Glossary definitions

Absolute advantage

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

Absolute Poverty

This 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 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.

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

These 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.

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.

Average tax rate

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

Balance of payments

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.

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

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' one of these in order to increase aggregate demand in the economy.

Business confidence

An economic indicator that measures the degree of optimism that business managers feel about the state of the economy and the prospects of their companies/ organizations.

Business cycle

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

Capital

The factor of production that comes from investment in physical capital and human capital. Physical capital is the stock of manufactured resources (e.g. factories, roads, tools) and human capital is the value of the workforce (improved through education or better health care).

Capital account

A measure of the buying and selling of assets between countries. The assets are often separated to show assets that represent ownership and assets that represent lending.

Capital flight

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

Capital transfers

A measure of net monetary movements gained or lost through actions such as the transfer of goods and financial assets by migrants entering or leaving the country, transfers relating to the sale of fixed assets, gift taxes, inheritance taxes, and death duties.

Carbon (emissions) taxes

Taxes levied on the carbon contents of fuel.

Central bank

The government's bank. The institution that is responsible for an economy's monetary policy.

Ceteris paribus

A Latin expression meaning "other things being equal".

Choice architecture

A theory that suggests that the decisions that we make are affected by the layout, sequencing, and range of choices that are available.

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.

Circular flow of income

A simplified model of the economy that shows the flow of money through the economy.

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.

Collusive oligopoly

This is where a few firms act together to avoid competition by resorting to agreements to fix prices or output in an oligopoly.

Common access resources

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

Common market

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

Comparative advantage

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

Competitive supply

This exists where products are produced by the same factors of production, and so compete for these resources for their production.

Complements

Goods which are used in combination with each other. For example, digital cameras and memory cards.

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 confidence

An economic indicator that measures the degree of optimism that consumers feel about the state of the economy and their own personal financial situation.

Consumer nudges

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

Consumer price index (CPI)

A measure of the average rate of inflation which calculates the change in the price of a representative basket of goods and services purchased by the "average" consumer.

Consumer surplus

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

Consumption (C)

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

Contractionary monetary policy

A monetary policy designed to decrease aggregate demand and thus the level of economic activity.

Corporate social responsibility

An approach taken by firms where they attempt to produce responsibly/ethically towards the community and environment, demonstrating a positive impact on society.

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).

Current account deficit

This is where revenue from the exports of goods and services and income flows is less than the expenditure on the import of goods and services and income flows in a given year.

Current account surplus

This is where the revenue from the export of goods and services and income flows is greater than the expenditure on the import of goods and services and income flows in a given year.

Current transfers

These are recorded in the balance of payments whenever an economy receives goods, services, income, or financial items without something in return. All transfers not considered to be capital are current.

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 they take no action.

Deflation

A persistent fall in the average level of prices in an economy.

Deflationary/recessionary gap

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

Demand

The willingness and ability of consumers to purchase a quantity of a good or service.

Demand curve

This shows the relationship between the price of a good or service and the quantity demanded. It is normally downward sloping.

Demand management

A (Keynesian) policy emphasising the importance of government intervention in managing the level of aggregate demand in the economy, through fiscal and monetary policies.

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.

Depreciation

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

Deregulation

A type of supply-side policy where the government reduces the number or type of regulations governing the behaviour of firms.

Devaluation

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

Development aid

Aid that consists of grants, concessional long-term loans, project aid, and programme aid.

Disinflation

A fall in the rate of inflation.

Disposable income

The remaining income available for an individual to spend or save, after taxation.

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.

Economic growth

The growth of the real value of output in an economy over time. Usually measured as growth in real GDP.

Economic well-being

A multi-dimensional concept relating to the level of prosperity and quality of living standards in a country.

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

"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.

Efficiency

A quantifiable concept which is determined by the ratio of useful output to total input.

Elasticity

A measure of the responsiveness of something to a change in one of its determinants.

Elasticity of demand for exports

A measure of the responsiveness of the quantity demanded of exports when there is a change in the price of exports.

Elasticity of demand for imports

A measure of the responsiveness of the quantity demanded of imports when there is a change in the price of imports.

Engel curve

A curve showing the relationship between income and quantity demanded.

Entrepreneurship

The factor of production involving organising and risk-taking.

Equilibrium

A state of rest, self-perpetuating in the absence of any outside disturbance.

Equity

The concept or idea of fairness.

Excess demand

This occurs where the price of a good is lower than the equilibrium price, such that the quantity demanded is greater than the quantity supplied.

Excess supply

This occurs where the price of a good is higher than the equilibrium price, such that the quantity supplied is greater than the quantity demanded.

Exchange rate

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

Expansionary monetary policy

A monetary policy designed to increase aggregate demand and thus the level of economic activity.

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.

Export promotion

Strategies based on openness and increased international trade. Growth is achieved by concentrating on increasing exports, and export revenue, as a leading factor in the AD of the economy. Growth in the international market should be translated into growth in the domestic market, over time.

Export revenue

Value of exports earned by producers

Exports

Goods and services produced in one country and purchased by consumers in another country.

External balance

The value of exports of goods and services minus the value of imports of goods and services.