Definitions Flashcards
Abnormal profit
This arises when average revenue is greater than average cost (greater than the minimum return required by a firm to remain in a line of business).
Absolute advantage
A country has an absolute advantage in the production of a good if it can produce more of it with the same resources or, equivalently, if it can produce the same amount using fewer resources compared to another country.
Absolute poverty
People living below the minimum income necessary to satisfy basic physical needs (food, clothing, and shelter); as of October 2015, the World Bank international poverty line is set at US$1.90 PPP per day.
Abuse of market power
When a firm acts with the intention to eliminate competitors or to prevent entry of new firms in a market.
Actual growth
Occurs when real output (real GDP) increases through time and is a result of greater or better use of existing resources. In the PPC model it can be illustrated by a movement from a point inside a PPC to another point in the northeast direction.
Administrative barriers
Trade barriers in the form of regulations that aim to limit imports into a country. These barriers may take the form of product safety standards, sanitary standards or pollution standards but may also include more stringent than necessary application of customs procedures.
Adverse selection
A type of market failure involving asymmetric information, where the party with the incomplete information is induced to withdraw from the market. The buyer, for example, of a used car, may hesitate to buy without knowing about the quality of the vehicle. The seller, for example of health insurance, may hesitate to sell a policy without knowing the health of the buyer.
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
Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way. It is achieved when, for the last unit produced, price (P) is equal to marginal cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal social cost (MSC).
Allocative inefficiency
When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results. MSB ≠ MSC.
Anchoring
Refers to situations when people rely on a piece of information that is not necessarily relevant as a reference point when making a decision.
Anti-dumping
Typically refers to tariffs that aim at raising the artificially low price of a dumped imported good to the level of the higher domestic price. A dumped good is one that is exported at a price below the cost of producing it.
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/ in terms of a foreign currency
Appropriate technology
Technology that relies mostly 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 tend to decrease the short-term fluctuations of the business cycle without the 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 balance of payments, it 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 the balance of payments, 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
A subdiscipline of economics that relies on elements of cognitive psychology to better understand decision-making by economic agents. It challenges the assumption that economic agents (consumers or firms) will always make rational choices with the aim of maximizing with respect to some objective.
Biases
Systematic deviations from rational choice decision-making.
Bilateral trade agreement
An agreement between two countries to phase-out or eliminate trade related barriers.
Bounded rationality
A term introduced by Herbert Simon that suggests consumers and businesses have neither the necessary information nor the cognitive abilities required to maximize with respect to some objectives (such as utility), and thus choose to satisfice. They therefore are rational only within limits.
Bounded self-control
The idea that individuals, even when they know what they want, may not be able to act in their interests. Findings of bounded self-control include evidence of procrastination (for example, among students, professionals and others) that may result in self-harm, and submitting to temptation (for example, dieters).
Bounded selfishness
The idea that 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
When government expenditures exceed government (tax) revenues usually 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 refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure 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 the balance of payments that includes credit and debit entries for non-produced, non-financial assets as well as 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
Include financial or non-financial assets for items including debt forgiveness, investment, non-life insurance claims. They are part of the capital account of the balance of payments.
Carbon (emissions) taxes
Taxes levied on the carbon content of fuel. They are a type of Pigouvian tax.
Central bank
An institution charged with conducting monetary and exchange rate policy, regulating behaviour of commercial banks, and providing banking services to the government and commercial banks.
Ceteris paribus
A Latin expression meaning “other things being equal”.
Choice architecture
The design of environments based on the idea that the layout, sequencing, and range of choices available affect the decisions made by consumers.
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 illustration that shows the flows of income and expenditures in an economy.
Collective self-governance
In the case of a common pool resource, such as a fishery, users solve the problem of overuse by 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 thus compete with each other for the use of the same resources.
Complements
Goods that are jointly consumed, for example, 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; the greater this proportion, the greater the degree of market power of the 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 the typical consumer buys expressed as an index number. The CPI is 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
Refers to a decrease in government expenditures and/or an increase in taxes that aim at decreasing aggregate demand and thus reducing inflationary pressures.
Contractionary monetary policy
A policy employed by the central bank involving an increase in interest rates and aimed at decreasing aggregate demand and thus inflationary pressures. Referred to also as tight monetary policy.
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 that is a result of increased production costs (typically because of rising money wages or rising commodity prices) and illustrated by a leftward shift of the SRAS curve.
Credit items
Refers to transactions within the balance of payments of a country that lead to an inflow of currency (for example, the export of goods); these transactions enter the account with a plus sign.
Credit rating
A grade assigned by certain agencies (such as Moody’s or Standard and Poor’s) on the borrowing risks a prospective issuer of debt (for example, of a bond) presents to lenders.
Crowding out
The idea that expansionary fiscal policy is not very effective in increasing aggregate demand because the increased borrowing needs of the government to finance the increased expenditures could lead to increased interest rates. Thus, reducing private sector investment, consumer spending, and other components of AD.
Current account
A subaccount of the balance of payments 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 (or simply when debits or outflows are greater than credits or inflows).
Current account surplus
Exists when the sum of net exports of goods and services plus net income plus net current transfers is positive (or simply when credits or inflows are greater than debits or inflows).
Current transfers
An entry in the current account that records payments between residents and non-residents of a country without something of economic value being received in return and that affect directly the level of disposable income (for example, workers remittances, pensions, aid and grants, and so on).
Customs union
An agreement between countries to phase out or eliminate tariffs and other trade barriers (liberalise trade) 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 (for example, the import of services); these transactions enter the account with a minus sign.
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
Arises when the 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 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. It is normally downward sloping.
Demand management
Policies that aim at manipulating aggregate demand through changes in interest rates (monetary policy) or changes in government expenditures and taxation in order to influence growth, employment and inflation.
Demand-pull inflation
Refers to economic policies that aim at affecting aggregate demand and thus macroeconomic variables such as growth, inflation and employment; demand side policies include fiscal policy and monetary policy.
Demerit goods
Goods or services that not only harm the individuals who consume these but also society at large, and that tend to be overconsumed. Usually they are 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 reduce or eliminate regulations related to the operation of firms so that production costs decrease—resulting in increased competition and higher levels of output.
Development aid
Aid aimed at assisting developing countries in their development efforts. Includes project aid, program aid and debt relief. It is concessional meaning 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)
According to the UN these are 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 thus greater access to goods and services, better education and health, a better environment to live in as well as individual empowerment.
Economic growth
Refers to increases in real GDP over time.
Economic integration
Economic interdependence between countries usually involving agreements between two or more countries to phase-out or eliminate trade and other barriers between them.
Economics
Economics is the study of how to make the best possible use of scarce or limited resources to satisfy unlimited human needs and wants.
Economic well-being
A multidimensional concept relating to the level of prosperity and quality of living standards in a country.
Economies of scale
Falling average costs that a firm experiences when it increases its scale of operations.
Efficiency
In general, involves making the best use of scarce resources. May refer to producing at the lowest possible cost or to allocative efficiency where marginal social costs are equal to marginal social benefits or where social surplus is maximum.
Elasticity
A measure of the responsiveness of an economic variable (such as the quantity demanded of a product) to a change in another economic variable (such as its price or income).
Elasticity of demand for exports
A measure of the responsiveness of the volume of exports to a change in their price.
Elasticity of demand for imports
A measure of the responsiveness of the volume of imports to a change in their price.
Engel curve
A curve showing the relationship between consumers’ income and quantity demanded of a good. It indicates whether a good is normal or inferior.
Entrepreneurship
Refers to the ability of certain individuals to organize the other factors of production (land, labour, capital) and their willingness to take risks.
Equilibrium
A state of balance that is self-perpetuating in the absence of any outside disturbance.
Equity
The concept or idea of fairness.
Excess demand
Occurs when quantity demanded at some price is greater than quantity supplied.
Excess supply
Occurs when quantity supplied at some price is greater than quantity demanded.
Exchange rate
The value of one currency expressed in term of another currency; for example, €1 = US$1.5.
Excludable
A characteristic that most goods have that refers to the ability of producers to charge a price and thus exclude whoever is not willing or able to pay for it from enjoying it.
Expansionary fiscal policy
Refers to an increase in government expenditures and/or a decrease in taxes that aim at increasing aggregate demand and thus real output and employment.
Expansionary monetary policy
Monetary policy aiming at increasing aggregate demand through a decrease in interest rates; also referred to as easy monetary policy.
Expenditure approach
One of three analytically equivalent approaches of measuring GDP that adds all the expenditures made on final domestic goods and services over a period of time by households, firms, the government and foreigners.
Expenditure reducing
Contractionary demand side policies aiming at decreasing national income and thus expenditures on imports so that a current account deficit narrows.
Expenditure switching
Policies aimed at switching expenditures away from imports towards domestically produced goods and services by making imports more expensive in order to narrow a current account deficit. It includes lowering the exchange rate as well as adopting trade protection.
Exports
Goods and services produced in one country and purchased by consumers in another country.
Export promotion
Growth policies aiming at expansion of export revenues as the vehicle of economic growth; often contrasted to import substitution.
Export revenue
The revenues collected by exporting firms.
Export subsidy
Payments made by the government to exporting firms on the basis of the number of units exported.
External balance
A situation where the value of a country’s exports is balanced by the value of its imports over a period of time, such that a current account surplus or deficit does not persist over long periods.
Externalities
External costs or benefits to third parties when a good or service is produced or consumed. An externality arises when an economic activity imposes costs or creates benefits on third parties for which they are not compensated or do not pay for respectively.
Factors of production
In the balance of payments this records inflows and outflows of portfolio and FDI funds over a period of time, official borrowing and changes in reserve assets.
Financial Account
The net balance arising from flows of FDI, flows of portfolio investment and changes in reserve assets
OR a net change in foreign ownership of domestic financial assets
Firm
An entity such as a business that uses factors of production in order to produce and sell goods and services and earn profits. It is an important decision maker in a market economy.
Firms
Productive units that transform inputs (factors of production) into output (goods and services), usually aiming at earning profits.
Fiscal policy
A demand-side policy using changes in government spending and/or direct taxation to influence aggregate demand and thus growth, employment and prices.
Fixed exchange rate
An exchange rate system where the exchange rate is fixed, or pegged, to the value of another currency (or to the average value of a selection of currencies) and maintained there with appropriate central bank intervention.
Floating exchange rate
An exchange rate system where the exchange rate is determined solely by the market demand and market supply of the currency in the foreign exchange market without any central bank intervention.
Foreign aid
Refers to flows of grants or loans from developed to developing countries that are non-commercial from the point of view of the donor and for which the terms are concessional (that is, the interest rate is lower than the market rate and the repayment period longer).
Foreign direct investment (FDI)
When a firm establishes a productive facility in a foreign country or acquires controlling interest (at least 10% of the ordinary shares) in an existing foreign firm.
Foreign sector
In an open economy the term refers to exports and imports.
Framing
In behavioural economics, the term refers to the way choices are presented as a simple change of the “frame”, that may affect the choice made. For example, highlighting the positive or the negative aspects of the same choice may lead to different decisions.
Free goods
Goods such as air or sea water that are not considered scarce and thus do not have an opportunity cost.
Free market economy
An economy where the means of production are privately owned and where market forces determine the answers to the fundamental questions (what/how much, how and for whom) that all economies face.
Free rider problem
Arises when individuals consume a good or service without paying for it because they cannot be excluded from enjoying it.
Free trade
International trade that is not subject any kind of trade barriers, such as tariffs or quotas.
Free trade area/agreement
An agreement between two or more countries to phase-out or eliminate trade barriers between them, members of the agreement are free to maintain their own trade policy towards non-members.
Frictional unemployment
Unemployment of individuals who are in-between jobs, as people quit to find a better job or to move to a different location.
Full employment
A goal of macroeconomic policy that aims at fully utilizing the scarce factor of production labour. Full employment exists when the economy is producing at its potential level of real output and thus there is only natural unemployment (the AD–AS model considers the AD and AS curves together). In the production possibilities curve (PPC model), full employment exists when the economy is producing on the PPC.
Full employment level of output
The level of output that is produced by the economy when there is only natural unemployment.
Game theory
A branch of mathematics that studies the strategic interaction of decision-makers that may be individuals, firms, countries, and so on.
Gender inequality index (GII)
A composite indicator that measures gender inequalities in three dimensions of human development, namely reproductive health, empowerment and economic status.
Gini coefficient
A measure of the degree of income inequality of a country that ranges from zero (perfect income equality) to one (perfect inequality). Diagrammatically it is the ratio of the area between the Lorenz curve and the diagonal over the area of the half-square.
Government (national) debt
The sum of all past budget deficits minus any budget surpluses; the total amount the government owes to domestic and foreign creditors.
Government spending (G)
Refers to all spending by the government that is distinguished into current expenditures, capital expenditures and transfer payments.
Gross domestic product (GDP)
The value of all final goods and services produced within an economy over a period of time, usually a year or a quarter.
Gross national income (GNI)
The income earned by all national factors of production independently of where they are located over a period of time; it is equal to GDP plus factor income earned abroad minus factor income paid abroad.
Growth in production possibilities
When the production possibilities of a country increase because of more/better resources and/or better technology becoming available; illustrated by a shift outwards of the PPC.
Happiness Index
An index that is used to measure economic well-being of a population using several quality of life dimensions.
Happy Planet Index
An index that combines four elements to show how efficiently residents of different countries are using environmental resources to lead long, happy lives. The elements are well-being, life expectancy, inequality of outcomes and ecological footprint.
Homogeneous product
Goods that are considered identical across firms in the eyes of consumers; examples include mostly primary sector goods like corn, wheat or copper.
Household indebtedness
The money that households owe.
Households
Groups of individuals in the economy who share the same living accommodation, who pool their income and jointly decide the set of goods and services to consume.
Human capital
The education, training, skills, experience and good health embodied in the labour force of a country.
Human Development Index (HDI)
A composite index of development that reflects the three basic goals of development, which are a long and healthy life, improved education, and a decent standard of living. The variables measured are life expectancy at birth, mean years of schooling and expected years of schooling, and GNI per capita (PPP US$).
Humanitarian aid
Aid given to alleviate short-term suffering, consisting of food aid, medical aid, and emergency relief aid usually as a result of a natural catastrophe or war.
Imperfect competition
A market structure where firms have a degree of market power as they face a negatively sloped demand curve and can thus set price.
Imperfect information
When the information about a market or a transaction is incomplete.
Import expenditure
The value of imports of goods and services.
Imports
The value of goods and services purchased domestically that are produced abroad.
Import substitution
A growth strategy where domestic production is substituted for imports in an attempt to shift production away from the primary sector and industrialize. This strategy requires that the domestic industry is protected from import competition.
Incentive-related policies
Policies that aim at improving economic incentives of individuals and firms.
Incentive role of prices
Prices provide producers and consumers the incentive to respond to price changes. Given a price change, producers have the incentive to change the quantity supplied in accordance with the law of supply, while consumers have the incentive to change the quantity demanded based on the law of demand.
