IB Economics HL Definitions

Absolute advantage

This is where a country is able to produce more output than other countries using the same input of factors of production.

Actual growth

This occurs when previously unemployed factors of production are brought in to use. It is represented by a movement from a point within a PPC to a new point nearer to the PPC.

Adverse selection

This occurs when a buyer and seller do not have the same information, causing a transaction to take place based upon uneven terms.

Allocative efficiency

The level of output where marginal cost is equal to average revenue. The firm sells the last unit it produces at the amount that it cost to make it. The socially optimum level of output.

Allocative inefficiency

This occurs where the marginal social cost of producing a good is not equal to the marginal social benefit of the good to society. In different words, it occurs where the marginal cost of producing a good (including any external costs) is not equal to the price that is charged to consumers.

Anchoring

Anchors are mental reference points, relating to ideas or values, which are used to make decisions. Value is often set by anchors or imprints in our minds that we then use as mental reference points when making decisions. When an idea or a value is firmly anchored in a person's mind, it can lead to automatic decisions and behaviours.

Average tax rate

The proportion of a person's income that is paid in tax, usually expressed as a percentage.

Bounded rationality

The idea that most consumers and businesses do not have enough information to make fully informed choices and therefore satisfice rather than maximise utility.

Capital flight

The movement of money and assets out of a country to seek a safer location in another country.

Debt relief (cancellation)

The removal of debt owed by a least developed country to support development.

Equity

The concept of fairness.

Gross domestic product (GDP)

The total value of final goods and services produced within a country in one year.

Imperfect competition

A market structure showing some but not all features of perfect competition.

Import substitution

Strategies to encourage domestic production instead of importing goods, often involving protectionism.

Imports

Goods and services purchased domestically but produced abroad.

Keynesian revolution

John Maynard Keynes' theory advocating government intervention to manage aggregate demand.

Primary commodities

Raw materials produced in the primary sector.

Social enterprise

Company prioritizing social impact over profit, using entrepreneurial methods and reinvesting profits into social goals.

Sustainability

Meeting present needs without compromising future generations' ability to meet theirs.

Absolute poverty

Absolute poverty is measured in terms of the basic need for survival. It is the amount of income a person needs to have in order to stay alive.

Aggregate demand

The total spending in an economy consisting of consumption, investment, government expenditure and net exports.

Aggregate demand curve

A curve showing the relationship between the average price level and real GDP.

Aggregate supply (AS)

The total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods.

Anti-monopoly regulation

Policies that are intended to regulate the market share of an individual company in order to enforce competition

Appreciation

An increase in the value of one currency in terms of another currency in a floating exchange rate system.

Appropriate technology

Technology that caters to the particular economic, social, and environmental characteristics of its users.

Asymmetric information

This is where one party in an economic transaction has access to more or better information than the other party.

Automatic stabilizers

The features of government fiscal policy (for example, unemployment benefits and direct tax revenues) that automatically counter-balance fluctuations in economic activity. For example, government spending on unemployment benefits automatically rise and direct tax revenues automatically fall when economy activity is slow.

Balance of payments

A record of the value of all the transactions between the residents of a country and the residents of all other countries over a given period of time.

Balance of trade in goods

A measure of the revenue received from the exports of tangible (physical) goods minus the expenditure on the imports of tangible goods over a given period of time.

Balance of trade in services

A measure of the revenue received from the exports of services minus the expenditure on the imports of services over a given period of time.

Behavioural economics

A branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision-making by economic actors. It challenges the assumption that actors always make rational choices to maximise utility.

Bounded self-control

The idea that consumers are not always rational in controlling their consumption and may continue consuming even when the price exceeds the marginal utility gained.

Bounded selfishness

Concern for the well-being of others.

Budget deficit

A situation where planned government spending exceeds planned government revenue. Governments may run a budget deficit to increase aggregate demand.

Business confidence

An economic indicator measuring the degree of optimism business managers feel about the state of the economy and their company's prospects.

Business cycle

A model showing periodic fluctuations in economic activity, typically including the phases of recovery, boom, slowdown, and recession.

Capital

The factor of production resulting from investment in physical capital (manufactured resources such as factories, roads, tools) and human capital (the value of the workforce improved through education and healthcare).

Capital account

A measure of the buying and selling of assets between countries, often separated into ownership assets and lending assets.

Capital transfers

Net monetary movements gained or lost through transfers such as migrants transferring assets, sale of fixed assets, gift taxes, inheritance taxes, and death duties.

Carbon (emissions) taxes

Taxes levied on the carbon content of fuel.

Central bank

The government's bank; the institution responsible for an economy's monetary policy.

Ceteris paribus

A Latin expression meaning "other things being equal".

Choice architecture

The idea that decisions are affected by the layout, sequencing, and range of choices available.

Circular economy

An economic system that moves beyond the linear take-make-dispose model and aims to redefine growth by designing out waste, keeping products and materials in use, and regenerating natural systems.

Circular flow of income

A simplified model showing the flow of money through an economy.

Coase theorem

States that when an externality exists and property rights are assigned, parties can bargain to reach an efficient outcome regardless of who holds the initial rights, assuming no bargaining costs.

Collusive oligopoly

A market structure where a few firms agree to fix prices or output to avoid competition.

Common access resources

Natural resources with no established private ownership; they are non-excludable but rivalrous.

Common market

A customs union with common product regulations and free movement of goods, services, capital, and labour.

Comparative advantage

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

Competitive supply

When goods are produced using the same factors of production and compete for those resources.

Complements

Goods used together, where consumption of one increases demand for the other.

Concentration ratios

A measure showing the percentage of market share held by the largest X firms in an industry (e.g., CR4).

Consumer confidence

An indicator measuring the degree of optimism consumers feel about the economy and their personal finances.

Consumer nudges

Positive reinforcement and indirect suggestions used to influence consumer behaviour and decision-making.

Consumer price index (CPI)

A measure of inflation calculated by tracking changes in the price of a representative basket of goods and services.

Consumer surplus

The difference between what consumers are willing to pay and what they actually pay.

Consumption (C)

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

Contractionary monetary policy

A monetary policy designed to decrease aggregate demand and economic activity.

Corporate social responsibility (CSR)

When firms operate ethically and responsibly towards society and the environment.

Cost-push inflation

Inflation caused by rising production costs, shifting the SRAS curve left.

Credit creation

The ability of commercial banks to lend multiples of their deposits, increasing the money supply.

Crowding out

When government borrowing raises interest rates, reducing private investment and consumption.

Current account

The balance of trade in goods and services plus net income flows and net current transfers.

Current account deficit

When a country's expenditure on imports and income outflows exceeds revenue from exports and income inflows.

Current account surplus

When revenue from exports and income inflows exceeds expenditure on imports and income outflows.

Current transfers

Transactions where goods, services, income, or financial items are received without something in return (excluding capital transfers).

Customs union

A trade agreement where members trade freely among themselves and adopt common external trade barriers.

Cyclical (demand-deficient) unemployment

Disequilibrium unemployment caused by insufficient aggregate demand.

Default choices

When consumers are automatically enrolled in an option unless they actively choose otherwise.

Deflation

A persistent fall in the general price level.

Deflationary (recessionary) gap

When aggregate demand is below full employment output, causing unemployment.

Demand

The willingness and ability to purchase a good or service.

Demand curve

A downward-sloping curve showing the relationship between price and quantity demanded.

Demand management

(Keynesian) policies using fiscal and monetary tools to manage aggregate demand.

Demand-pull inflation

Inflation caused by increasing aggregate demand.

Demerit goods

Goods considered harmful that are over-consumed in a free market.

Depreciation

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

Deregulation

A supply-side policy involving reducing government regulations on firms.

Devaluation

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

Development aid

Grants, concessional loans, project aid, and programme aid given to support development.

Disinflation

A fall in the rate of inflation.

Disposable income

Income remaining after taxes, available for spending or saving.

Dumping

Selling a good abroad below its unit cost of production.

Economic development

Improvement in living standards, poverty reduction, better health and education, and increased economic freedom.

Economic growth

An increase in real GDP over time.

Economic well-being

A multi-dimensional measure of prosperity and living standards.

Economically least developed countries (ELDCs)

UN-classified low-income countries facing severe structural barriers to sustainable development.

Economics

The study of how scarce resources with alternative uses are allocated to satisfy unlimited wants (Lionel Robbins, 1932).

Economies of scale

Reductions in unit costs as a firm increases its scale of production.

Efficiency

The ratio of useful output to total input.

Elasticity

A measure of responsiveness of one variable to a change in another.

Elasticity of demand for exports

Responsiveness of export demand to a change in export prices.

Elasticity of demand for imports

Responsiveness of import demand to a change in import prices.

Engel curve

A curve showing the relationship between income and quantity demanded.

Entrepreneurship

The factor of production involving organisation and risk-taking.

Equilibrium

A state where there is no tendency to change unless disturbed.

Excess demand

When price is below equilibrium, causing quantity demanded to exceed quantity supplied.

Excess supply

When price is above equilibrium, causing quantity supplied to exceed quantity demanded.