Economics Vocabs

Unit 1

Economic systems - system of production, resource allocation, and distribution of goods and services

Free market economic systems - a market in which resource allocation is determined by demand and supply with no government control

Centrally planned economic system - an economic system in which resource allocation by the government or central planning authority

Mixed economy - a combination of both planned and free market systems and includes both a private and public sector.

Public sector - government sector which controls basic services

Private sector - economy sector which provides services, free from government control although dangerous goods are illegal

Positive economic statement - objective statements that can be tested, amended or rejected by referring to the available evidence.

Normative economic statement -subjective statement of opinion which can neither be proven or disproven.

The basic economic question - defined as limited resources and unlimited wants

Ceteris paribus - means that all other variables remain the same

Unit 2

Opportunity cost - the cost or value of an economic decision in terms of the next best option foregone.

Free goods - good that are unlimited in supply with no opportunity cost

Economic goods - all goods which have a value with limited in supply

Market place - any physical or online location where consumers and suppliers meet, to exchange their goods and services

Market failure - inefficient distribution of goods and services in free markets, individual incentives for rational behavior do not lead to rational outcomes

Demand - quantity of good that buyers (consumers) are willing and able to buy at various prices over a time period, ceteris paribus

Supply - quantity of goods and services that producers are willing and able to produce at a given time, for a given price, ceteris paribus

Market equilibrium - occur where quantity demanded is equal to quantity supplied

Allocative efficiency - allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers

Welfare loss - loss of social surplus that arises when MSB is not equal to MSC

Market disequilibrium - when the market is not allocatively efficient because the market has either too few or too many of the goods and services being produced, from society's point of view

Price elasticity of demand (PED) - responsiveness of a good demanded to changes in its prices

PED formulae - % change in Qd / % change in price

PED elastic good - large responsiveness of Qd due to changes in prices ; PED greater than 1

PED inelastic good - small responsiveness of Qd due to changes in prices ; PED smaller than 1

PED unitary good - good or service where a change in the price of the product leads to a proportional change in quantity demanded; PED = 1

Cross price elasticity of demand (XED) - if there are two goods, X and Y, a change in the price of one may lead to a change in demand for the other

Income elasticity of demand (YED) - responsiveness of a good demanded to changes in income levels

YED formulae - % change in in Qd / % change in income

Normal good - as income rises, D for goods rise - direct relationship b/w income and demand

Inferior good - as income rises, D for goods fall - inverse relationship b/w income and demand

Price elasticity of supply - responsiveness in Q supplied to changes in price, movement along the supply curve

PES formulae - % change in in Qd / % change in price

Indirect tax - tax placed on a good or service, raising the production costs of the business, tax on expenditure rather than a tax on income

Specific tax - fixed amount placed upon a good or service

Ad valorem tax - a percentage value added to the price of a good or service

Producer tax - tax on sales but paid for by the manufacturer or producer

Excise tax - tax applied to a narrow range of products such as cigs or alcohol to reduce consumption

Subsidy - support provided by the government to encourage production or consumption of a good or service

Price ceiling - when a government sets a max price below the equilibrium price

Shortage - when a market for a good or service is not in equilibrium because demand for the product is greater than supply

Price floor - when a government sets a min price above the equilibrium price

Externalities - the spillover costs to a third party caused by production and consumption; MSC ≠ MSB

Merit good - good or service which consumers undervalue but governments believe it provides positive externalities

Positive externality - benefits enjoyed by a third-party when a consumer makes a purchasing decision

Marginal private benefit - additional benefit for consumers arising from consumption

Marginal social benefit - additional benefit for society arising from consumption

Social efficiency - occur when resources in economy are used in the most efficient way possible and are represented by the output level where SMC = SMB

Demerit good - good or service which consumers overvalue but governments believe it provides negative externalities

Negative externality - costs to a third-party caused by production or consumption, occur when MSC is greater than MSB

Marginal private cost - provide cost by producer or user of one additional unit of a good or service

Marginal social cost - additional cost to society arising from production

Marginal private cost - additional cost to producers arising from production

Socially optimum level of output - MSB = MSC

Public goods - a good that is non-rivalrous and non-excludable that has external benefits

Unit 3

Macroeconomic objectives - control of inflation, maintenance of economic growth, low and stable unemployment and the external balance above objectives

Circular flow of income - an economic model that illustrates the flow of money and resources between firms and households at an economic level

Leakages - money that leaves the circular flow such as savings, taxation, imports

Injections - money that enters the circular flow such as investment, government expenditure, exports

Gross Domestic Product (GDP) - total value of all final goods and services produced within a country over a time period, regardless who owns the factor of production

GDP = C + I + G + (X-M)

Gross National Income (GNI) - total income generated by a country and is calculated by adding net property income from abroad to the GDP, equal to value of final goods and services produced by factor of production by a country’s residents

GNI = GDP + net property income

Real GDP/GNI - GDP or GNI adjusted for the effects of inflation i.e. the rise in general prices.

GDP / GNI per capita - measure GNI per head of population

Big Mac index - an index used to measure the purchasing power parity (PPP) between two currencies

Purchasing power parity (PPP) - long-term exchange rate calculated by considering the ratio of prices in one country compared to another

Human development index - used by the United Nations Development Programme to measure a country’s economic development in terms of life expectancy, education, and material standard of living

OECD better life index - measure of well-being which looks at some of the key factors that affect welfare of a nation’s population

Happy planet index -measures sustainable well-being for a nation’s population

Aggregate demand - total spending of all goods and services produced in the economy at a given price level and at a given point in time

Private consumption (C) - spending by households on domestic consumer goods and services over a period of time

Government spending (G) - public sector spending whether by national or local governments

Investment (I) - expenditure by firms on capital equipment and is an injection into the economy

Net exports (X-M) - the value of exports (ie export revenues) - value of import (ie import expenditures)

Aggregate supply - total quantity of all goods and services the economy can produce at a given price level and in a given time period

Supply shock - an unexpected event that impacts on the supply of a product or commodity, resulting in a sudden change in price

Unemployment rate - count of jobless people in a country who are seeking work but who do not have a job

Cyclical unemployment - caused by a downturn in the economy

Frictional unemployment - caused by workers moving between jobs

Structural unemployment - people who are unemployed due to technology or innovation

Hidden unemployment - individuals who have given up looking for work as they fear they have no chance of being successful

Inflation - sustained increase in the average/general level of prices in an economy

Deflation - sustained decrease in the average/general level of prices in an economy

Disinflation - fall in the rate of inflation in an economy

Demand pull inflation - caused by an increase in AD, hence a right shift in AD curve, as price level increases

Cost push inflation - caused by a decrease in SRAS, hence a left shift in SRAS curve, resulting from increases in the cost of production, as price level increases

Macroeconomic equilibrium - where aggregate supply is equal to aggregate demand.

Inflationary gap - inflationary pressure created by the current (or SR) equilibrium being above the full employment (or LR) equilibrium

Recessionary gap - where the level of national output is operating below the full employment level of output

Recession - a period of time when there is a fall in GDP for two consecutive three-month periods.

Monetarist / neo-classical - believe government do not need to intervene and economy is self correcting

Keynesian economics - believe government need to intervene and fiscal and monetary policy should be used actively in the short run

Lorenz curve - illustrates the level of income inequality within an economy

Gini coefficient - can be used to measure the size of a country’s income inequality

Equality - fairness in terms of providing everyone with the same opportunities to be successful

Equity - everyone has diff advantages and skills and have resources and opportunities needed to reach an equal outcome

Direct taxation - taxpayers pay directly to the government, such as income tax, corporate tax

Indirect taxation - can be passed on or shifted to another person or group by the person or business that owes it, such as sales tax, excise duty

Progressive taxation - a tax where the burden paid increases as a household's income rises

Regressive taxation - a tax where the burden paid falls as a household's income rises

Proportional taxes - taxes where the burden falls equally on both low and high income households

Monetary policy - demand-side policy with the central bank using changes in the money supply or interest rates to influence AD

Central bank - government’s bank and has control over money supply in the economy

Base rate or discount interest rate - interest rate that central bank charge commercial banks for short term loans

Expansionary monetary policy - expansion of money supply through reduced interest rate / or quantitative easing

Contractionary monetary policy - contraction of money supply through higher interest rate / or lowering the money in circulation

Quantitative easing - central bank purchases securities to increase money supply and encourage investment and lending

Fiscal policy - demand-side policy to achieve their macroeconomic objectives by using government spending and tax policies to influence economic conditions

Expansionary fiscal policy -decrease taxation and or increase government spending to increase AD

Contractionary fiscal policy - increase taxation and or decrease government spending to fight inflationary pressures

Supply-side policies - policies aimed at increasing AS; shifting from left to right

Privatization - transfer of assets from public sector to priv sector

Market based supply-side policies - policies aimed at increasing AS by placing a greater emphasis on market forces and competition

Interventionist supply side policies - policies aimed at increasing AS by placing a greater emphasis on greater intervention by governments

Infrastructure - consists of any large-scale capital used in the production of goods and services ; as it increases infrastructure, it increases LRAS in the economy

Unit 4

International trade - exchange of all goods and services between one country and another

Free trade - trade policy that does not restrict imports or exports

Protectionism - government policies that restrict international trade to help domestic industries

Tariff - tax placed on imported good or service as they enter the domestic economy, paid by the individual or organization importing the good

Quota - limit on the numbers of value of a good or service that a country will allow into the country

Economic integration - involve different countries coordinating and linking their economic policies

Trade creation - occurs when entry to a customs union means that the production of a good or service switches from a high-cost producer to a lower-cost producer

Free trade area - where a group of countries agrees to remove trade barriers between them and they set their own tariffs and other trade barriers within countries outside the FTA

Customs union - agreement between countries to remove or reduce trade barriers between them but they set common external tariff barriers against non-members

Exchange rate - value of one currency expressed in terms of another on the foreign exchange markets

Balance of payment - include balance of trade in goods, services, income and transfers. Referred to as “exports of goods and services” and “imports of goods and services”

Current account - record of revenues earned from export of G and S and expenditure on imports of G and S

Current account deficit - value of total imports of G and S plus net income flows are greater than value of total exports of G and S

Current account surplus - revenues from exports of G and S plus net income flows are greater than spending on imports of G and S

Current transfers - transfer of money between countries for non-investment purposes

Credit - any transactions that results in currency coming into the country, credit items are awarded a positive value on balance of payment

Debit - any international transaction which results in money leaving nation, awarded a negative value on balance of payment

Balancing item - difference between debit and credit, the amount that a country requires in order to make their debits and credits balance

Capital account - transfer of money into and out of a country for investment purposes and is divided into capital transfers and transactions of intangible non financial assets

Financial account - measures net change in ownership of financial assets and consists of a record of the number of domestic assets purchased by overseas purchasers, as well as foreign assets purchased by domestic residents

Sustainable development goals - 17 life-changing goals including ending extreme poverty, giving people better healthcare etc

Barriers to development - factors that act as a barrier to development in many LEDCs e.g. poor infrastructure, low savings rate etc

Inward-looking development strategies (import substitution) - trade and economic policy which advocates replacing foreign imports with domestic production

Outward-looking development strategies (export substitution) - trade and economic policy which prioritize export goods for which the nation has a comparative advantage

Aid - assistance provided to a country that would not otherwise have been given if left up to market forces

Transfer payments - government redistribution of income and wealth made without any transfer of goods or services in exchange.

Import tariffs - tax on imported goods designed to protect domestic industry

Government grants - form of government subsidy provided to help new or struggling businesses

Bail-outs - specific help provided to key industries when struggling financially

Financial assistance - type of government assistance paid in the form of a grant or loan to encourage businesses to set up in areas of high unemployment

Spending multiplier - represents the multiple by which GDP increases or decreases in response to an increase and decrease in government expenditures and investment

Automatic stabilizers - occur due to tax and government expenditure automatically change during business cycle, has consequence of inflationary and deflationary gap

Budget balance - when government income from taxation and sales of public assets is equal to its total expenditure

Government expenditure - government or public spending, classified into current expenditures, capital expenditures and transfer payment

Government budget - derived from government income from taxation and sales of public assets minus total expenditures

Budget deficit - when government income from taxation and sales of public assets is lower than its total expenditure

Budget surplus - when government income from taxation and sales of public assets is greater than its total expenditure

Income -money that individual receives from income / rent on land/property / interest on their savings / profit on stocks and shares that they may earn.

Relative poverty - the condition in which people lack the minimum amount of income needed in order to maintain the average standard of living in the society in which they live.

Universal basic income - a governmental public program for a periodic payment delivered to all on an individual basis without means test or work requirement

Development - measures improvement in individual freedom, reducing poverty as well as provision of public services

Micro-credits / micro loans - very small loans made to often impoverished borrowers who lack collateral, steady employment or a verifiable credit history

Appropriate technology - machinery and technology that is cheaper and more appropriate for LEDCs than conventional technology used in wealthier nations

Trade liberalization - reduction or removal trade barriers such as tariffs, quotas and subsidies

Diversification - policy of steering an economy away from an over reliance on a narrow range of goods and services

Multinational company - company with operations in two or more countries, provide direct foreign investment to different nations, they can be done by setting up a manufacturing plant in a foreign country or acquiring a domestic business in a foreign country

FDI - investment in the form of a controlling ownership in a busines in one country by an entity based in another country

AID - assistance provided to a country that would not otherwise have been given if left up to market forces

Remittances - funds paid to fam members back home by refugees working overseas

Middle income nation - diverse band of nations defined as lower middle-income economies, with a GNI per capita between $1006 and $3955

Economic sectors of the economy - industrialized nation, more developed or more economically developed country

Poverty cycle - involve low incomes which lead to low savings and low investment which ensures low incomes in the future

Comparative advantage - economy's ability to produce goods and services at a lower opportunity cost than that of trade partners

Red tape / bureaucratic barriers - where the gov imposes excessive rules, regulations and bureaucracy on imported goods ; used as ‘hidden’ trade restrictions to protect domestic producers and reduce imports