Fiszki: IB Economics SL Definitions | Quizlet

Absolute poverty

The inability of an individual or a family to afford a basic standard of goods and services, where this standard is absolute and unchanging over time. Absolute poverty is defined in relation to a nationally or internationally determined 'poverty line', which determines the minimum income that can sustain a family in terms of its basic needs.

Ad valorem taxes

Taxes calculated as a fixed percentage of the price of the good or service; the amount of tax increases as the price of the good or service increases.

Administrative barriers

Trade protection measures taking the form of administrative procedures that countries may use to prevent the free flow of imports into a country; these may include customs procedures involving inspections and valuation, controls on packaging, "red tape" and others. Often considered to be a kind of 'hidden' trade protection, as they don't involve obvious trade protection measures such as tariffs and quotas.

Aggregate demand

The total quantity of goods and services that all buyers in an economy (consumers, firms, the government and foreigners) want to buy over a particular time period, at different possible price levels, ceteris paribus.

Aggregate supply

The total quantity of goods and services produced in an economy over a particular time period, at different price levels, ceteris paribus.

Allocative efficiency

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers.

Appreciation (of a currency)

Refers to an increase in the value of a currency in the context of a floating (or flexible) exchange rate system or managed exchange rate system (compare with revaluation, which refers to an increase in currency value in the context of a fixed exchange rate system).

Automatic stabilisers

Factors that automatically, without any action by government authorities, work toward stabilising the economy by reducing the short term fluctuations of the business cycle. Two important automatic stabilisers are progressive income taxes and unemployment benefits.

Balance of payments

A record (usually for a year) of all transactions between the residents of a country and the residents of all other countries, showing all payments received from other countries (credits), and all payments made to other countries (debits). In the course of a year, the sum of all the credits must be equal to the sum of all the debits.

Bilateral trade agreement

Any trade agreement (or agreement to lower international trade barriers) involving two trading partners, usually two countries. It may also involve a trade agreement between one country and another group of countries when this groups acts as a single unit (such as the European Union). May be contrasted with regional trade agreement and multilateral trade agreement.

Budget deficit/surplus

Referring usually to the government's budget, it is the situation where government tax revenues are less/greater than government expenditures over a specific period of time (usually a year).

Business confidence

A measure of the degree of optimism among firms in an economy about the future performance of firms and the economy

Business cycle

Fluctuations in the growth of real output, or real GDP, consisting of alternating periods of expansion (increasing real output) and contraction (decreasing real output); also known as trade cycles.

Cap and trade scheme

A scheme in which a government authority (of a single country or a group of countries) sets a limit or 'cap' on the amount of pollutants that can be legally emitted by a firm, set by an amount of pollution permits (known as tradable permits) distributed to firms; firms that want to pollute more than their permits allow can buy more permits in a market, while firms that want to pollute less can sell their excess permits.

Capital account

In the balance of payments, refers to the inflows minus outflows of funds for (i) capital transfers' (e.g. debt forgiveness and non-life insurance claims), and (ii) the purchase or use of non-produced natural resources (e.g. mineral rights, forestry rights, fishing rights and airspace)

Current account

In the balance of payments, this includes the balance of trade (recording exports minus imports of goods) plus the balance on services (recording exports of services minus imports of services), plus inflows minus outflows of income and current transfers. The most important part of the current account in most countries is the balance of trade.

Carbon tax

A tax per unit of carbon emissions of fossil fuels, considered by many countries as a policy to deal with the problem of climate change.

Common access resources

Resources that are not owned by anyone, do not have a price, and are available for anyone to use without payment (for example, lakes, rivers, fish in the open seas, open grazing land, the ozone layer and many more); their depletion or degradation leads to environmental unsustainability.

Complementary goods

Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other.

Composite indicator

A summary measure of more than one indicator, often used to measure economic development; for example the Human Development Index (HDI), that measures income, education and health indicators.

Concessional loan

Loans that are offered as part of foreign aid, made on concessional terms, i.e. that they are offered at interest rates that are lower than commercial rates, with longer repayment periods.

Conditional aid

Refers to development aid provided by bilateral or multilateral development organisations, which is extended to countries on condition that they satisfy certain requirements, usually requiring that they adopt particular policies.

Consumer price index

A measure of the cost of living for the typical household; (indication of inflation) it compares the value of a basket of goods and services in one year with the value of the same basket in a base year. Inflation (and deflation) is measured as a percentage change in the value of the basket from one year to another.

Consumer surplus

Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid. In a diagram, it is shown by the area under the demand curve and above the price paid by consumers.

Cost-push inflation

Inflation caused by a fall in aggregate supply, in turn resulting from increases in costs of production (AS curve shifts leftward).

Cross-price elasticity of demand (XED)

A measure of the responsiveness of the demand for one good to a change in the price of another good; measured by the percentage change in the quantity of one good demanded divided by the percentage change in the price of another good. If XED>0 the two goods are substitutes; if XED<0, the two goods are complements.

Crowding-out

Refers to the possible impacts on real GDP of increased government spending (expansionary fiscal policy) financed by borrowing; if increased government borrowing results in a higher rate of interest, this could reduce private investment spending, thus reversing the impacts of the government's expansionary fiscal policy.

Cyclical unemployment

A type of unemployment that occurs during the downturns of the business cycle (in a recessionary gap) when there is a the downturn due to declining/low aggregate demand = 'demand-deficient' unemployment.

Deflation

A continuing (or sustained) decrease in the general price level.

Demand

Indicates the various quantities of a good that consumers (or a consumer) are willing and able to buy at different possible prices during a particular time period, ceteris paribus (all other things being equal).

Demerit goods

Goods that are considered to be undesirable for consumers and are overprovided by the market. Reasons for overprovision may be that the goods have negative externalities, or consumer ignorance about the harmful effects.

Depreciation (of a currency)

Refers to a decrease in the value of a currency in the context of a floating (or flexible) exchange rate system or managed exchange rate system (to be compared with devaluation, which is a decrease in currency value in a fixed exchange rate system). (Note that depreciation also refers to capital goods that become worn out and are discarded.)

Devaluation (of a currency)

Refers to a decrease in the value of a currency in the context of a fixed exchange rate system (to be compared with depreciation, which is a decrease in currency value in the context of a floating (or flexible) or managed exchange rate system).

Development aid

Foreign aid intended to help economically less development countries; may involve project aid, programme aid, technical assistance or debt relief.

Disinflation

Refers to a fall in the rate of inflation; it involves a positive rate of inflation

Dumping

The practice of selling a good in international markets at a price that is below the cost of producing it (usually by providing export subsidies); while it is illegal according to international trade rules, many countries practise it anyway. Forms the basis of the anti-dumping argument in favour of trade protection. See also anti-dumping.

Economic development

Broad-based rises in the standard of living and well-being of a population, particularly in economically less developed countries. It involves increasing income levels and reducing poverty, reducing income inequalities and unemployment, and increasing provision of and access to basic goods and services such as food and shelter, sanitation, education and health care services.

Economic growth

Increases in total real output produced by an economy (real GDP) over time; may also refer to increases in real output (real GDP) per capita (or per person).

Economic integration

Refers to economic interdependence between countries, usually achieved by agreement between countries to reduce or eliminate trade and other barriers between them. There are various degrees of integration, depending on the type of agreement and the degree to which barriers between countries are removed; see trading bloc, free trade area, customs union, common market, monetary union.

Equity

The condition of being fair or just (not necessarily equal!)

Exchange rate

The rate at which one currency can be exchanged for another, or the number of units of foreign currency that correspond to the domestic currency; can be thought of as the 'price' of a currency, which is expressed in terms of another currency.

Excise taxes

Taxes imposed on spending on particular goods or services (for example, gasoline/petrol); are a type of indirect tax.

Excludable

A characteristic of goods according to which it is possible to exclude people from using the good by charging a price for it; if someone is unwilling or unable to pay the price they will be excluded from using it. Most goods are excludable. It is one of the two characteristics of 'private goods'. See also rivalrous.

Expenditure approach

A method used to measure the value of aggregate output of an economy, which adds up all spending on final goods and services produced within a country within a given time period. As suggested by the circular flow model, it is equivalent to measurement by the income approach and the output approach.

Externality

Occurs when the actions of consumers or producers give rise to positive or negative side-effects on other people who are not part of these actions, and whose interests are not taken into consideration. Positive externalities give rise to positive side-effects; negative externalities to negative side-effects.

Export promotion

Refers to a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports. As a trade strategy, it looks outward towards foreign markets and is based on stronger links between the domestic and global economies. To be contrasted with import substitution.

Financial account

In the balance of payments, refers to inflows minus outflows of funds due to foreign direct investment, portfolio investment and changes in reserve assets.

Fixed exchange rate

Refers to an exchange rate that is fixed by the central bank of a country, and is not permitted to change in response to changes in currency supply and demand. Maintaining the value of a currency at its fixed rate requires constant intervention by the central bank or government

Foreign aid

Consists of concessional financial flows from the developed world to economically less developed countries, and includes concessional loans and grants. See also concessional loan and official development assistance. To be contrasted with multilateral development assistance.

Free rider problem

Occurs when people can enjoy the use of a good without paying for it, and arises from non-excludability: people cannot be excluded from using the good, because it is not possible to charge a price. Is often associated with public goods, which are a type of market failure: due to the free rider problem, private firms fail to produce these goods.

Free trade

The absence of government intervention of any kind in international trade, so that trade takes place without any restrictions (or barriers) between individuals or firms in different countries.

Free trade area

A type of trading bloc, consisting of a group of countries that agree to eliminate trade barriers between themselves. Each member country retains the right to pursue its own trade policy towards non-member countries. An example of a free trade area is NAFTA (North American Free Trade Agreement).

Freely floating exchange rate

An exchange rate determined entirely by market forces, or the forces of supply and demand. There is no government intervention in the foreign exchange market to influence the value of the exchange rate. Also known as 'floating exchange rate' or 'flexible exchange rate'.

Frictional unemployment

A type of unemployment that occurs when workers are between jobs; workers may leave their job because they have been fired, or because their employer went out of business, or because they are in search of a better job, or they may be waiting to begin a new job; tends to be short term.

Gini coefficient

A summary measure of the information contained in the Lorenz curve of an economy, defined as the area between the diagonal and the Lorenz curve, divided by the entire area under the diagonal. The Gini coefficient has a value between 0 and 1; the larger the Gini coefficient, and the closer it is to 1, the greater is the income inequality.

Government intervention

The practice of government to intervene (interfere) in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives.

Green GDP

Gross domestic product (GDP) that has been adjusted to take into account environmental destruction and/or health consequences of environmental problems.

Gross domestic product (GDP)

A measure of the value of aggregate output of an economy, it is the market value of all final goods and services produced within a country during a given time period (usually a year); it is a commonly used measure of the value of aggregate output; to be contrasted with gross national income (GNI).

Gross national income (GNI)

A measure of the total income received by the residents of a country, equal to the value of all final goods and services produced by the factors of production supplied by the country's residents regardless of where the factors are located; GNI GDP plus income from abroad minus income sent abroad. Formerly known as gross national product (GNP); may be contrasted with gross domestic product (GDP).

Human Development Index (HDI)

A composite indicator of development which includes indicators that measure three dimensions of development: income per capita, levels of health and educational attainment; is considered to be a better indicator of development than single indicators such as GNI per capita.

Humanitarian aid

Foreign aid extended in regions where there are emergencies caused by violent conflicts or natural disasters such as floods, earthquakes and tsunamis, intended to save lives, ensure access to basic necessities such as food, water, shelter and health care, and provide assistance with reconstruction.

Import substitution

Also known as import-substituting industrialisation, refers to a growth and trade strategy where a country begins to manufacture simple consumer goods oriented towards the domestic market (such as shoes, textiles, beverages, electrical appliances) in order to promote its domestic industry; it presupposes the imposition of protective measures (tariffs, quotas, etc.) that will prevent the entry of imports that compete with domestic producers. To be contrasted with export promotion.

Income approach

A method used to measure the value of aggregate output of an economy, which adds up all income earned by the factors of production in the course of producing all goods and services within a country in a given time period. As suggested by the circular flow model, it is equivalent to measurement by the expenditure approach and the output approach.

Income elasticity of demand

A measure of the responsiveness of demand to changes in income; measured by the percentage change in quantity demanded divided by the percentage change in price (inelastic <1, elastic >1).

Indirect taxes

Taxes levied on spending to buy goods and services, called indirect because, whereas payment of some or all of the tax by the consumer is involved, they are paid to the government authorities by the suppliers (firms), that is, indirectly.

Infant industry

A new domestic industry that has not had time to establish itself and achieve efficiencies in production, and may therefore be unable to compete with more 'mature' competitor firms from abroad. The presence of infant industries is considered to be one of the strongest arguments in favour of trade protection policies in developing countries.

Inferior good

A good the demand for which varies negatively (or indirectly) with income; this means that as income increases, the demand for the good decreases (e.g. second hand clothes).

Inflation

A continuing (or sustained) increase in the general price level.

Infrastructure

Numerous types of physical capital resulting from investments, making major contributions to economic growth and development by lowering costs of production and increasing productivity.

Interest rate

Interest expressed as a percentage; in the case of borrowed money, it is interest as a percentage of the amount borrowed. Changes in interest rates form the basis of monetary policy.

International Monetary Fund (IMF)

An international financial institution composed of 185 member countries, whose purpose is to make short-term loans to governments on commercial terms (i.e. non-concessional) in order to stabilise exchange rates, alleviate balance of payments difficulties and help countries meet their foreign debt obligations.

Labour market reforms

Reforms intended to make labour markets more competitive and flexible, to make wages respond to the forces of supply and demand, to lower labour costs and increase employment by lowering the natural rate of unemployment; include abolishing or reducing minimum wages, reducing job security and reducing unemployment benefits. They are a type of supply-side policy.

Labour market rigidities

Factors preventing the forces of supply and demand from operating in the labour market, and therefore preventing labour market flexibility; include minimum wage legislation, job security, etc. See labour market reforms.

Law of demand

A law stating that there is a negative causal relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of the good demanded falls (and vice versa).

Law of supply

A law stating that there is a positive causal relationship between the price of a good and quantity of the good supplied, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of the good supplied also increases (and vice versa).

Lorenz curve

A curve illustrating the degree of equality (or inequality) of income distribution in an economy. It plots the cumulative percentage of income received by cumulative shares of the population. Perfect income equality would be represented by a straight line. The closer the Lorenz curve is to the straight line, the greater the equality in income distribution.

Luxuries

Goods that are not necessary or essential (e.g. sportscar); they have a price elastic demand (PED>1) and income elastic demand (YED>1). To be contrasted with necessities.

Managed exchange rates

Exchange rates that are for the most part free to float to their market levels (i.e. their equilibrium levels) over long periods of time; however, central banks periodically intervene in order to stabilise them over the short term.

Marginal social benefits (MSB)

The extra benefits to society of consuming one more unit of a good; are equal to marginal private benefits (MPB) when there are no consumption externalities.

Marginal social costs (MSC)

The extra costs to society of producing one more unit of a good; are equal to marginal private costs (MPC) when there are no production externalities.

Market failure

Occurs when the market fails to allocate resources efficiently, or to provide the quantity and combination of goods and services mostly wanted by society. Market failure results in allocative inefficiency, where too much or too little of goods or services are produced and consumed from the point of view of what is socially most desirable.

Price ceiling

A maximum price set by the government for a particular good, meaning that the price that can be legally charged by the sellers of the good cannot be higher than the legal maximum price. Results in a shortage of the product.

Merit goods

Goods that are held to be desirable for consumers, but which are underprovided by the market. Reasons for underprovision may be that the good has positive externalities, or consumers with low incomes cannot afford it (and so do not demand it), or consumer ignorance about the benefits of the good.

Price floor

A minimum price set by the government for a particular good, meaning that the price that can be legally charged by the sellers of the good cannot be lower than the legal minimum price. Results in a surplus of the product.

Multilateral development assistance

Lending to developing countries for the purpose of assisting their development on non-concessional terms (market rates of interest and repayment periods) by multilateral organisations, i.e. organisations composed of many countries, including development banks such as the World Bank, and the International Monetary Fund; to be contrasted with foreign aid.

Multilateral trade agreement

A trade agreement (or agreement to lower international trade barriers) between many countries; at the present time these are mainly carried out within the framework of the World Trade Organization (WTO), and involve agreements between WTO member countries. May be contrasted with bilateral trade agreement and regional trade agreement.

Multinational corporation (MNC)

A firm involved in foreign direct investment (FDI); it is a firm that is based in one country (the home country) and that undertakes productive investments in another country (the host country).

Necessities

Goods that are necessary or essential: they have a price inelastic demand (PED<1) and income inelastic demand (YED<1). To be contrasted with luxuries.

Negative externality of consumption

A negative externality caused by consumption activities, leading to a situation where marginal social benefits are less than marginal private benefits (MSB < MPB); see also externality and negative externality.

Negative externality of production

A negative externality caused by production activities, leading to a situation where marginal social costs are greater than marginal private costs (MSC>MPC); see also externality and negative externality.

Nominal GDP

Gross domestic product measured in terms of current (or nominal) prices, which are prices prevailing at the time of measurement. Does not account for changes in the price level; to be distinguished from real GDP.

Non-excludable

A characteristic of some goods where it is not possible to exclude someone from using a good, because it is not possible to charge a price; it is one of the two characteristics of public goods (to be contrasted with excludable). See also non-rivalrous.

Non-rivalrous

A characteristic of some goods where the consumption of the good by one person does not reduce consumption by someone else; it is one of the two characteristics of public goods (to be contrasted with rivalrous). See also non- excludable.

Normal good

A good the demand for which varies positively (or directly) with income; this means that as income increases, demand for the good increases.

Official Development Assistance (ODA)

The most important part of foreign aid, referring to foreign aid that is offered by countries or by international organisations composed of a number of countries (it does not include aid offered by non-governmental organisations).

Opportunity cost

The value of the next best alternative that must be given up or sacrificed in order to obtain something else.

Output approach

A method used to measure the value of aggregate output of an economy, which calculates the value of all final goods and services produced in the country within a given time period. As suggested by the circular flow model, it is equivalent to measurement by the expenditure approach and the income approach.

Overallocation of resources

Occurs when too many resources are allocated to the production of a good relative to what is socially most desirable, resulting in its overproduction.

Overvalued currency

A currency whose value is higher than its free-market value; may occur if the exchange rate is fixed (or pegged), or in a managed exchange rate system, but not in a freely floating exchange rate system. To be contrasted with undervalued currency.

Portfolio investment

Financial investment, including investment in stocks and bonds. Appears as an item in the financial account of the balance of payments.