Economics Subject-Specific Glossary

Vocabulary practice flashcards covering essential definitions across microeconomics, macroeconomics, international economics, and development economics from the economics glossary.

Absolute advantage

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

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.

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.

Aggregate demand

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

Aggregate supply (AS)

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

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.

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.

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

It is a record of the value of all the transactions between the residents of a country with the residents of all other countries over a given period of time.

Behavioural economics

This is 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 will always make rational choices with the aim of maximising utility.

Bounded rationality

This suggests that most consumers and businesses do not have enough information to make fully-informed choices and so opt to satisfice, rather than maximise their utility.

Bounded self-control

In reality, consumers are often not rational in their self-control and do not stop consuming, even when it is sensible to stop. They consume even though the price of the good or service is greater than the marginal utility they gain from consumption.

Bounded selfishness

Concern for the well-being of others.

Budget deficit

A situation that exists when planned government spending exceeds planned government revenue. A government may "run a budget deficit" in order to increase aggregate demand in the economy.

Business cycle

A diagram showing the periodic/cyclical fluctuations in economic activity. The business cycle shows that economies typically move through a pattern of economic growth with the phases: recovery, boom, slowdown, recession.

Capital flight

This occurs when money and other assets flow out of a country to seek a "safe haven" in another country.

Circular economy

An economic system that looks beyond the linear take-make-dispose model and aims to redefine growth, focusing on society-wide benefits. It is based on three principles: design out waste, keep products and materials in use, and regenerate natural systems.

Coase theorem

This theorem states that when an externality is created and there is a conflict due to assigned property rights, the two parties can bargain with each other to reach an efficient outcome regardless of who actually has the initial property rights. In this theorem, it is assumed that there are no costs associated with the bargaining that takes place between the two parties.

Common access resources

Common access resources are natural resources over which there is no established private ownership—they are non-excludable, but rivalrous.

Comparative advantage

This is where a country is able to produce a good at a lower opportunity cost of resources than another country.

Concentration ratios

Functions showing the percentage of market share (or output) held by the largest $X$ firms in an industry, expressed in the form $CR_X$, where $X$ represents the number of the largest firms. Most commonly, it is expressed as $CR_4$.

Consumer nudges

Positive reinforcement and indirect suggestions used to influence the behaviour and decision making of consumers.

Consumer surplus

The additional benefit/utility received by consumers by paying a price that is lower than they are willing to pay.

Cost-push inflation

Inflation that is caused by an increase in the costs of production in an economy, i.e. a shift of the SRAS curve to the left.

Credit creation

The ability of commercial banks to expand the deposits of money that they receive by lending multiples of the amount, thus increasing the overall money supply.

Crowding out

A situation where the government spends more than it receives in revenue and needs to borrow money, forcing up interest rates and "crowding out" private investment and private consumption.

Current account

A measure of the flow of funds from trade in goods and services, plus net investment income flows (profit, interest, and dividends) and net transfers of money (foreign aid, grants, and remittances).

Customs union

An agreement made between countries, where the countries agree to trade freely among themselves, and they also agree to adopt common external barriers against any country attempting to export to the customs union.

Cyclical (demand-deficient) unemployment

Disequilibrium unemployment that exists when there is insufficient demand in the economy and wages do not fall to compensate for this.

Debt relief (cancellation)

The act of eliminating the debt owed by an economically least developed country in order to allow it to achieve development objectives.

Default choices

This is when consumers are automatically enrolled in a system, so that the consumer will "make" this choice if he/she takes no action.

Deflationary/recessionary gap

The situation where total spending (aggregate demand) is less than the full employment level of output, thus causing unemployment.

Demand-pull inflation

Inflation that is caused by increasing aggregate demand in an economy, i.e. a shift of the AD curve to the right.

Demerit goods

Goods or services considered to be harmful to people that would be over-provided by the market and so over-consumed.

Devaluation

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

Dumping

It is the selling of a good in another country at a price below its unit cost of production.

Economic development

A broad concept involving improvement in standards of living, reduction in poverty, improved health and education along with increased freedom and economic choice.

Economically least developed countries (ELDC’s)

Those countries classified by the UN as being "low-income countries confronting severe structural impediments to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets".

Economics

"Economics is the science that studies human behaviour as a relationship between ends and scarce resources which have alternative uses". Lionel Robbins (1932)

Economies of scale

Unit cost advantages that a business may experience as an outcome of increasing its scale of operations.

Exchange rate

The value of one currency expressed in term of another, for example, $€1 = \text{US } \$1.5$.

Expenditure reducing

Policies implemented by the government that attempt to reduce overall expenditure in the economy, including expenditure on imports.

Expenditure switching

Policies implemented by the government that attempt to switch the expenditure of domestic consumers away from imports towards domestically produced goods and services.

Externalities

External costs or benefits to a third party, when a good or service is produced or consumed.

Factors of production

The four resources that allow an economy to produce its output: land, labour, capital and entrepreneurship (management).

Fairtrade

A scheme where products from producers in economically least developed countries can be certified to display the registered Fairtrade mark encouraging consumers to buy them because they know that the producers of the products have been paid a fair price and the products have been produced under approved conditions.

Fiscal policy

A demand-side policy using changes in government spending and/or direct taxation to achieve economic objectives relating to inflation and unemployment.

Floating exchange rate

An exchange rate regime where the value of a currency is allowed to be determined solely by the demand for, and supply of, the currency on the foreign exchange market.

Foreign direct investment (FDI)

A long-term investment by a multinational corporation in a foreign country, (where the foreign investor owns more than $10\%$ of the domestic company).

Framing

This is the way that choices are described and presented. Changing the framing of a choice may affect tastes and preferences.

Free rider problem

This occurs when people who benefit from consuming resources, goods, or services do not have to pay for them, which results in overconsumption.

Frictional unemployment

Equilibrium unemployment that exists when people have left a job and are in the process of searching for another job.

Full employment level of output

The level of output that is produced by the economy when there is only natural unemployment.

Gini coefficient (index)

A coefficient (index) that measures the ratio of the area between a Lorenz curve and the line of absolute equality to the total area under the line of equality. The higher the figure, the more unequal is the distribution.

Gross domestic product (GDP)

The total money value of all final goods and services produced in an economy in a given time period, usually one year.

Gross national income (GNI)

The total money value of all final goods and services produced in an economy in one year, plus net property income from abroad (interest, rent, dividends and profit).

Happy Planet Index

An index that combines four elements to show how efficiently residents of different countries are using environmental resources to lead long, happy lives. The elements are well-being, life expectancy, inequality of outcomes, and ecological footprint.

Human Development Index (HDI)

A composite index that brings together three variables that reflect the three basic goals of development, a long and healthy life, improved education, and a decent standard of living. The variables measured are life expectancy at birth, mean years of schooling and expected years of schooling, and GNI per capita (PPP US$).

Human Opportunity Index (HOI)

This index measures how individual circumstances, such as place of residence, gender, and education of the household head, can affect a child’s access to basic opportunities such as water, education, electricity and sanitation. It is created by the World Bank.

Import substitution

Strategies to encourage the domestic production of goods, rather than importing them. It should mean that industries producing the goods domestically should grow, as will the economy, and then should be competitive on world markets in the future. The strategies encourage protectionism.

Income elasticity of demand (YED)

A measure of the responsiveness of the demand for a good or service to a change in income.

Infant industry

A new industry that should be protected from foreign competition until it is large enough to achieve economies of scale that will allow it to be internationally competitive.

Inflationary gap

The situation where total spending (aggregate demand) is greater than the full employment level of output, thus causing inflation.

Informal market

The part of an economy that is neither taxed nor monitored by the government. The activities of the informal economy are not included in a country’s national income figures.

Infrastructure

The large-scale capital usually provided by government that is necessary for economic activity to take place.

International Monetary Fund (IMF)

An organization working to foster global monetary cooperation, secure financial stability, facilitate international trade, and reduce poverty.

J-curve

The J-curve suggests that in the short term, even if the Marshall-Lerner condition is fulfilled, a fall in the value of the currency will lead to a worsening of the current account deficit, before things improve in the long term.

Keynesian multiplier

The ratio of an induced change in the level of national income to an original change in one or more of the injections into the circular flow of income (i.e. investment, government spending, or export revenue).

Keynesian revolution

An economic school of thought based upon the works of John Maynard Keynes, challenging the classical (laissez faire) viewpoint and advocating the role of government in managing the level of aggregate demand.

Labour market flexibility

This refers to the speed with which labour markets adapt to fluctuations and changes in production, the economy, or society.

Long run aggregate supply (LRAS)

Aggregate supply that is dependent upon the resources in the economy and that can only be increased by improvements in the quantity and/or quality of factors of production.

Long-run Phillips curve

A curve showing the monetarist view that there is no trade-off between inflation and unemployment in the long run and that there exists a natural rate of unemployment that can only be affected by supply-side policies.

Lorenz curve

A curve showing what percentage of the population owns what percentage of the total income in the economy. It is calculated in cumulative terms. The further the curve is from the line of absolute equality (45-degree line), the more unequal is the distribution of income.

Managed exchange rate

An exchange rate that floats in the foreign exchange markets but is subject to intervention from time to time by domestic monetary authorities, in order to resist fluctuations that they consider to be undesirable. Also known as a "dirty float".

Mandated choices

Mandated choices are when consumers are required to state whether or not they wish to take part in an action.

Marginal propensity to consume (MPC)

The proportion of each extra amount of income that is spent by households on domestically produced goods and services, (consumption), expressed as a decimal.

Marginal social benefit (MSB)

The extra benefit/utility to society of consuming an additional unit of output, including both the private benefit and the external benefit.

Marginal social cost (MSC)

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

Market failure

The failure of markets to produce at the point where community surplus (consumer surplus + producer surplus) is maximised.

Market power

The ability of a firm (or group of firms) to raise and maintain price above the level that would prevail under perfect competition.

Marshall-Lerner condition

This condition states that a depreciation, or devaluation, of a currency will only lead to an improvement in the current account balance if the sum of the elasticity of demand for exports plus the elasticity of demand for imports is greater than one.

Merit goods

Goods or services considered to be beneficial for people that would be under-provided by the market and so under-consumed.

Microfinance

The provision of small loans to poor entrepreneurs who lack access to traditional banking services.

Monetarist/new classical revolution

An economic school of thought which argues that changes in the money supply are the most significant determinants of the rate of economic growth and the behaviour of the business cycle. In this school of thought, policy makers should not intervene to manage the level of aggregate demand.

Monopolistic competition

A market structure where there are many buyers and sellers, producing differentiated products, with no barriers to entry or exit.

Monopoly

A market structure where there is only one firm in the industry, so the firm is the industry. Monopolies may, or may not, have barriers to entry.

Moral hazard

This occurs when a party provides misleading information and changes behaviour after a transaction has taken place.

Multidimensional Poverty Index (MPI)

An international measure of acute poverty covering over 100 economically least developed countries. It complements traditional income-based poverty measures by capturing the deprivations that each person faces at the same time with respect to education, health and living standards.

Natural rate of unemployment

The rate of unemployment that is consistent with a stable rate of inflation. It is the rate where the long run Phillips curve touches the x-axis.

Non-collusive oligopoly

This is where firms in an oligopoly do not resort to agreements to fix prices or output. Competition tends to be non-price. Prices tend to be stable.

Nudge theory

This is generally used to describe situations where nudges (prompts, hints) are used to improve the life and wellbeing of people and society.

OECD Better Life Index

An index to compare well-being across countries, based on 11 topics that the OECD has identified as essential, in the areas of material living conditions and quality of life.

Opportunity cost

The next best alternative foregone when an economic decision is made.

Perfect competition

A market structure where there are a very large number of small firms, producing identical products that are incapable of affecting the market supply curve. Because of this, the firms are price takers. There are no barriers to entry or exit and all the firms have perfect knowledge of the market.

Phillips curve

A curve showing the relationship between the rate of unemployment and the rate of inflation.