)

An average calculated from a weighted basket of the prices of the goods and services that the typical consumer buys expressed as an index number.The CPI is used as a measure of the cost of living in a country and to calculate inflation.

Consumer surplus

The difference between how much a consumer is at most willing to pay for a good and how much they actually pay.

Consumption (C)

Spending by households on durable and non-durable goods and on services over a period of time.

Contractionary fiscal policy

Refers to a decrease in government expenditures and/or an increase in taxes that aim at decreasing aggregate demand and thus reducing inflationary pressures.

Contractionary monetary policy

A policy employed by the central bank involving an increase in interest rates and aimed at decreasing aggregate demand and thus inflationary pressures. Referred to also as tight monetary policy.

Cost-push inflation

Inflation that is a result of increased production costs (typically because of rising money wages or rising commodity prices) and illustrated by a leftward shift of the SRAS curve.

Credit items

Refers to transactions within the balance of payments of a country that lead to an inflow of currency (for example, the export of goods); these transactions enter the account with a plus sign.

Credit rating

A grade assigned by certain agencies (such as Moody's or Standard and Poor's) on the borrowing risks a prospective issuer of debt (for example, of a bond) presents to lenders.

Crowding out

The idea that expansionary fiscal policy is not very effective in increasing aggregate demand because the increased borrowing needs of the government to finance the increased expenditures could lead to increased interest rates. Thus, reducing private sector investment, consumer spending, and other components of AD.

Current account

A subaccount of the balance of payments that records the value of net exports in goods and services, net income and net current transfers of a country over a period of time.

Current account deficit

Exists when the sum of net exports of goods and services plus net income plus net current transfers is negative (or simply when debits or outflows are greater than credits or inflows).

Current account surplus

Exists when the sum of net exports of goods and services plus net income plus net current transfers is positive (or simply when credits or inflows are greater than debits or inflows).

Current transfers

An entry in the current account that records payments between residents and non-residents of a country without something of economic value being received in return and that affect directly the level of disposable income (for example, workers remittances, pensions, aid and grants, and so on).

Customs union

An agreement between countries to phase out or eliminate tariffs and other trade barriers and establish a common external barrier toward non-members.

Cyclical (demand-deficient) unemployment

Unemployment that is a result of a decrease in aggregate demand and thus of economic activity; it occurs in a recession.

Debit items

Refers to transactions within the balance of payments of a country that lead to an outflow of currency (for example, the import of services); these transactions enter the account with a minus sign.

Debt relief

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

Default choice

When a choice is made by default, meaning that when given a choice it is the option that is selected when one does not do anything.

Deflation

A sustained decrease in the average price level of a country.

Deflationary / recessionary gap

Arises when the equilibrium level of real output is less than potential output as a result of a decrease in AD.

Demand

The relationship between possible prices of a good or service and the quantities that individuals are willing and able to buy over some time period, ceteris paribus.

Demand management

Policies that aim at manipulating aggregate demand through changes in interest rates (monetary policy) or changes in government expenditures and taxation in order to influence growth, employment, and inflation.

Demand-pull inflation

Inflation that is caused by increases in aggregate demand.

Demand side policies

Refers to economic policies that aim at affecting aggregate demand and thus macroeconomic variables such as growth, inflation and employment; demand side policies include fiscal policy and monetary policy.

Demerit goods

Goods or services that not only harm the individuals who consume these but also society at large, and that tend to be overconsumed. Usually they are due to negative consumption externalities.

Depreciation

A decrease in the value of a currency in terms of another currency in a floating or managed exchange rate system.

Deregulation

Policies that reduce or eliminate regulations related to the operation of firms so that production costs decrease-resulting in increased competition and higher levels of output.

Devaluation

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

Development aid

Aid aimed at assisting developing countries in their development efforts. Includes project aid, programme aid and debt relief. It is concessional, meaning there are low interest rates and long repayment periods.

Direct taxes

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

Discount rate

The interest rate that a central bank charges commercial banks for short-term loans (also referred to as the refinancing rate).

Disinflation

When the average price level continues to rise but at a slower rate so that the rate of inflation is positive but lower.

Dumping

When a firm sells abroad at a price below average cost or below the domestic price.

Development

broad notion of progress in social and economic conditions in a society encompassing Improved material standards of living, self esteem and expanded opportunities for all individuals.

Economic growth

Refers to increases in real GDP over time.

Economic integration

Economic interdependence between countries usually involving agreements between two or more countries to phase-out or eliminate trade and other barriers between them.

Economics

Economics is the study of how to make the best possible use of scarce or limited resources to satisfy unlimited human needs and wants.

Economic well-being

A multidimensional concept relating to the level of prosperity and quality of living standards in a country.

Economies of scale

Falling average costs that a firm experiences when it increases its scale of operations.

Efficiency

In general, involves making the best use of scarce resources. May refer to producing at the lowest possible cost or to allocative efficiency where marginal social costs are equal to marginal social benefits or where social surplus is maximum.

Elasticity

A measure of the responsiveness of an economic variable (such as the quantity demanded of a product) to a change in another economic variable (such as its price or income).

Engel curve

A curve showing the relationship between consumers' income and quantity demanded of a good. It indicates whether a good is normal or inferior.

Entrepreneurship

Refers to the ability of certain individuals to organise the other factors of production (land, labour, capital) and their willingness to take risks.

Equilibrium

A state of balance that is self-perpetuating in the absence of any outside disturbance.

Equity

The concept or idea of fairness.

Excess demand

Occurs when quantity demanded at some price is greater than quantity supplied.

Excess supply

Occurs when quantity supplied at some price is greater than quantity demanded.

Exchange rate

The value of one currency expressed in terms of another currency; for example, €1 = USS1.5.

Expansionary fiscal policy

Refers to an increase in government expenditures and/or a decrease in taxes that aim at increasing aggregate demand and thus real output and employment.

Expansionary monetary policy

Monetary policy aiming at increasing aggregate demand through a decrease in interest rates; also referred to as easy monetary policy.

Expenditure approach

One of three analytically equivalent approaches of measuring GDP that adds all the expenditures made on final domestic goods and services over a period of time by households, firms, the government and foreigners.

Expenditure reducing

Contractionary demand side policies aiming at decreasing national income and thus expenditures on imports so that a current account deficit narrows.

Exports

Goods and services produced in one country and purchased by consumers in another country.

Export promotion

Growth policies aiming at expansion of export revenues as the vehicle of economic growth; often contrasted to import substitution.

Export revenue

The revenues collected by exporting firms.