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Economics HL IB > Economics Definitions > Flashcards

Economics Definitions Flashcards

1
Q

GDP

A

(Gross Domestic Product)

Total value of all the financial goods and services produced in an economy in a year.

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2
Q

GNI

A

(Gross National Income)

Total income that is earned by a country’s factors of production REGARDLESS OF WHERE THE ASSETS ARE LOCATED

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3
Q

NNI

A

(Net National Income)

GNI taking into account the DEPRECIATION of capital/capital consumption.

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4
Q

Opportunity Cost

A

Cost of next best opportunity forgone.

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5
Q

Market

A

Where buyers and sellers come together to carry out economic transactions.

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6
Q

Positive Economics

A

Economic theories or statements that are falsifiable (yes or no).

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7
Q

Negative Economics

A

Theories/statements that are opinions and therefore cannot be PROVEN to be correct.

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8
Q

Planned Economy

A

An economic system in which all resources ate collectively owned and government bodies allocate scarce resources centrally.

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9
Q

Free Market Economy

A

An economic system in which decisions on what and how to produce goods and services are taken by private firms which are free from government control. Prices are therefore used to ration goods and services.

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10
Q

Utility

A

A measure of the satisfaction consumers gain from consuming particular goods and services in particular quantities.

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11
Q

Total utility

A

Total satisfaction of bundle of products consumed

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12
Q

Marginal utility

A

Extra satisfaction gained with every extra unit of the good or service consumed.

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13
Q

Production possibility curves

A

Shows the different combinations of 2 goods and services an economy can produce in given time period if all the resources in the economy are fully employed and the state of technology is fixed.

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14
Q

Demand

A

the quantity of a good or service consumers are willing and able to purchase at a given price in a given time period.

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15
Q

Law of demand

A

As the price of a product falls the quantity demanded of the product will usually increase, ceteris paribus.

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16
Q

Supply

A

The quantity of a good or service that producers are willing and able to produce at a given price in a given time period.

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17
Q

Law of supply

A

As the price of a product rises the quantity supplied of a product usually increases, ceteris paribus.

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18
Q

Demand Function

A

A function of price that specifies the quantity demanded of a product at each price.
(Qd=a-bP)

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19
Q

Supply function

A

A function of price that specifies the quantity supplied of a product at each price.
(Qs=c+dP)

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20
Q

Equilibrium

A

when the quantity demanded of a product in a market is equal to the quantity supplied for the same product in a market. At this point there is neither excess supply (surplus) nor excess demand (shortage).

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21
Q

Consumer Surplus

A

The extra utility consumers gain from paying a price lower than the price they are prepared to pay.

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22
Q

Producer Surplus

A

The extra revenue producers gain from selling their output at a price that is higher than they are prepared to accept.

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23
Q

Allocative efficiency

A

When resources are allocated in the most efficient way. i.e. the point at which community surplus is maximised.
Occurs when average revenue is equal to marginal cost.

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24
Q

Community surplus

A

The sum of producer and consumer surplus.

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25
Q

Welfare loss

A

this occurs when community surplus is not maximised. It usually occurs because of market failure.

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26
Q

Economic growth.

A

Economic growth is the increase in a country’s capacity for production. This can be measured by a rise in an economies GDP overtime and a shift towards in an economies PPC.

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27
Q

Intermediate good

A

Is a good which is produced and then used in the production of another good.

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28
Q

Elasticity

A

A measure of how responsive buyers or sellers are to changes in market conditions.

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29
Q

PED

A

(price elasticity of demand)

it is a measure of how much the quantity demanded of a product changes when there is a change in its price.

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30
Q

XED

A

(Cross elasticity of demand)

A measure of how responsive demand for one product is when there is a change in the price of another product.

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31
Q

YED

A

(Income elasticity of Demand)

A measure of how much demand for a product changes when there is a change in consumer income.

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32
Q

PES

A

A measure of how much the quantity supplied of a product changes with a change in the price of the product.

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33
Q

Stock

A

Output that has not been supplied to the market.

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34
Q

Market failure

A

Market failure occurs when community surplus is not maximised and when allocative efficiency is not achieved.

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35
Q

Public goods

A

Public goods are goods which are non-rivalrous and non-excludable.

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36
Q

Excludable good

A

this is a good that once produced, it is possible for people not rot consume the.
(E.g street lighting or armed forces would be non-excludable)

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37
Q

Rivalrous goods

A

goods which when they are consumed by one person are not reduced in the quantity available of them for other people to consume.

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38
Q

Merit goods

A

products whose benefits are greater than consumers realise.

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39
Q

Externality

A

An externality occurs when production or consumption of a good or service has an effect on a third party.
This means that the MSB is not equal to MSC.

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40
Q

Hypothesis of Eventually Diminishing Marginal Returns

A

As extra units of a variable factor are added to a given quantity of a fixed factor, the output from each additional unit of the variable factor will eventually diminish.

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41
Q

Hypothesis of Eventually Diminishing Average Returns

A

As extra units of a variable factor are added to a given quantity of a fixed factor the output per unit of the variable factor will eventually diminish.

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42
Q

Explicit costs

A

Explicit costs involve the direct payment of money from the firm for the factors of production.

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43
Q

Implicit costs

A

Implicit costs are the opportunity cost if using factors already owned by the firm.
It may include for example the earnings a firm could have had had it employed its factors of production in a different way. Or, it may include the opportunity cost of the entrepreneurs time.

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44
Q

Total Product

A

(TP)

This is the total output of a firm produces in a given time period

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45
Q

Average Product

A

(AP)

This is output produced, on average, by each unit of the variable factor.

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46
Q

Marginal Product

A

(MP)

this is the extra output produced when an extra unit of variable factor is used.

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47
Q

MEC

A

Marginal External Cost

A cost per unit produced which is borne by a third party

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48
Q

Revenue

A

A firm’s income from selling goods and services.

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49
Q

TR

A

Total Revenue
(average) price x quantity sold
Maximised at the point where MR=0
=aq -bq^2

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50
Q

AR

A

Average Revenue is the revenue received per unit sold.
(p x q) ÷ q [i.e. P]
in general AR decreases with output

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51
Q

MR

A

Marginal revenue is the additional revenue gained when an additional unit of output is sold.
Gradient is twice as large as AR

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52
Q

Diseconomies of scale

A

An increase in LRAC that occurs because of an alteration in the factors of production in order to increase its scale of output.

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53
Q

Total profit

A

Total revenue-total economic cost

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54
Q

Economic cost

A

The opportunity cost of all resources employed by the firm.
Implicit cost + explicit cost
(This means it includes normal profit.)

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55
Q

Normal profit

A

The minimum amount of profit the entrepreneur needs to make to be willing to continue to operate the firm.

i. e. firm is earning zero economic profit.
i. e. where total revenue is equal to total economic cost
a. k.a zero economic profit.

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56
Q

Break even price

A

The price at which the firm is able to make normal profit in the long run.
i.e P = ATC

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57
Q

Shut down price

A

The level of price which enables a firm to cover its variable costs in the short run
i.e. where P = AVC

58
Q

The profit maximising level of output

A

The point at which marginal revenue is equal to marginal cost.
i.e the greatest amount of abnormal profit that can be earned before losses are incurred.

59
Q

Abnormal profit

A

Profit gained when TR>TC

a.k.a economic profit

60
Q

Multiplier effect

A

The process by which an injection into the circular flow leads to a greater final change in AD and thus in NI.
In a closed economy the multiplier effect is given by :
1÷(1-MPC)
In an open economy with a got sector given by:
1÷MPW=1÷(MPS+MRT+MPM)

61
Q

MPW

A

Marginal propensity to withdraw

it is comprised of marginal propensity to spend, marginal rate of taxation and marginal propensity to import.

62
Q

Unemployment rate

A

The percentage of the labour force who are out of work but willing and able to work.

63
Q

Inflation

A

A persistent increase in the average price level in the economy. It is usually calculated through the use of a consumer price index.

64
Q

Deflation

A

The persistent fall in the average price level.

65
Q

Disinflation

A

Fall in the rate of inflation.

66
Q

Philips curve

A

A curve that shows the combinations of inflation and unemployment rates consistent with a macro-economic equilibrium.
In the short run it is downward sloping.
In the long run it is vertical as any attempting to increase AD only increase inflation but unemployment rate remains as workers realise their rap wage rate does not change discouraging them to work.

67
Q

Progressive tax

A

A tax system based on the idea that as income rises the proportion of income designated to tax rises

68
Q

Concentration Ratio

A

(CRx)
This is a commonly used indicator for the concentration of firms in an industry. It shows the percentage of market share held by x number of firms in an industry.
e.g. the CR4 in the US drink industry is 90%(high concentration)
When CR4 exceeds 50% the industry is deemed to be oligopolistic.
-Shortfall= doesn’t show competition among largest companies in industry.
-Alternative is Herfindahl-Herschmann index.

69
Q

Collusion

A

A decision by firms to agree a common set of actions (e.g. charge same prices for product). It therefore means there is less competition between firms in the same industry

70
Q

Cartel

A

A collusive oligopoly which member firms agree to collude formally.

71
Q

Tacit/informal collusion

A

This is a situation in which firms charge the same price without formally agreeing to do so.
It often occurs because less dominant firms in an oligopolistic industry may choose their prices based on the prices of the most dominant firm in there industry (without communication between firms on the matter).
An example would be the UK electricity companies

72
Q

Price discrimination

A

The practice of charging different prices to different consumer groups (for the same product) where the difference in price is not justified by a difference in cost.

73
Q

Business cycle

A

Periodic fluctuations in economic activity measure by changes in real GDP.

74
Q

Deflationary gap

A

When the equilibrium level of output in an economy is below the full level of employment.
a.k.a output gap

75
Q

Inflationary gap

A

When there is an increase in the price level but no increase in real output in an economy.
Keynesian’s believe this occurs when there is an increase in AD but no spare capacity in an economy (the economy is operating at a level of full employment).

76
Q

Theory of Absolute Advantage

A

The theory that a country has an absolute advantage in the production of a good iuf it can produvce iot using fewerr resources than anotyher country.

77
Q

Comparative Advanatge

A

a comparative advantage is where one country produces a good or service at a lower relative opportunity cost than another.

78
Q

Relative opportunity cost

A

The cost of production one good or service in terms of the sacrificed output of another good or service.

79
Q

Protectionism

A

The policy of adopting measures designed to reduce/prevent trade between countries usually by discouraging/preventing spending on imports.

80
Q

Tariff

A

Tax on imports

81
Q

Quota

A

A physical limit on the number or value of goods that can be imported into a country.

82
Q

Exchange rates

A

The value of one currency expressed in the terms of another currency or a basket of currencies.
They can either be floating, fixed or managed.

83
Q

Freely floating exchange rate

A

This is an exchange rate system where the value of the currency is determined by the demand for and supply of the currency on foreign exchange markets.

84
Q

Appreciation

A

Increase in the value of a currency in a floating exchange rate system.

85
Q

Depreciation

A

Decrease in the value of a currency in a floating exchange rate system.

86
Q

Revaluation

A

Increase in the currency value in a fixed exchange rate system

87
Q

Devaluation

A

Decrease in the currency value in a fixed exchange rate system

88
Q

Fixed exchange rate

A

An exchange rate regime where the value of a currency is fixed or pegged to the value of another currency, to the value of a selection of currencies or to the value of a commodity.

89
Q

Balance of payments account

A 
A record of the value of all the transactions (money flows) between the residents of one country and the residents of all other countries in the world over a given time.
Subdivided into 
1. Current Account
2. Capital account
3. Financial account
90
Q

Current Account

A

Measure of the flow of funds from trade in goods and services plus other income flows.
Subdivided into:
1. Balance of trade in goods
2. Balance of trade in services (a.k.a invisible trade balance)
3. Income (net investment income)
4. Current Transfers

91
Q

Balance of trade in goods

A

Component of current account
Measures difference between the revenue received form the export of tangible goods and the expenditure of imports on tangible goods.
NB- exports are credits and imports are debits

92
Q

Balance of trade in services

A

Measures the difference revenue front he exports of services and expenditure on the import of services over a given period of time.
e.g. financial services, tourism

93
Q

Net Investment Income

A

(a.k.a net factor income from abroad)
sum of 2 things:
1. Difference between income earned by residents temporarily working abroad and income paid to non-residents working in domestic country
2. Difference between the interest and profits paid to residents on their overseas investments and the interest and profit earned by foreign firms operating in the domestic country

94
Q

Current transfers

A

(aka Net transfer of money)
Payments made between countries when no goods or services change hands except those that alter a country’s financial assets (e.g. gets annual contributions to int organisations, remittances,private gifts between residents and non-residents)

95
Q

Capital account

A

Small part of balance of payments account, does not have a large effect on the balance of payments does not have a significant effect on the balance.
Has two components:
1. Capital transfers
2.Transactions in non-produced, non-financial assets (sales and purchases of the rights of natural resources [intellectual property rights, ownership of land])

96
Q

Capital transfers

A

Monetary movements through actions that alter the assets or liabilities of the country’s residents e.g. transfer resulting from emigration and immigrate, debt forgiveness, sale of fixed assets.

97
Q

Fixed asset

A

Tangible asset owned by a firm used in production which can be operated for at least a year.

98
Q

Financial account

A 
Measures the net change in foreign ownership of domestic financial assets. Financial accounts surplus indicates foreign ownership of domestic assets is increasing more quickly than domestic ownership of foreign assets.
3 components of financial account:
1. Direct Investment
2. Portfolio investment
3. Reserve assets
99
Q

Direct Investment

A

(Component of financial account)

The purchase of long term assets including property and business. (FDI by MNCs in other countries is recorded here)

100
Q

Portfolio investment

A

(Component of financial account)
Measure of stock and bind purchases that do not lead to a lasting interesting a company.
Includes: gvt bonds and corporate bonds
Also includes savings account deposes made by foreigners and made by domestic agents abroad.

101
Q

Reserve assets

A

(Component of financial account)

Records transactions in gold, foreign currencies and any other commodities held by central bank.

102
Q

Net Errors and admissions

A

Another entry added to the balance of payments that offsets any deficit or surplus on the sum of the three main accounts caused by inaccuracies made in the calculation of the individual components of the balance of payment accounts.

103
Q

Marshall Lerner Condition

A

Condition that tells us how successful a depreciation/ devaluation of a currency’s exchange rate will as a mean to improve a current account deficit (in the balance of payments).
It states that if and only if
PEDexports + PEDimports > 1
than a depreciation/devaluation of the currency will be successful.

104
Q

J-curve

A

A diagrammatical representation of the Marshall-Lerner condition.
It shows what happens to a current account deficit over time when the exchange rate is devalued or depreciated.

105
Q

Economic integration

A

A process whereby countries coordinate and link their economic policies.

106
Q

Bilateral trade agreement

A

An agreement which relates to trade between two counters.
The aim is usually to reduce or remove tariffs and/or quotas that have been placed on traded items between the to countries

107
Q

Multilateral trade agreement

A

An agreement relating to trade between multiple countries.
It usually aims to reduce or remove tariffs and/or quotas that have been placed on traded items between multiple countries

108
Q

PTA

A

(Preferential Trading area)
A trading bloc that gives preferential access to certain products from certain countries.
Usually carried out by reducing (not removing) tariffs.

e.g. between EU and and the (ACP) African, Caribbean and Pacific Group of States [78 countries] enables EU to guarantee supplies of raw materials and enables ACP to access special funds to try to achieve price stability in mining and agriculture markets.

109
Q

FTA

A

(Free trading area)
Agreement made between countries to allow free trading among member countries but able to trade with countries outside the FTA in whichever way they wish.
eg NAFTA coats made in Mexico from imported fabric cannot be exported tariff free to US

110
Q

CU

A

(Customs Union)
Agreement between two or more countries to abolish tariffs on trade between them and to place a common external tariff on trade with non-members.

111
Q

Common market

A

(a.k.a single market)
Deepens economic integration formCU by removing NTBs, promoting the free movement of labour/capital and agreeing common policies in a number of areas

112
Q

NTBs

A

Non-tarrif barriers which may inhibit trade between countries.
(Eliminated in common market but exist in CUs)

113
Q

Economic and monetary union

A

Countries share the same currency and have a common monetary policy (i.e. common central bank) as a result
eg Euro Zone

114
Q

Complete economic integration

A

This would be the final stage of economic integration at which point the individual countries involve would have no control of economic policy. There would exist full monetary union and complete harmonisation of fiscal policy.

115
Q

Trade creation

A

When economic integration leads to high cost domestic products being replaced by imports from a more efficient source within the economically integrated area.

116
Q

Trade diversion

A

When the entry of a country into a customs union leads to the production of a good or service transferring from a low-cost producer to a high-cost producer.
It is therefore a disadvantage of economic integration.
It comes about due to the unions placement of or increase in tariffs on a product that was previously less expensive when a country (before the country entered the union).

117
Q

Terms of trade

A

It is an index that shows the value of a country’s average export prices relative to their average import prices. It is calculated with a simple equation.

118
Q

Plebisch-singer hypothesis

A

Developing countries will suffer a welfare loss as they grow because their TOT will decline.
As developing countries are more dependent on/ specialise in export of commodities ( due to the fact their was a trend in the fall in the prices of commodities and the low YED for primary products and the supply of labour in developing countries is relatively elastic) they will see a fall in the index of their export prices and deterioration in their TOT and a deterioration in the current account balance created by a fall in export revenue.

119
Q

Economic development

A

An improvement in welfare

120
Q

Relative poverty

A

Poverty determined by the relative size of a person’s income to the average earnings. A poverty level will be set as a percentage of these average earnings.

121
Q

Absolute poverty

A

Measured in terms of basic needs for survival . It is therefore the amount a person needs in order to live (World bank has an absolute poverty line of US $1.25)
PPP exchange rates are used to calculate and translate this figure.

122
Q

PPP

A

(Purchasing power parity)
Equates purchasing power of currencies in different currencies
It is calculated by comparing prices of identical goods and services in different currencies.

123
Q

HDI

A

(Human development Index)
-Provided by UNDP
-Consists of: life expectancy at birth, adult literacy, primary/secondary/tertiary school enrolment, GDP per capita at PPP
-Gives value between 0 and 1
BUT
-can mask inequality (because it is an average figure)
-doesn’t take into account all aspects of development

124
Q

GDI

A

(Gender-related development index)

Looks at same indicators as HDI bt takes into account gender inequalities.

125
Q

HPI

A

(Human poverty index)
Looks at the proportion of people who are deprived of opportunity to reach a basic level in each area.
eg % of people not to reach 40.

126
Q

Infrastructure

A

The essential facilities and services such as roads, airports and sewage treatment, water systems, railways, telephone, and other utilities that are necessary for economic activity.

127
Q

Corruption

A

Dishonest exploitation of power for personal gains.

It distorts the wishes of people, makes the legal system less effectively (increasing ht incentive to cat illegally), decreases productive efficiency, bribes lead to higher prices, reduces trust in an economy, often leads to capital flight.

128
Q

ISI

A

(Import substitution industrialisation)
Strategy that aims to build up secondary sector in developing countries until they are able to achieve a size that allows them to gain economies of scale and are able to compete in world markets. this will ultimately improve country’s current account balance and prevent Development being held back by primary sector over-specialisation.

129
Q

Export promotion

A

A strategy to increase development in developing countries based on concentrating, producing and exporting products in which the country has a comparative advantage. It aims to therefore increase exports and thus export revenue to increase real GDP and leading to higher incomes.

130
Q

trade liberalisation

A

Removal or at least reduction of trade barriers that block free trade of goods and services between countries.
WTO attempts to promote t.l. in line with wwashington consensus.

131
Q

Washington Consensus

A 
A mix of policies that emphasises increasing the role of the market forces prescribed to developing countries in the 1980s by the IMF and world bank.
The 10 policies were
1.Lower marginal tax rates and to broaden tax base
2.fiscal discipline
3.redirect spending towards health, edu and infrastructure
4.interest rate liberalisation
5.Privitisation
6.Deregulation
7.Secure property rights
8. A competitive exchange rate
9. Trade liberalisation
10. Liberalisation of FDI in flows
132
Q

FDI

A

Long term investment by private MNCs in countries overseas.
Either consists of MNCs building new facilities or expanding their facilities in foreign countries (greenfield investment) or merging with/acquiring existing firms in foreign countries.

133
Q

Aid

A

Any assistance that is given to a country that would not have been provided through normal market forces.
It can be split into:
-humanitarian aid
-development aid

134
Q

Humanitarian aid

A

Aid given to alleviate short-term suffering its can either be in the form of:

  • food aid
  • medical aid
  • emergency aid (necessity goods)
135
Q

Development aid

A

Aid given in order to alleviate poverty in the long run.
It is categorised using two main criteria:
1. Main objective is the promotion of economic development and welfare
2. Its concessional in character and cottons a grant element of at least 25% (calculated at a rate of discount of 10%)

136
Q

ODA

A

(Official development Assistance)

Aid organised by a official government agency

137
Q

Economic good

A

A good that is scarce and therefore an opportunity cost involved in consuming it (and producing it).

138
Q

Sustainable development

A

Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

139
Q

Price mechanism

A

The process by which prices rise or fall as a result of changes in demand and supply.

140
Q

Monopolistic competition

A

A market structure where, like perfect competition there are many firms and freedom of entry, but where each firm produces a differentiated product and thus they have some control over the price.

141
Q

Elasticity

A

Measures the responsiveness in one variable when another changes

142
Q

Contestable markets

A

A theory that suggests monopolies will be both productively and allocatively efficient if they need to stop competitors entering the market.

Economics HL IB (5 decks)

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