CIE Economics AS definitions Micro and Macro

Absolute advantage

used in the context of international trade, a situation where, for a given set of resources, one country can produce more of a particular product than another country.

Ad valorem tax

a tax that is charged as a given percentage of the price.

Aggregate demand (AD):

the total spending on an economy's goods and services at a given price level in a given time period.

Aggregate expenditure

the total amount spent in the economy at different levels of income.

Aggregate supply (AS)

the total output (real GDP) that producers in an economy are willing and able to supply at a given price level in a given time period

Appreciation

an increase in the international price of a currency caused by market forces.

Automatic stabilisers

changes in government spending and taxation that occur to reduce fluctuations in aggregate demand without any alteration in government policy.

Balance of payments

a record of a country's economic transactions with the rest of the world over a year.

Budget

an annual statement in which the government outlines plans for its spending and tax revenue.

Canons of taxation

Adam Smith's criteria for a 'good' tax.

Capital

a man-made aid to production.

Change in demand

when there is a shift in the demand curve due to a change in factors other than the price of the particular product.

Choice

underpins the concept that resources are scare so choices have to be made by consumers, firms and governments.

Command or planned economy

one where resource allocation decisions are taken by a central body.

Comparative advantage

used in the context of international trade, a situation where a country can produce a product at a lower opportunity cost than another country.

Complement

a good consumed with another.

Consumer price index

an index that shows the average change in the prices of a representative basket of products purchased by households.

Consumer surplus

the difference between the value a consumer places on units consumed and the payment needed to actually purchase that product.

Consumption

spending by households on goods and services; the process by which consumers satisfy their wants.

Cost-push inflation

inflation caused by increases in costs of production.

Creeping inflation

a low rate of inflation.

Cross elasticity of demand (XED)

a numerical measure of the responsiveness of the quantity demanded for one product following a change in the price of another related product.

Current account

within the balance of payments, a record of the trade in goods, trade in services, investment income and current transfers.

Customs union

a trade bloc where there is free trade between member countries and a common external tariff on imports from non-members.

Deadweight loss

the welfare loss when due to market failure desirable consumption and production does not take place.

Deflation

a sustained fall in the price level.

Demand curve

represents the relationship between the quantity demanded and price of a product.

Demand schedule

the data from which a demand curve is drawn.

Demand

the quantity of a product that consumers are willing and able to buy at different prices.

Demand-pull inflation

inflation caused by increases in aggregate demand not matched by equivalent increases in aggregate supply.

Demerit good

one that has adverse side effects when consumed.

Depreciation

a decrease in the international price of a currency caused by market forces.

Derived demand

where the demand for a good or service depends upon the use that can be made from it.

Developed economies

economies with high GDP per head.

Developing economy

an economy with a low GDP per head; one that has a low income per head.

Discretionary fiscal policy

deliberate changes in government spending and taxation.

Disequilibrium

a situation where demand and supply are not equal.

Disinflation

a fall in the inflation rate.

Division of labour

where a manufacturing process is split into a sequence of individual tasks.

Dumping

selling products in a foreign market at below their cost of production.

Economic development

an increase in welfare and the quality of life.

Economic efficiency

where scarce resources are used in the most efficient way to produce maximum output.

Economic growth

in the short run an increase in a country's output and in the long run an increase in a country's productive potential; represented by a shift outwards of the production possibility curve.

Economic structure

the way in which an economy is organised in terms of sectors.

Economic system

the means by which choices are made in an economy.

Economic union

a trade bloc where there is free trade between member countries, a common external tariff and some common economic policies, which may include a common currency.

Effective demand

demand that is supported by the ability to pay.

Elastic

where the relative change in demand or supply is greater than the change in price.

Elasticity

a numerical measure of responsiveness of one variable following a change in another variable,

ceteris paribus.

other things remaining equal

Embargo

a ban on imports and/or exports.

Emerging economies

economies with a rapid growth rate and that provide good investment opportunities. Entrepreneur: organises production and is willing to take risks.

Equilibrium price

the price where demand and supply are equal, where the market clears.

Equilibrium quantity

the amount that is traded at the equilibrium price.

Equilibrium

a situation where there is no tendency for change.

Exchange control

restrictions on the purchases of foreign currency.

Exchange rate

the price of one currency in terms of another currency.

Excludability

where it is possible to exclude one from consumption.

Expenditure dampening or reducing policy

policy measures designed to reduce imports and increase exports by reducing demand.

Expenditure switching policy

policy measures designed to encourage people to switch from buying foreign- produced products to buying domestically produced products.

Factors of production

anything that is useful in the production of goods and services.

Financial account

within the balance of payments, a record of the transfer of financial assets between the country and the rest of the world.

Firm

any business that hires factors of production in order to produce goods and services.

Fiscal drag

the income of people and firms being pushed into higher tax brackets as a result of inflation.

Fiscal policy

the use of taxation and government spending to influence aggregate demand.

Fixed exchange rate

an exchange rate set by the government and maintained by the central bank.

Floating exchange rate

an exchange rate that is determined by the market forces of demand and supply.

Foreign direct investment (FDI)

the setting up of production units or the purchase of existing production units in other countries.

Free rider

someone who does not pay to use a public good.

Free trade area

a trade bloc where member governments agree to remove trade restrictions among themselves. Free Free trade: international trade not restricted by tariffs and other protectionist measures.

Fundamental economic problem

scarce resources relative to unlimited wants.

Government failure

where government intervention to correct market failure causes further inefficiencies. Government macroeconomic failure: government intervention reducing rather than increasing economic performance.

Government spending

the total of local and national government expenditure.

Hot money flows

flows of money moved around the world to take advantage of changes in interest rates and exchange rates.

Hyperinflation

an exceptionally high rate of inflation, which may result in people losing confidence in the currency.

Incidence

the extent to which the tax burden is borne by the producer or the consumer or both.

Income effect

where following a price change, a consumer has higher real income and will purchase more of this product.

Income elasticity of demand (YED)

a numerical measure of the responsiveness of the quantity demanded following a change in income.

Indirect tax

a tax that is levied on goods and services.

Inelastic

where the relative change in demand or supply is less than the change in price.

Infant industries

new industries that have a low output and a high average cost.

Inferior goods

one whose demand decreases as income increases.

Inflation

a sustained increase in an economy's price level.

Information failure

where people do not have full or complete information.

Interest rate

the price of borrowing money and the reward for saving.

Investment

the creation of capital goods; spending by firms on capital goods.

J-curve effect

a fall in the exchange rate causing an increase in a current account deficit before it reduces it due to the time it takes for demand to respond.

Joint demand

when two goods are consumed together.

Joint supply

when two items are produced together.

Labour productivity

output per worker hour.

Labour

human resources available in an economy.

Land

natural resources in an economy.

Long run

time period when all factors of production are variable.

Long-run aggregate supply (LRAS)

the total output of a country supplied in the period when prices of factors of production have fully adjusted.

Macroeconomic equilibrium

the output and price level achieved where AD equals AS.

Macro-economy

the economy as a whole.

Managed float

where the exchange rate is influenced by state intervention.

Marginal rate of taxation

the proportion of extra income taken in tax.

Market demand

the total amount demanded by consumers.

Market economy

one where most decisions are taken through market forces.