RG Econ IB Definitions

Abnormal profit

Arises when average revenue is greater than average cost

Absolute advantage

It can produce more with the same resources/ same amount using fewer resources, compared to another country.

Absolute poverty

People living below minimum income necessary to satisfy basic physical needs (food, clothing, and shelter) US $1.90 PPP per day.

Abuse of market power

When firm acts with intention to eliminate competitors or prevent entry of new firms in a market.

Actual growth

Real GDP increases through time and is a result of better use of existing resources.

Administrative barriers

Trade barriers in the form of regulations that aim to limit imports into a country. May take the form of product safety standards, sanitary standards or pollution standards

Adverse selection

A type of market failure involving asymmetric information, where the party with the incomplete information is induced to withdraw from the market.

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 demand curve

A curve showing the planned level of spending on domestic output at different average price levels.

Aggregate supply (AS)

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

Aggregate supply curve

A curve showing the planned level of output that domestic firms are willing and able to offer at different average price levels.

Allocative efficiency

Right amount of goods and services produced from society's POV so scarce resources are allocated in best possible way. When Price (P) = marginal cost (MC), marginal social benefit (MSB) = marginal social cost (MSC).

Allocative inefficiency

When more or less than socially optimal amount is produced and consumed so theres misallocation of resources

Anchoring

Relying on a piece of information that isn’t relevant as a reference when making a decision.

Anti-dumping

Tariffs that aim at raising artificially low price of a dumped imported good to the level of the higher domestic price.

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.

Appropriate technology

Technology that relies on the relatively abundant factor an economy is endowed with.

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 stabilizers

Institutionally built-in features (like unemployment benefits and progressive income taxation) that decrease short-term fluctuations of business cycle w/out 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 BoP, 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 BoP, 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

Relies on elements of cognitive psychology to understand decision-making by economic agents. Challenges assumption that consumers or firms will always make rational choices with the aim of maximizing

Biases

Systematic deviations from rational choice decision-making.

Bilateral trade agreement

An agreement between two countries to eliminate trade related barriers.

Bounded rationality

Suggests consumers and businesses dont have necessary information/ cognitive abilities required to maximize choices

Bounded self-control

Individuals may not be able to act in their interests

Bounded selfishness

People do not always maximize self-interest but also have concern for the well-being of others as shown by volunteer work and charity contributions.

Budget deficit

Government expenditures exceed government (tax) revenues 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 include machines, tools, equipment, infrastructure and factories 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 BoP, includes credit and debit entries for non-produced, non-financial assets and capital transfers between residents and non-residents.

Capital flight

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

Capital gains tax

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

Capital transfers

Part of BoP, Include financial or non-financial assets for items including debt forgiveness, investment, non-life insurance claims.

Carbon (emissions) taxes

Taxes levied on the carbon content of fuel. Pigouvian tax (indirect)

Central bank

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

Ceteris paribus

other things being equal

Choice architecture

Layout, sequencing, and range of choices available affect decisions made by consumers.

Circular economy

Aims to redefine growth, focusing on society-wide benefits. It is based on design out waste, keep products and materials in use, and regenerate natural systems.

Circular flow of income

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

Collective self-governance

Devising rules concerning the obligations of the users, the monitoring of the use of the resource, penalties of abuse, and conflict resolution.

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.

Competitive supply

When goods that a firm is producing use the same resources in their production process. The goods compete with each other for the use of the same resources.

Complements

Goods that are jointly consumed EG 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.

greater the proportion, greater the degree of market power of 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)

The average of the prices of the goods and services that typical consumer buys expressed as an index number. 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

Decrease in government expenditures and/or an increase in taxes that aim at decreasing AD and reducing inflationary pressures.

Contractionary monetary policy

A policy employed by the central bank involving an increase in IR and aimed at decreasing AD and inflationary pressures.

Corporate indebtedness

The sum of what a corporation owes to banks or other holders of its debt.

Corporate social responsibility

A corporate goal adopted by many firms that aims to create and maintain an ethical and environmentally responsible image.

Cost-push inflation

Inflation cause of increased production costs because of rising money wages or rising commodity prices

Credit items

Transactions within the balance of payments of a country that lead to an inflow of currency EG export of goods

Credit rating

A grade assigned by certain agencies on the borrowing risks a prospective issuer of debt presents to lenders.

Crowding out

Expansionary fiscal policy isnt effective in increasing AD because increased borrowing needs of government to finance the increased expenditures could lead to increased IR

Current account

A subaccount of the BoP 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

Current account surplus

Exists when the sum of net exports of goods and services plus net income plus net current transfers is positive

Current transfers

An entry in the current account that records payments between residents and non-residents of a country that affect level of disposable income

Customs union

An agreement between countries to 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

Debt relief (cancellation)

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

Debt servicing

Refers to the repayment of principal and interest on the debt of a person, a firm or a country.

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

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 curve

A curve illustrating 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

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

Demerit goods

Goods or services that harm individuals who consume and society, 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 eliminate regulations related to the operation of firms so that production costs decrease

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, program aid and debt relief. 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.

Economically least developed countries (ELDCs)

Low-income countries facing severe structural constraints to sustainable development, with low levels of human assets, highly vulnerable to economic and environmental shocks.

Economic development

A multidimensional concept involving a sustained increase in living standards that implies higher levels of income and greater access to goods and services, better education and health