Textbook Glossary Flashcards
Abnormal profit
Arises when total revenue of a firm is greater than its total costs; alternatively when average revenue is greater than average cost, or price is greater than average cost.
absolute advantage
Refers to the ability of a country to produce a good using fewer resources than another country, in other words, the ability of a certain amount of resources in a country to produce more than the same resources can produce in another country.
absolute poverty
The inability of an individual or a family to afford a basic standard of goods and services, where this standard is absolute and unchanging over time; it is defined in relation to a nationally or internationally determined poverty line, which determines the minimum income that can sustain a family in terms of its basic needs.
abuse of market power
Occurs when firms engage in activities that restrict competition.
actual growth (PPC)
In the context of the production possibilities (PPC model), it is growth that occurs due to reduction of unemployment or improvement in efficiency of resource use, resulting in a movement of a point inside the PPC to a point closer to the PPC in the northeast direction.
administrative barriers
Trade protection measures taking the form of administrative procedures that countries may use to prevent the free flow of imports into country; may include customs procedures involving inspections and valuation, controls on packaging, and others. Often considered to be a kind of ‘hidden’ trade protection.
adverse selection
A type of asymmetric information where one party has more information than the other party about the quality of the product being sold. If the seller has more information, such as when selling a used car, the buyer will reduce demand. If the buyer has more information, such as regarding one’s health condition when buying health insurance, the seller will reduce supply. The result in both cases is underallocation of resources to the good or service.
aggregate demand
The total quantity of goods and services that all buyers in an economy (consumers, firms, the government and foreigners) want to buy over a particular time period, at different possible price levels, ceteris paribus
aggregate demand curve
A curve used in macroeconomics showing the relationship between the total amount of real output demanded by the four components (consumers, firms, government, foreigners) and the economy’s price level over a particular time period, ceteris paribus.
aggregate supply
The total quantity of goods and services produced in an economy over a particular time period, at different price levels, ceteris paribus.
allocative efficiency
An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers. The condition for allocative efficiency is given by MSB=MSC(marginal social benefit =marginal social cost or P = MC (price is equal to marginal cost); alternatively it is when social surplus is maximum.
allocative inefficiency
The absence of allocative efficiency; when MSB # MSC (or P + MC).
anchoring
Part of behavioural economics, involve the use of irrelevant information to make decisions, which often occurs due to its being the first piece of information that the consumer happens to come across.
anti-dumping
An argument that justifies trade protection policies: if a country’s trading partner is suspected of practicing dumping (selling a good in international markets at a price below the cost of producing it), then the country should have the right to impose trade protection measures (tariffs or quotas) to limit imports of the dumped good; dumping is illegal according to international trade rules.
appreciation (of a currency)
An increase in the value of a currency in the context of a floating exchange rate system or managed exchange rate system.
appropriate technology
Technologies that are well- suited to a country’s particular economic, geographical, ecological and climate conditions. Often used in connection with labour-abundant developing countries that require labour-intensive (as opposed to capital- intensive) technologies.
asymmetric information
A type of market failure where buyers and sellers do not have equal access to information, usually resulting in an underallocation of resources to the production of goods and services, as parties to a transaction with less access to information try to protect themselves against the consequences of the information asymmetry.
automatic stabilisers (business cycle)
Factors that automatically, without any action by government authorities, work toward stabilising the economy by reducing the short- term fluctuations of the business cycle. Two important automatic stabilisers are progressive income taxes and unemployment benefits.
availability (behavioral economics)
A term from behavioural economics, refers to use of information that is most recently available, which people tend to rely on more heavily, though there is no reason that this information is any more reliable than previously available information.
average costs
Costs per unit of output, or the cost of each unit of output on average. They are calculated by dividing total cost by the number of units of output produced.
average revenue
Revenue per unit of output sold, calculated by dividing total revenue by the number of units of output produced.
average tax rate
Tax paid divided by total income, expressed as a percentage (i.e. tax paid divided by total income multiplied by 100).
balance of payments
A record (usually for a year) of all transactions between the residents of a country and the residents of all other countries, showing all payments received from other countries (credits), and all payments made to other countries (debits).
balance of trade in goods
Part of the balanceof payments, it is the value of exports of goods minus the value of imports of goods over a specific period of time (usually a year).
balance of trade in services
Part of the balance of payments, it is the value of exports of services minus the value of imports of services over a specific period of time (usually a year).
barriers to entry
Anything that can prevent a firm from entering an industry and beginning production, as a result limiting the degree of competition in the industry.
base rate / minimum lending rate
The interest rate charged by the central bank when it lends funds to commercial banks (according to UK terminology); has different names ni different countries, for example refinancing rate in the European Union, discount rate in the United States, base rate in the United Kingdom.
behavioral economics
A relatively new branch of economics strongly influenced mainly by psychology, but also by sociology and neuroscience, based on the idea that human behaviour is far more complex than the assumptions of rational consumer choice.
biases
A terms from behavioural economics, it is a term from psychology that refers to systematic errors in thinking or evaluating; examples include rules of thumb, anchoring, framing, availability.
bilateral trade agreement
Any trade agreement (or agreement to lower international trade barriers) involving two trading partners, usually two countries. It may also involve a trade agreement between one country and another group of countries when this groups acts as a single unit (such as the European
Union). May be contrasted with regional trade agreement and multilateral trade agreement.
bounded rationality
Part of behavioural economics, it is the idea that consumers are rational only within limits, as consumer rationality is limited by consumers’ insufficient information, the costliness of obtaining information, and the limitations of the human mind to process large amounts of information.
bounded self-control
Part of behavioral economics, it si the idea that people in reality exercise self-control only within limits, lacking the self-control required of them to make rational decisions.
bounded selfishness
Part of behavioural economics, ti is the idea that people are selfish only within limits; the assumption of self-interested behaviour of the rational consumer cannot explain the numerous accounts of selfless behaviour.
budget deficit
Referring usually to the government’s budget, ti is the situation where government tax revenues are less than government expenditures over a specific period of time (usually a year).
budget surplus
Referring usually to the government’s
budget, it is the situation where government tax
revenues are greater than government expenditures over a specific period of time (usually a year).
capital flight
The large-scale transfer of privately-owned financial capital (funds) to another country resulting from fear and uncertainty of holding domestic assets.
capital transfers
A part of the capital account of the balance of payments, they include inflows minus
outflows for such things as debt forgiveness, non-life insurance claims, and investment.
business cycle
Fluctuations in the growth of real
output, or real GDP, consisting of alternating periods of expansion (increasing real output) and contraction (decreasing real output).
business confidence
A measure of the degree of optimism among firms in an economy about the future performance of firms and the economy; it is measured on the basis of surveys of business managers. Is an important determinant of the investment component of
aggregate demand.
capital expenditures
With reference to government expenditures, these include public investments, or the production of physical capital, such as building roads, airports, harbours, school buildings, hospitals, etc.
capital gains tax
A tax on profits from financial investments such as stocks and bonds or from buying and selling real estate.
capital
One of the factors of production, which itself has been produced (it does not occur naturally), also known as ‘physical capital’, including machinery, tools, equipment, buildings, etc. Other types of capital include “human capital’, or the skills, abilities, knowledge and levels of good health acquired by people; ‘natural capital’, or everything that traditionally has been included in the factor of production ‘land; and ‘financial capital’, or purchases of financial instruments such as stocks and bonds.
capital account
In the balance of payments, refers
to the inflows minus outflows of funds for (i)capital transfers (including such things as debt forgiveness and non-life insurance claims), and (ii) the purchase or use of non-produced natural resources (such as mineral rights, forestry rights, fishing rights and airspace): it is a relatively unimportant part of the balance ofpayments.
carbon tax
A tax per unit of carbon emissions of fossil fuels, considered by many countries as a policy to deal with the problem of climate change.
central bank
A financial institution responsible
for regulating the country’s financial system and commercial banks, and carrying out monetary policy.
ceteris paribus
A Latin expression meaning ‘other things being equal’; al other variables other than those under investigation are assumed to be constant or unchanging.
change
One of the key concepts of this course; change is important in economics in the study of both economictheorvaswellasinrealworldeventsOneof
the key concepts of this course
choice
One of the key concepts of this course; economics si a study of choices, or selecting among alternatives, due to the scarcity of resources. One of the key concepts of this course
choice architechture
A term in behavioural economics. it is the design of particular ways or environments in which people make choices, based on the idea that consumers make decisions in a particular context and that choices of decision-makers are influenced by how options are presented to them.
circular economy
The idea that goods should be produced in such a way that they can be repaired rather than thrown out: they would be made out of biological materials so that once discarded they can go back to the biosphere and prevent pollution of the planet.
circular flow of income
a flow of income in an economy where the value of output produced is equal to the total income generated in producing that output, which is equal to the expenditures made to purchase that output (see circularflow of income model).
circular flow of income model
Amodel showing the flow of resources from consumers (households) to firms, and the flow of products from firms to consumers, as well as money flows consisting of consumers* income
arising from the sale of their resources and firms’
revenues arising from the sale of their products.
classical economics
Economic ideas of the nineteenth
century; a main feature was the idea that markets working on their own according ot the principles of supply and demand could solve all major economic problem, including unemployment and recession, and allocate resources efficiently.
collective self-governance
A solution to the use of common pool resources where the users take control of the resources and use them in a sustainable way;
runs counter to the idea of the tragedy of the commons. This solution presupposes that the users of the resources can communicate with each other, resulting in rules about the use of the resources along with sanctions for violations of the rules.
collusion
An agreement among firms to fix prices,
or divide the market between them, so as to limit competition and maximise profit; usually involves firms in oligopoly.
collusive oligopoly
Refers to the type of oligopoly where firms agree to restrict output or fix the price, in order to limit competition, increase market power (monopoly power) and increase profits.
command and control
Refers to government laws and regulations that everyone must follow.
commercial bank
A financial institution (which may be private or public) whose main functions are to hold
deposits for their customers (consumers and firms), to make loans to their customers, to transfer funds by cheque (check) from one bank to another, and to buy government bonds; they are regulated by the central bank.
common market
A type of trading bloc in which countries that have formed a customs union proceed
further to eliminate any remaining tariffs ni trade between them; they continue to have a common
external policy (as in a customs union), and in addition agree to eliminate all restrictions on movements of any factors of production within them: factors affected are mainly labour and capital. The best-known common market is the European Economic Community (EEC. precursor of the present European Union).
common pool resources
Resources that are not owned by anyone, do not have a price, and are available for anyone to use without payment (for example, lakes, rivers, fish in the open seas, open grazing land, the ozone layer and many more); their depletion or degradation leads to environmental unsustainability.
community / social surplus
The sum of consumer and producer surplus; it is maximum in a competitive market with no market failures.
comparative advantage
Arises when a country has a lower relative cost, or opportunity cost, ni the production of a good than another country. Forms the basis of the theory of comparative advantage.
competition
Occurs when there are many buyers and sellers acting independently, so that no one has the
ability to influence the price at which the product is sold in the market.
competitive market
A market composed of many
buyers and sellers acting independently, none of whom has any ability to influence the price of the product (i.e. no market power).
competitive market equilibrium
The equilibrium that emerges at the point where the demand curve intersects the supply curve in a free competitive market (where there is no government intervention)
competitive supply
In the case of two goods, refers to production of one or the other by a firm; in other words, the two goods compete with each other for the same resources (for example, if a farmer can produce wheat or corn, producing more of one means producing less of the other).
complementary goods
Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other.
composite indicator
A summary measure of more than one indicator, often used to measure economic development; for example the Human Development Index (HDI), that measures income, education and health indicators.
concentration ratio
A measure of how much an industry’s production is concentrated among the industry’s largest firms; it measures the percentage of output produced by the largest firms in an industry, and is used to provide an indication of the degree of competition or degree of market power in an industry. The higher the ratio, the greater the degree of market power; see also market concentration.
consumer confidence
A measure of the degree of optimism of consumers about their future income and
the future of the economy; it is measured on the basis of surveys of consumers. Is an important determinant of the consumption component of aggregate demand.
nudge / consumer nudge
Part of behavioural economics, it is a method designed to influence consumers’ choices in a
predictable way, without offering financial incentives or imposing sanctions, and without limiting choice.
consumer price index (CPI)
Ameasure of the cost of living for the typical household; ti compares the value of
a basket of goods and services in one year with the value of the same basket in a base year. Inflation (and deflation) are measured as a percentage change in the value of the basket from one year to another.
consumer surplus
Refers to the difference between the highest prices consumers are willing to pay for a good
and the price actually paid. In a diagram, it is shown by the area under the demand curve and above the price paid by consumers up to quantity purchased.
consumption
Spending by households (consumers) on goods and services (excludes spending on housing).
contracting out
A practice often undertaken by the government when it makes an agreement (or contract) with a private firm to carry out an activity that the government was previously doing itself.
contractionary fiscal policy
Refers to fiscal policy usually pursued in an inflation, involving a decrease in government spending or an increase in taxes (or both). May be contrasted with expansionary fiscal policy.
expansionary monetary policy
Refers to monetary policy usually pursued in an inflation, involving an increase in interest rates, intended to lower investment and consumption spending. May be contrasted with expansionary monetary policy.
corporate income tax
Tax on the profits of corporations, which are businesses (firms) that have formed a legal body called a ‘corporation’ that si legally separate from its owners.
corporate indebtedness
The degree to which corporations have debts.
corporate social responsibility
The practice of some corporations to avoid socially undesirable activities, such as polluting activities, employing children, or employing workers under unhealthy conditions;
as well as undertaking socially desirable activities, such as support for human rights and donations to charities.
cost-push inflation
A type of inflation caused by a fall in aggregate supply, usually resulting from increases in costs of production (for example, wages or prices of other inputs), shown in the AD-AS model as a leftward shifts of the AS curve.
costs of production
Payments by firms to obtain and use factors of production in their production process.
credit items
In the balance of payments, refer to payments received from other countries, entering the balance of payments accounts with a plus sign; they represent an inflow of foreign exchange into a country.
credit rating
An assessment of the ability of a borrower to pay back loans, usually carried out by agencies that are qualified to do this; a high credit rating received by a government means that it is expected to be able to pay back its loans in full and on time without difficulties.
crowding out
Refers to the possible impacts on real GDP of increased government spending (expansionary fiscal policy) financed by borrowing; if increased government borrowing results in a higher rate of interest, this could reduce private investment spending, thus reversing the impacts of the government’s expansionary fiscal policy.
current account balance
The sum of credits plus debits in the current account of the balance of payments.
credit account deficit
Occurs when the current account balance has a negative value, meaning that debits are larger than credits (there is an excess of debits).
current account
In the balance of payments, this includes the balance of trade (recording exports
minus imports of goods) plus the balance on services (recording exports of services minus imports of services), plus inflows minus outflows of income and current transfers. The most important part of the current account in most countries is the balance of trade.
current account surplus
Occurs when the current account balance has a positive value, meaning that credits are larger than debits (there si an excess of credits).
current expenditures
In the government budget, refers to government spending on day-to-day items that are recurring (i.e. repeat themselves) and items that are used up or ‘consumed’ as a good or service is provided. Include wages and salaries (for all government employees; spending for supplies and equipment for the day-to-day operation of government activities (for example, school supplies and medical supplies for public schools and public health care services); provision of subsidies; and interest payments on government loans.
current transfers
An item in the current account of the balance of payments, refers to inflows and outflows of funds for items including gifts, foreign aid and pensions.
customs union
A type of trading bloc, consisting of a group of countries that fulfil the requirements
of a free trade area (elimination of trade barriers between members) and in addition adopt a common policy towards all non-member countries; members of a customs union also act as a group in all trade negotiations and agreements with non-members.
cyclical / demand-deficient unemployment
A type of unemployment that occurs during the downturns of the business cycle, when the economy is in a recessionary gap; the downturn is seen as arising from declining or low aggregate demand, and therefore is also known as ‘demand-deficient’ unemployment.
debit items
In the balance of payments, refer to payments made to other countries, entering the balance of payments accounts with a minus sign; they represent an outflow of foreign exchange from a country.
debt relief
Refers to the cancellation or forgiveness of al or a portion of a country’s debt.
debt servicing
The payments that must be made in order to repay the principal (the amount of a loan) plus interest.
default choice
A term in behavioural economics: it is a choice that is made by default, which means doing the option that results when one does not do anything.
deferred consumption
Occurs when consumers postpone spending, such as if they expect the price level to fall.
deficit
In general, this is the deficiency of something compared with something else. (i) In the balance of payments, a ‘deficit’ in an account occurs when the credits (inflows of money from abroad are smaller than the debits (outflows of money to other countries); for example, a deficit in the balance of trade means that the value of exports (credits) is smaller than the value of imports (debits). (ii) In the case of the government budget, a ‘deficit’ occurs when government revenues are smaller than government expenditures.
deflation
A continuing (or sustained) decrease in the general price level.
deflationary / recessionary gap
A situation where real GDP is less than potential GDP, and unemployment is greater than the natural rate of unemployment; it arises when the AD curve intersects the S R A S curve at a lower level of real GDP than potential GDP. Also known as ‘deflationary gap’.
demand
Indicates the various quantities of a good that consumers (or a consumer) are willing and able to buy at different possible prices during a particular time period, ceteris paribus (all other things being equal).
demand curve
A curve showing the relationship between the price of a good and the quantity of the
good demanded, ceteris paribus (all other things equal); see demand.
demand management
Policies that focus on the demand side of the economy, attempting to influence
aggregate demand to achieve the goals of price stability, full employment and economic growth.
demand-pull inflation
A type of inflation caused by an increase in aggregate demand, shown in the AD-AS model as a rightward shift in the AD curve.
demand-side policies
Policies that attempt to change aggregate demand (shift the aggregate demand curve
in the AD-AS model) in order to achieve the goals of price stability, full employment and economic growth, and minimise the severity of the business cycle. In the event of an inflationary or recessionary (deflationary) gap, they try to bring aggregate demand to the full employment level of real GDP, or potential GDP. They can also impact on economic growth by contributing to increases in potential GDP. Consists of fiscal and monetary policies. To be contrasted with supply-side policies.
demerit goods
Goods that are considered to be undesirable for consumers and are overprovided by
the market. Reasons for overprovision are usually that the goods have negative consumption externalities, in addition there may be consumer ignorance about the harmful effects.
depreciation (of a currency)
Refers to a decrease in the value of a currency in the context of a floating exchange rate system or managed exchange rate system (to be compared with devaluation, which is a decrease in currency value in a fixed or pegged exchange rate system).
deregulation
Policies involving the elimination or reduction of government regulation of private sector
activities, based on the argument that government regulation stifles competition and increases efficiency.
determinants of AD
Factors that cause shifts of the aggregate demand curve; include factors that influence consumption spending (C), investment spending (1), government spending (G) and net exports(X- M).
devaluation (of a currency)
Refers to a decrease in the value of a currency in the context of a fixed or pegged exchange rate system (to be compared with depreciation, which is a decrease in currency value in the context of a floating or managed exchange rate system).
development aid
Foreign aid intended to help economically less developed countries with their growth and development efforts; to be contrasted with humanitarian aid.
direct taxs
Taxes paid directly to the government tax authorities by the taxpayer, including personal income taxes, corporate income taxes and wealth taxes.
disinflation
Refers to a fall in the rate of inflation; it involves a positive rate of inflation and should be contrasted with deflation.
distribution of income
Concerned with how much of an economy’s total income different individuals or different groups in the population receive, and involves answering the for whom basic economic question.
diversification
Generally refers to change involving greater variety, and is used to refer to increasing the variety of goods and services produced and/or exported by a country; it si the opposite of specialization.
economic development
Broad-based rises in standards of living and well-being of a population, particularly in developing countries. It involves increasing income levels and reducing poverty, reducing income inequalities and unemployment, and increasing provision of and access to basic goods and services such as food and shelter, sanitation, education and health care services.
economic growth
Increases in total real output produced by an economy (real GDP over time; may also refer to increases in real output (real GDP) per capita (or per person).
equality
The state of being equal with respect to something; income equality means everyone receives the same income. One of the key concepts of this course
economic well-being
One of the key concepts of this course; refers to levels of prosperity, economic satisfaction and standards of living among the members of a society. One of the key concepts of this course
less economically developed countries (LEDCs)
Developing countries with very low incomes that have low levels of human capital and a high degree of economic vulnerability; they are challenged in achieving sustainable development.
economies of scale
Decreases in the average costs of production that occur as a firm increases its output by varying all its inputs (i.e. in the long run); explain the
downward-sloping portion of the long-run average total cost curve: as a firm increases its size, the costs per unit of output fall.
equilibrium
A state of balance such that there is
no tendency to change
economic inequality
The degree to which people in a population differ in their ability to satisfy their economic needs; economists focus on inequalities that result mainly from differences in income and wealth.
empirical evidence
Real-world information, observations and data that we acquire through our senses and experience.
efficiency
One of the key concepts of this course; involves making the best possible use of scarce resources to avoid waste; may refer to producing at the lowest possible cost, or producing what consumers mostly want
economics
The study of choices leading to the best possible use of scarce resources in order to best satisfy unlimited human needs and wants.
entrepreneurship
One of the factors of production, involving a special human skill that includes the ability to innovate by developing new ways of doing things,
to take business risks and to seek new opportunities for opening and running a business. Entrepreneurship organises the other three factors of production (land, labour, and capital) and takes on the risks of success or failure of a business.
economic integration
Refers to economic interdependence between countries, usually achieved by agreement between countries to reduce or eliminate trade and other barriers between them. There are various degrees of integration, depending on the type of agreement and the degree to which barriers between countries are removed; see trading bloc, free trade area, customs union, common market, monetary union.
elastic
Refers to a high responsiveness of a variable (such as quantity demanded to a change in another variable (such as price or income); see various elasticities.
Engel curve
A curve that shows the relationship between consumer income and demand for a product; indicates whether a good is normal or inferior.
elasticity
In general, this is a measure of the responsiveness or sensitivity of a variable to changes in any of the variable’s determinants. See specific elasticities: price elasticity of demand, income elasticity of demand, price elasticity of supply.
equilibrium level of output
The level of output (real
GDP) where the aggregate demand curve intersects the aggregate supply curve (also known as the ‘equilibrium level of income’). Note the distinction between short- run equilibrium level of output and long-run equilibrium level of output.
equilibrium price
The price determined in a market when quantity demanded is equal to quantity supplied, and there is no tendency for the price to change; it is the price that prevails when there is market equilibrium.
equilibrium quantity
The quantity that is bought and sold when a market is in equilibrium, i.e. when quantity
demanded is equal to quantity supplied.
equity
one of the key concepts of this course; is the condition of being fair or just; should be contrasted with the term ‘equality’. Often used ni connection with income distribution, in which case it is usually interpreted to mean income equality (though this is only one possible interpretation of equity).
excess demand
In the context of demand and supply, occurs when the quantity of a good demanded is greater than the quantity supplied, leading to a shortage of the good.
excess supply
In the context of demand and supply, occurs when the quantity of a good demanded is
smaller than the quantity supplied, leading to a surplus.
exchange rate
The rate at which one currency can be exchanged for another, or the number of units of foreign currency that correspond to the domestic currency; can be thought of as the ‘price of a currency, which is expressed in terms of another currency.
excludable
A characteristic of goods according to which it is possible to exclude people from using the good by charging a price for it; if someone is unwilling or unable to pay the price they will be excluded from using it. Most goods are excludable.
expansionary fiscal policy
Refers to fiscal policy usually pursued in a recession, involving an increase in government spending or a decrease in taxes (or both). May be contrasted with contractionary fiscal policy
expansionary monetary policy
Refers to monetary policy usually pursued in a recession, involving a decrease in interest rates, intended to increase investment and consumption spending. May be contrasted with contractionary monetary policy.
expenditure approach
A method used to measure the value of aggregate output of an economy, which adds up all spending on final goods and services produced within a country within a given time period (C + I + G + (X - M). As suggested by the circular flow model, it is equivalent to measurement by the output approach and the income approach.
expenditure reducing policies
Policies that involve reducing expenditures in the domestic economy so as to bring about a decrease in imports in order to correct a current account deficit; they include contractionary fiscal and monetary policies.
expenditure switching policies
Policies that involve switching consumption away from imported goods and towards domestically produced goods, in order to correct a current account deficit; include trade protection policies and depreciation.
export promotion
Refers to a growth and trade strategy where a country attempts to achieve economic growth by expanding its exports. As a trade strategy, it
looks towards foreign markets and is based on stronger links between the domestic and global economies.
export subsidy
A payment by the government to a producer or exporter per unit of the subsidised good, where the subsidy is paid for each unit of the good that is exported.
exports
Goods or services that are sold to other countries.
external balance
A situation where the revenues from exports of goods and services are roughly equal to the expenditures on imports of goods and services over an extended period of time
externality
Occurs when the actions of consumers or producers give rise to positive or negative side-effects on other people who are not part of these actions, and whose interests are not taken into consideration. Positive externalities give rise to positive side-effects; negative externalities to negative side-effects.
Factors of production
All resources, or inputs (land, labour, capital, entrepreneurship) used to produce goods and services.
financial account
In the balance of payments, refers to inflows minus outflows of funds due to foreign direct investment, portfolio investment, changes in reserve assets and changes in official borrowing.
firm
A business involved in production of goods or services; a key decision-maker in a market economy.
fiscal policy
Manipulations by the government of its own expenditures and taxes in order to influence the level of aggregate demand; it is a type of demand-side policy or demand management.
fixed exchange rate
Refers to an exchange rate that is fixed by the central bank of a country, and is not permitted to change in response to changes in currency supply and demand; requires constant intervention by. the central bank or government.
fixed exchange rate system
An exchange rate system where exchange rates are fixed by the central bank of each country.
floating exchange rate
An exchange rate determined entirely by market forces, or the forces of supply and demand. There is no government intervention in the foreign exchange market to influence the value of the exchange rate.
floating exchange rate system
An exchange rate system where exchange rates are determined entirely by market forces.
for whom to produce
One of the three basic economic questions; refers to the choice that must be made in response to the question of income or wealth distribution among a population.
foreign aid
The transfer of funds or goods and services to developing countries with the main objective
to bring about improvements in their economic, social or political conditions. Such transfers must
be ‘concessional’ (loans must be on more favourable terms than a bank would give) and ‘non-commercial’ (must not be involved with buying and selling activities concerned with making a profit).
foreign direct investment (FDI)
Refers to investment by firms based in one country (the home country in productive activities ni another country (the host country) with control of at least 10 per cent of the firm in the host country. Firms that undertake FDI are called multinational corporations.
foreign exchang
Refers to foreign national currencies, i.e. for any country, ti refers to currencies other than its own.
framing
A term from behavioural economics, it deals with how choices are presented to decision-makers; for example, consumers might be willing to pay a higher price for a faded pair of jeans in a boutique than for an identical pair of jeans in a discount store.
free entry
The condition in which firms face no barriers to entering an industry, characteristic of
the market structures of perfect competition and monopolistic competition.
free good
Any good that is not scarce, therefore has a zero opportunity cost.
free market economy
An ‘ideal type of economy based on the market approach to making economic decisions; involve private sector ownership and decision-making, and price rationing; to be contrasted with a planned economy.
free rider problem
Occurs when people can enjoy the use of a good without paying for it, and arises from non-excludability: people cannot be excluded from using the good, because it is not possible to charge a price. Is often associated with public goods, which are a type of market failure: due to the free rider problem, private firms fail to produce these goods.
free trade
The absence of government intervention of any kind in international trade, so that trade takes place without any restrictions (or barriers) between individuals or firms in different countries.
free trade area (agreement)
A type of trading bloc, consisting of a group of countries that agree to eliminate trade barriers between themselves; it is the most common type of integration area, and involves a lower degree of economic integration than a customs union or common market. Each member country retains the right to pursue its own trade policy towards non-member countries. An example is NAFTA (North American Free Trade Agreement).
frictional unemployment
A type of unemployment that occurs when workers are between jobs; workers may leave their job because they have been fired, or because their employer went out of business, or because they are in search of a better job, or they may be waiting to begin a new job; tends to be short term.
full employment
(i) In the production possibilities model, refers to maximum use of all resources in the economy to produce the maximum quantity of goods and services that the economy is capable of producing (production possibilities), implying zero unemployment. (in) In the AD-AS model, refers to the natural rate of unemployment, or unemployment of labour that prevails when the economy is producing potential output, or real GDP, determined by the position of the LRAS curve (when the economy is in long equilibrium).
full employment level of output (real GDP)
The level of output (or real GDP) at which unemployment is equal to the natural rate of unemployment: the level of output (real GDP) where there is no deflationary or recessionary gap. Also known as potential output
(potential GDP).
gains from trade
Refer to the gains from international trade that arise when countries specialise and trade according to their absolute or comparative advantage; may be in terms of increased output or increased consumer or producer surplus.
game theory
A mathematical technique analysing the behaviour of decision-makers who are dependent on each other, and who use strategic behaviour as they try to anticipate the behaviour of their rivals. Has become an important tool in microeconomics, often used to analyse the behaviour of oligopolistic firms: is based heavily on the work of American mathematician and economist John Nash.
GDP per capita
Gross domestic product divided by the number of people in the population; is an indicator of the amount of domestic output per person in the population.
Gender Inequality Index (GII)
A composite indicator that measures inequalities between the genders in three dimensions: reproductive health, empowerment, and labor market participation.
Gini coefficient
A summary measure of the information contained in the Lorenz curve of an economy, defined as the area between the diagonal and the Lorenz curve, divided by the entire area under the diagonal. The Gini coefficient has a value between 0 and 1; the larger the Gini coefficient, and the closer it is to ,1 the greater is the income inequality.
globalisation
Refers to economic integration on a global scale, involving increasing interconnectedness throughout the world in many areas (trade, finance, investment, people, technology, ideas, knowledge, communications and culture).
GNI per capita
Gross national income divided by the
number of people in the population; is an indicator of the amount of income in an economy per person in the population.
governance
Refers to the way of governing, and the exercise of power in the management of an economy’s economic and social resources, in order to achieve particular objectives such as economic growth and development.
government debt
Refers to the government’s accumulation of budget deficits minus budget surpluses; is the total amount owed by the government to all creditors (lenders); also known as national debt.
government intervention
The practice of government to intervene (interfere) in markets, preventing the free functioning of the market, usually for the purpose of achieving particular economic or social objectives.
gross domestic product (GDP)
A measure of the value of aggregate output of an economy, it is the market value of all final goods and services produced within a country during a given time period (usually a year).
gross national income (GNI)
A measure of the total income received by the residents of a country, equal to the value of all final goods and services produced by the factors of production supplied by the country’s residents regardless of where the factors are located; GNI = GDP plus income from abroad minus income sent abroad.
growth in production possibilities
An outward shift in the PPC caused by a decrease in unemployment, or improvement in efficiency of production, or both, leading to more output produced.
growth maximization
One possible goal of firms, involving the objective to make the growth of the firm as high as possible.
Happiness Index
An alternative method to standard national income accounting that measures economic well-being using numerous quality of life dimensions in addition to real GDP per capita.
Happy Planet Index
An alternative method to standard national income accounting that takes into account environmental sustainability and inequalities. It is a measure of sustainable well-being based on four dimensions, life expectancy, well-being, inequality of outcomes, ecological footprint.
