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.
homogeneous product
A product that is completely standardized and not differentiated; is characteristic of products in perfect competition.
household
A consumer or group of consumers (such as a family) that buys goods and services for its own use; a key decision-maker in a market economy.
household indebtedness
The degree to which households have debts.
how to produce
One of the three basic economic questions; refers to the choice that must be made in response to the question of what combinations of resources and what types of technologies to use in order to produce goods and services.
human capital
The skills, abilities and knowledge acquired by people, as well as good levels of health, all of which make them more productive; considered to be a kind of ‘capital’ because it provides a stream of future benefits by increasing the amount of output that can be produced in the future.
Human Development Index (HDI)
A composite indicator of development which includes indicators that measure three dimensions of development: income per capita, levels of health and educational attainment; is considered to be a better indicator of development than single indicators such as GNI per capita.
humanitarian aid
Foreign aid extended in regions where there are emergencies caused by violent conflicts or natural disasters such as floods, earthquakes and tsunamis, intended to save lives, ensure access to basic necessities such as food, water, shelter and health care, and provide assistance with reconstruction.
hypothesis
An educated guess, usually about a cause- and-effect relationship about an event, usually used
to make predictions of real-world events by use of empirical evidence; hypotheses that have not been refuted (rejected) by the evidence may be used to build theories.
imperfect competition
Refers to the situation where firms face some degree of competition (therefore they are not monopolies) but also have some degree of market power (therefore they are not perfectly competitive; include monopolistic competition and oligopoly.
import substitution
Agrowth and trade strategy where a country begins to manufacture simple consumer goods oriented towards the domestic market (such as shoes, textiles, beverages, electrical appliances) in order to promote its domestic industry; it presupposes the imposition of protective measures (tariffs, quotas, etc.) that will prevent the entry of imports that compete with domestic producers.
imports
Goods or services produced in other countries that are bought and brought into the domestic
economy.
incentive-related policies
Policies involving reduction of various types of taxes (such as income taxes and business taxes), ni the expectation that the tax cuts will change the incentives faced by tax-payers; for example, cuts in income taxes may encourage the desire to work; cuts in business taxes may encourage investment. Are a type of market-based supply-side policy.
income
(i) the money people receive from their employment as well as other sources including interest from savings accounts and holdings of bonds, rents from property, pensions, etc; (ii) in the current account of the balance of payments, refers to inflows of all income (mainly interest and profits) earned abroad minus the same income factors that are sent abroad.
income approach
A method used to measure the value of aggregate output of an economy, which adds up all income earned by the factors of production in
the course of producing all goods and services within a country in a given time period. As suggested by the circular flow model, it is equivalent to measurement by the expenditure approach and the output approach.
income effect
Part of an explanation of the law of
demand; as price falls real income increases causing the consumer to buy more of the good (the other part is the substitution effect).
income elastic demand
Relatively high responsiveness of demand to changes in income; YED (income elasticity of demand) >1.
income elasticity of demand
A measure of the responsiveness of demand to changes in income; measured by the percentage change in quantity demanded divided by the percentage change in price.
income inelastic demand
Relatively low responsiveness of demand to changes ni income; YED (income elasticity of demand) < 1.
income taxes
Taxes paid by households on their incomes
inelastic
Refers to a low responsiveness of a variable (such as quantity demanded) to a change in another variable (such as price or income: see various elasticities.
inflation
A continuing (or sustained increase in the general price level.
infant industry
A new domestic industry that has not had time to establish itself and achieve efficiencies in production, and may therefore be unable to compete with more ‘mature’ competitor firms from abroad; considered to be one of the strongest arguments in favour of trade protection in developing countries. Also known as sunrise industry.
industrial policies
Interventionist supply-side policies designed to support the growth of the industrial sector of an economy; may include support for small- and medium-sized firms or support for ‘infant industries’ through tax cuts, grants, low interest loans and other measures, as well as investment in human capital, research and development, or infrastructure development in support of industry.
indirect taxes
Taxes levied on spending to buy goods
and services, called indirect because, whereas payment of some or all of the tax by the consumer si involved, they are paid to the government authorities by the suppliers (firms), that is, indirectly.
inferior good
A good the demand for which varies negatively (or indirectly) with income; this means that as income increases, the demand for the good decreases.
inequality
The absence of equality
inflation targeting
A type of monetary policy carried out by some central banks that focuses on achieving a particular inflation target, rather than focusing on
the goals of low and stable rate of inflation and low unemployment.
inflationary gap
A situation where real GDP is greater than potential GDP, and unemployment si lower than
the natural rate of unemployment; it arises when the AD curve intersects the SRAS curve at a higher level of real GDP than potential GDP.
informal economy
That part of an economy that lies outside of the formal economy, consisting of economic activities that are unregistered and legally unregulated; ti exists everywhere in the world but in developing countries it is often a very important part of the economy, because it offers work and income to substantial portions of the population who have no other opportunities to work in view of lack of employment opportunities in the formal economy.
infrastructure
Numerous types of physical capital resulting from investments, making major contributions to economic growth and development by lowering costs of production and increasing productivity; include power, telecommunications, piped water supplies, sanitation, roads, major dam and canal works for irrigation and drainage, urban transport, ports and airports.
injections
In the circular flow of income model, refer to the entry into income flow of funds corresponding to investment, government spending or exports.
Interdependence
One of the key concepts of this course; refers to the idea that economic decision-makers interact with and depend on each other; arises from the fact that no one is self-sufficient. One of the key concepts of this course
interest
(i) A payment, per unit of time, for the use of borrowed money (borrowers pay interest, lenders receive interest). (ii) A payment, per unit of time, to owners of capital resources.
interest rate
Interest expressed as a percentage; in the case of borrowed money, it is interest as a percentage
of the amount borrowed. Changes in interest rates form the basis of monetary policy.
International monetary fund (IMF)
An international financial institution composed of 189 member countries, whose purpose is to make short-term loans to governments on commercial terms (i.e. non-concessional) in order to stabilise exchange rates, alleviate balance of payments difficulties and help countries meet their foreign debt obligations.
intervention
One of the key concepts of this course; typically refers to government intervention, meaning that the government becomes involved with the workings of markets.
interventionist policy
Any policy based on government intervention in the market: to be contrasted with market-oriented policy. See also government intervention.
interventionist supply-side policy
Any policy based on government intervention in the market intended to affect the supply-side of the economy, usually to shift the LAS curve to the right, increase potential output and achieve long-term economic growth; see industrial policy or investments in education or infrastructure as examples. May be contrasted with market-based supply side policy.
investment
Includes spending by firms or the government on capital goods(i.e. buildings, machinery, equipment, etc.) and all spending on new construction (housing and other buildings).
J-curve effect
A curve that plots the balance of trade (exports minus imports) on the vertical axis and time on the horizontal axis, showing that a country with a devaluing/depreciating currency may see a worsening in its trade balance (an increase in a trade deficit) in the period immediately following the devaluation or depreciation, while in a later period the trade deficit will begin to shrink provided the Marshall-Lerner condition holds.
joint supply
Refers to production of two or more goods that are derived from a single product, so that
it is not possible to produce more of one without producing more of the other (for example, butter and skimmed milk are both produced from whole milk, and producing more of one means producing more of the other as well).
Keynesian aggregate supply curve
An aggregate supply curve that has a flat (horizontal) section, an upward sloping section and a vertical section. It shows the relationship between real GDP and the price level on the assumption that prices and wages are inflexible downward. Changes in the price level and/or real GDP depend on the level of aggregate demand and where the economy is producing relative to full capacity output.
Keynesian multiplier
The ratio of real GDP divided by a change in any of the components of aggregate spending (consumption C, investment I, government spending. G, or net exports X–M).
Alternatively, it is 1/(1-MPC), where MPC is the marginal propensity to consume. The value of this ratio is usually greater than one because of a multiplied effect of an initial change in a component of aggregate spending on the final value of real output.
Keynesian revolution
A school of thought based on the contributions of John Maynard Keynes, according to which government intervention in the economy is essential for the management of aggregate demand in order to ensure that full employment will be achieved.
labour
A factor of production, which includes the physical and mental effort that people contribute to the production of goods and services.
labour market flexibility
Refers to the operation of market forces (supply and demand) in the labour market. May be achieved by reducing or eliminating interference with market forces (for example, reducing or eliminating minimum wages and labour union activities, reducing job security, etc.).
labour union
an association of workers in a particular profession, whose objective is to improve working conditions and defend rights of workers, representing its members in negotiations with employers.
laissez-faire
A French expression meaning let it do, referring to a free market economy without government intervention, such as was advocated by Adam Smith. According to this idea a free market economy left on its own will be highly efficient.
land
A factor of production which includes all natural resources: land and agricultural land, as well
as everything that is under or above the land, such as minerals, oil reserves, underground water, forests, rivers, and lakes. Natural resources are also called ‘gifts of nature’ or ‘natural capital’.
land rights
A group of property rights that refer to
the rights and rules to possess, occupy and use land; the term land here refers to natural resources including the land itself, trees, minerals, pasture, water.
law of demand
A law stating that there is a negative
relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of the good demanded falls (and vice versa).
law of diminishing marginal returns
A law stating that as more and more units of a variable input (such as labour) are added to one or more fixed inputs (such as land), the marginal product of the variable input at first increases, but there comes a point when the marginal product of the variable input begins to decrease; underlies the firms’ supply curve.
law of diminishing marginal utility
A law stating that as consumption of a good increases, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed, therefore consumers will buy more only if price falls; this underlies the law of demand.
law of supply
A law stating that there is a positive relationship between the price of a good and quantity of the good supplied, over a particular time period, ceteris paribus: as the price of the good increases, the quantity of the good supplied also increases (and vice versa).
leakages
In the circular flow of income model, refers to the withdrawal from the income flow of funds
corresponding to savings, taxes or imports.
long run (in macroeconomics)
In macroeconomics, ti is the period of time when prices of resources (especially wages) change along with changes ni the price level.
long run (in microeconomics)
In microeconomics, it is a time period in which all inputs can be changed; there are no fixed inputs.
long-run aggregate supply (LRAS) curve
A curve showing the relationship between real GDP produced and the price level when wages (and other resource prices) change to reflect changes in the price level, ceteris paribus. The LRAS curve is vertical at the full employment level of GDP, indicating that in the long-run output is independent of the price level.
long-run aggregate supply
The total quantity of goods and services (real output or real GDP) produced in an economy in the long run (when wages and other resource prices change to reflect changes in the price level), ceteris paribus.
long-run equilibrium level of output
The level of output (real GDP) that results when the economy is in long-run equilibrium, occurring when the aggregate demand and short-run aggregate supply curves intersect at a point on the long-run aggregate supply curve; occurs where the vertical L A S curve intersects the horizontal axis, known as potential output.
long-term growth
Growth of an economy (growth in real output) over long periods of time; shown by rightward shifts of the long-run aggregate supply (LRAS) curve corresponding to the long-term growth trend of the business cycle; or outward shifts of the production possibilities curve (PPC).
long-term growth rate
In the business cycle diagram, refers to the line that runs through the business cycle curve, representing average growth over long periods of time; shows how output grows over time when cyclical fluctuations are ironed out. The output represented by the long-term growth trend is known as potential output.
Lorenz curve
A curve illustrating the degree of equality (or inequality) of income (or wealth) distribution in an economy. It plots the cumulative percentage of income received by cumulative shares of the population. The closer the Lorenz curve is to the diagonal line of perfect equality, the more equal the income distribution.
loss
Arises when total costs of a firm are greater than its total revenue; alternatively when average cost is greater than average revenue, or average cost is greater than price; it is negative profit.
luxury goods
Goods that are not necessary or essential; they have a price elastic demand (PED>1) and income elastic demand (YED>1). To be contrasted with necessities.
macroeconomic equilibrium
In macroeconomics occurs where aggregate demand interests aggregate supply, determining the price level and level of real output (real GDP); see short-run and long-run equilibrium level of output.
macroeconomics
The branch of economics that examines the economy as a whole by use of aggregates, which are wholes or collections of many individual units, such as the sum of consumer behaviours and the sum of firm behaviours, total income and output of the entire economy as well as total employment and the general price level.
managed exchange rates
Exchange rates that are for the most part free to float to their market levels (i.e. their equilibrium levels) over long periods of time; however, central banks periodically intervene in order to stabilise them over the short term.
mandated choice
A term from behavioural economics. It is a choice between alternatives that si made mandatory (compulsory) by the government or other authority; required choice.
manufactures products
goods produced by labour usually working together with capital as well as raw materials, such as for example cars, computers, and televisions.
marginal benefit
The extra or additional benefit received from consuming one more unit of a good.
marginal cost
The extra or additional cost of producing one more unit of output.
marginal private benefits (MPB)
The extra or additional benefit received by consumers when they consume one more unit of a good.
marginal private costs (MPC)
The extra or additional costs to producers of producing one more unit of a good.
marginal product
the extra or additional output that results from one additional unit of a variable input (such as labour).
marginal propensity to consume (MPC)
The fraction of additional income spent on domestically produced goods and services. Determines the size of the Keynesian multiplier; the larger the MPC, the larger the multiplier.
marginal propensity to import (MPM)
The fraction of additional income spent on imports. The larger the MPM, the smaller the Keynesian multiplier.
marginal propensity to save (MPS)
The fraction of additional income that is saved. The larger the MPS, the smaller the Keynesian multiplier.
marginal propensity to tax (MPT)
The fraction of additional income that is paid as taxes. The larger the MPT, the smaller the Keynesian multiplier.
marginal revenue
The additional revenue arising from the sale of an additional unit of output.
marginal social benefits (MSB)
The extra or additional benefits to society of consuming one more unit of a good; are equal to marginal private benefits (MPB) when there are no consumption externalities.
marginal social costs (MSC)
The extra or additional costs to society of producing one more unit of a good; are equal to marginal private costs (MPC) when there are no production externalities.
marginal tax rate
The tax rate paid on additional income; refers to the tax rate that applies to the highest tax bracket of an individual’s personal income.
marginal utility
The extra or additional utility received from consuming one more unit of a good.
market
Any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out an exchange.
market concentration
The degree to which a market is dominated by a small number of large firms. Th smaller the number of firms controlling a market, the greater the market concentration. It is measured by the concentration ratio.
market demand
Refers to the sum of all individual consumer demands for a good or service.
market equilibrium
Occurs where quantity demanded is equal to quantity supplied, and there is no tendency for the price or quantity to change.
market failure
Occurs when the market fails to allocate resources efficiently, or to provide the quantity
and combination of goods and services mostly wanted by society. Market failure results in allocative inefficiency, where too much or too little of goods or services are produced and consumed from the point of view of what is socially most desirable.
market power
Refers to the control that a seller may
have over the price of the product it sells: it is the ability of a firm to charge a price greater than marginal cost, or P>MC.
market share
Refers to the percentage of total sales in a market that is earned by a single firm; it may be a goal of some firms to maximise market share, or to make it as large as possible.
market supply
Refers to the sum of all individual firm supplies of a good or service.
market-based supply-side policy
Any policy based on promoting well-functioning, competitive markets in order to influence the supply-side of the economy, usually to shift the LRAS curve to the right, increase potential output and achieve long-term economic growth; include labour market reforms, competition policies and incentive-related policies.
market-oriented policy
A policy in which government intervention is limited, economic decisions are made mainly by the private decision-makers (firms and consumers) and the market has significant freedom to determine resource allocation.
Marshall-Lerner condition
A condition stating when depreciation or devaluation of a country’s currency will lead to an improvement in that country’s balance of trade: the sum of the price elasticities of demand for imports and exports must be greater than I for the trade balance to improve (for a trade deficit to become smaller). This usually holds over the longer term, but not in the shorter term (see J-curve).
merit goods
Goods that are held to be desirable for
consumers, but which are underprovided by the market. Reasons for underprovision are usually that the goods have positive consumption externalities; in addition, consumers with low incomes may be unable afford them (and so do not demand them), or there is consumer ignorance about the benefits of the goods.
microeconomics
The branch of economics that examines the behaviour of individual decision-making units, consumers and firms; is concerned with consumer and firm behaviour and how their interactions in markets determine prices in goods markets and resource markets.
microfinance
Programmes to provide credit (loans) in small amounts to people who do not ordinarily have access to credit due to lack of collateral; also known as microcredit. These are very important in developing countries as a strategy to help poor people climb out of poverty.
minimum income standards
A method to measure poverty consisting of ongoing research on what people in a population believe are the essentials for a minimum acceptable standard of living that allows people to participate in society; is used to create a basket of goods needed to achieve this minimum.
minimum reserve requirements
A legally determined fraction of total deposits of commercial banks that must be kept within their vaults, which cannot be lent out.
minimum wage
A minimum price of labour (the
‘wage) set yb governments in the labour-market, in order to ensure that low-skilled workers can earn a wage high enough to secure them with access to basic goods and services. It is a type of price floor.
mixed economy
An economy that combines the command approach (government decision-making) with the market approach (private sector decision-making) to resource ownership, decision-making, and rationing.
mobile banking
Refers to the use of mobile phones and the internet to pay bills and to receive or pay money, meeting the needs of users for easier banking transactions; is playing an important role in reducing poverty in developing countries.
monetarist / new classical model
Actually includes two different models of the macroeconomy (the monetarist and the new classical); both are based on the following principles: the importance of the price mechanism in co-ordinating economic activities, the concept of competitive market equilibrium, and thinking about the economy as a harmonious system that automatically tends toward full employment.
monetary policy
Policy carried out by the central bank, aiming to change interest rates in order to influence aggregate demand; it is a type of demand-side policy, or demand management.
monetary union
A high form of economic integration, involving the adoption by a group of countries of a single currency, such as some of the countries of the European Union (‘euro zone’ countries) that have adopted the euro. Monetary union in addition involves the adoption of a common monetary policy carried out by a single central bank, which is necessitated by the use of a single currency.
monopolistic competition
One of the four market structures, with the following characteristics: a large number of firms; substantial control over market price; product differentiation; no barriers to entry. Examples include the shoe, clothing, detergent, computer, publishing, furniture and restaurant industries.
monopoly
One of the four market structures, with the following characteristics: a single or dominant large firm in the industry; significant control over price; produces and sells a unique product with no close substitutes; high barriers to entry into the industry. Examples include telephone, water and electricity companies in areas where they operate as a single supplier (these are natural monopolies).
moral hazard
Refers to situations where one party takes risks, but does not face the full costs of these risks because the full costs of the risks are borne by the other party; often arises in connection with insurance; is a form of asymmetric information causing market failure.
Multidimensional Poverty Index (MPI)
A composite indicator that measures poverty in three dimensions: health, education and living standards, each of which reflects deprivations (essential things people don’t have).
multilateral development assistance
Lending to developing countries for the purpose of assisting their development on non-concessional terms (market rates of interest and repayment periods) by multilateral organisations, i.e. organisations composed of many countries, including development banks such as the World Bank, and the International Monetary Fund.
multilateral trade agreement
A trade agreement (or agreement to lower international trade barriers) between many countries; at the present time these are mainly carried out within the framework of the World Trade Organization ( WTO), and involve agreements between WTO member countries.
multinational corporation (MNC)
A firm involved in foreign direct investment (FDI); it si a firm that is based in one country (the home country) and that undertakes productive investments in another country (the host country) with control of at least 10 percent of the firm in the host country.
national income accounting
Measurement of an economy’s national income and output as well as other measures of economic performance by specialised statistical services in every country.
national income statistics
Statistical data used to measure national income and output and other measures of economic performance.
national income
The total income of an economy, consisting of factor payments or the sum of wages, interest, rent plus profit, often used interchangeably with the value of aggregate output, particularly in the context of macroeconomic models (such as the
AD-AS model).
national output
Total output produced by an economy, also known as aggregate output, often measured by real GDP.
natural monopoly
A single firm (a monopoly) that can produce for the entire market at a lower average cost than two or more smaller firms. This happens when the market demand for the monopolist’s product is within the range of falling long-run average cost, where there are economies of scale. Examples include telephone, water and electricity companies in areas where they operate as a single supplier.
natural rate of unemployment
Unemployment that occurs when the economy si producing at its potential or full employment level of output (real GDP), and is equal to the sum of structural, frictional plus seasonal unemployment.
necessities
Goods that are necessary or essential: they have a price inelastic demand (PED<1) and income inelastic demand (YED<1).
negative consumption externality
A negative externality caused by consumption activities, leading to a situation where marginal social benefits are less than marginal private benefits (MSB< MPB).
negative externality
Atype of externality where the side-effects on third parties are negative or harmful.
negative production externality
A negative externality caused by production activities, leading to a situation where marginal social costs are greater than marginal private costs (MSC> MPC).
net exports
Refers to the value of exports minus the
value of imports.
nominal GDP
Gross domestic product measured in terms of current (or nominal) prices, which are prices prevailing at the time of measurement. Does not account for changes in the price level; to be distinguished from real GDP.
nominal GNI
Gross product national income in terms of current (or nominal) prices, which are prices prevailing at the time of measurement. Does not account for changes in the price level; to be distinguished from real GNI
nominal interest rate
An interest rate that prevails at any moment in time, which does not take changes in the price level into account; to be distinguished from real interest rate.
nominal value
Value that is in money terms, measured in terms of prices that prevail at the time of measurement, and that does not account for changes in the price level; to be distinguished from real values.
non-collusive oligopoly
A type of oligopoly where firms do not make agreements among themselves (i.e. do not collude) in order to fix prices or collaborate in
some way.
non-excludable
A characteristic of some goods where it is not possible to exclude someone from using a good, because it is not possible to charge a price; it is one of the two characteristics of public goods (to be contrasted with excludable).
non-governmental organisations (NGOs)
Non-profit organisations that provide a very wide range of services and humanitarian functions; in developing countries they provide foreign aid, all of which takes the form of grants (there are no loans involved). They are involved with an enormous range of activities, including emergency assistance, promotion of sustainable development, poverty alleviation, protection of child health, provision of technical assistance,
and many more.
non-price competition
Occurs when firms compete with each other on the basis of methods other than price (such as product differentiation, advertising and branding). Non-price competition occurs in oligopoly and monopolistic competition.
non-price determinants of demand
The variables (other than price) that can influence demand, and that determine the position of a demand curve; a change in any determinant of demand causes a shift of the demand curve.
non-price determinants of supply
The variables (other than price) that can influence supply, and that determine the position of a supply curve; a change in any determinant of supply causes a shift of the supply curve.
non-produced, non-financial assets
A part of the capital account of the balance of payments, which includes a variety of items such as mineral rights, forestry rights, fishing rights and airspace.
non-rivalrous
A characteristic of some goods where the consumption of the good by one person does not reduce consumption by someone else; it is one of the two characteristics of public goods (to be contrasted with rivalrous).
normal good
A good the demand for which varies positively (or directly) with income: this means that as income increases, demand for the good increases.
normal profit
The minimum amount of revenue that a firm must receive so that it keeps the business running (as opposed to shutting down). Normal profit is earned when abnormal profit is zero, or when average revenue is equal to average cost, or price is equal to average cost.
normative economics
The body of economics based on normative statements, which involve beliefs, or value judgements about what ought to be. Normative statements cannot be true or false; they cannot be refuted, they can only be assessed
relative to beliefs and value judgements. Normative economics forms the basis of economic policies.
OECD Better Life Index
An alternative measure to standard national income accounting that measures economic well-being in a number of dimensions that take into account quality of life.
official borrowing
Refers to government borrowing from abroad; is an item in the financial account of a country’s balance of payments.
Official Development Assistance (ODA)
The most important part of foreign aid, referring to foreign aid that is offered by countries or by international organisations composed of a number of countries (it does not include aid offered by non-governmental organisations).
oligopoly
One of the four market structures, with the following characteristics: small number of large
firms ni the industry; firms have significant control over price; firms are interdependent; products may be differentiated or homogeneous; there are high barriers to entry. Examples include the car industry, airlines, electrical appliances (differentiated products) and the steel, aluminium, copper, cement industries (homogeneous products).
open market operations
A tool of monetary policy whereby the central bank buys and sells bonds to commercial banks in order to influence the money supply and interest rate.
opportunity cost
The value of the next best alternative that must be given up or sacrificed in order to obtain something else.
output approach
A method used to measure the value of aggregate output of an economy, which
calculates the value of all final goods and services produced in the country within a given time period. As suggested by the circular flow model, it is equivalent to measurement by the expenditure approach and the income approach.
overvalues currency
A currency whose value is higher than its free-market value; may occur if the exchange rate is fixed (or pegged), or in a managed exchange
rate system, but not in a freely floating exchange rate system.
payoff matrix
In game theory, this shows all possible combinations of outcomes of different decisions made by the players in game theory
perfect competition
One of the four market structures, with the following characteristics: a large number of small firms; no control over price: all firms sell a homogeneous product; no barriers to entry, perfect information and perfect resource mobility. Close examples include agricultural commodity markets and the foreign exchange market.
perfectly elastic demand
Refers to a price elasticity of demand value of infinity, and arises in the case of a horizontal demand curve indicating that any quantity can be bought at that price.
perfectly elastic supply
Refers to a price elasticity of supply value of infinity, and arises in the case of a horizontal supply curve indicating that any amount can be sold at that price;
perfectly inelastic demand
Refers to a price elasticity of demand value of zero, and arises in the case of a vertical demand curve indicating that any amount can be sold at that price; see price elasticity of demand.
perfectly inelastic supply
Refers to a price elasticity of supply value of zero, and arises in the case of a vertical supply curve; see price elasticity of supply.
personal income taxes
Taxes paid by households or individuals ni households on all forms of income, including wages, rental income, interest income, and dividends (income from ownership of shares in a company).
Phillips curve
A curve showing the relationship between unemployment and inflation. The short-run Phillips curve shows a negative relationship between the rate of inflation and the unemployment rate. The long-run Phillips curve is vertical at the natural rate of unemployment, indicating that there is no negative relationship between inflation and unemployment.
Pigouvian taxes (or Pigovian taxes)
Indirect taxes designed to correct negative externalities of production or consumption
planned economy
An economy where all economic decision-making is carried out by government planning (based on command and control methods); rather than reliance on prices determined in markets.
portfolio investment
Financial investment, including investment in stocks and bonds. Appears as an item in the financial account of the balance of payments.
positive consumption externality
A positive externality caused by consumption activities, leading to a situation where marginal social benefits are greater than marginal private benefits (MSB>MPB).
positive economics
The body of economics based on positive statements, which are about things that are, were or will be. Positive statements may be true or false so they can be refuted. They form the basis of theories and models that try to explain economic events.
positive externalities
A type of externality where the side-effects on third parties are positive or beneficial, also known as ‘spillover benefits’.
positive production externality
A positive externality caused by production activities, leading to a situation where marginal social costs are less than marginal private costs (MSC < MPC).
potential output (potential GDP)
The level of output (real GDP) that can be produced when there is ‘full employment’, meaning that unemployment is equal to the natural rate of unemployment; also known as the full employment level of output.
poverty
The inability of an individual or family to afford an adequate standard of goods and services;
this standard may be absolute or relative.
poverty cycle (trap)
Arises when low incomes result in low (or zero) savings, permitting only low (or zero) investments in physical, human and natural capital, and therefore low productivity of labour and of land, which in turn gives rise to low, if any, growth in income (sometimes growth may be negative), and hence low incomes once again. Poverty is transmitted from generation to generation.
poverty line
An income level that is just enough to ensure a family with the minimum necessary food, housing, clothing, medical needs.
preferential trade agreement
An agreement between two or more countries to lower trade barriers between them on particular products, resulting in easier access to the markets of other members for the selected products, compared with the access of countries that are not members.
price ceiling
A maximum price set by the government for a particular good, meaning that the price that can be legally charged by the sellers of the good cannot be higher than the legal maximum price. Results in a shortage of the product.
price competition
Occurs when a firm lowers its price to attract customers away from rival firms, thus increasing sales at the expense of other firms. May occur in the case of monopolistic competition or oligopoly, but not in perfect competition (or monopoly).
price control
Setting of minimum or maximum prices by the government (or private organisations) so that prices are unable to adjust to their equilibrium level determined by demand and supply. Price controls result in shortages or surpluses.
price deflator
A price index used to convert nominal values into real values, such as nominal GDP into real
GDP, known as the ‘GDP deflator’
price elastic demand
Relatively high responsiveness of quantity demanded to changes in price; PED (price elasticity of demand) > 1
price elastic supply
Relatively high responsiveness of quantity supplied to changes in price; PES (price elasticity of supply) > 1
price elasticity of demand (PED)
A measure of the responsiveness of the quantity of a good demanded to changes in its price, given by the percentage change in quantity demanded divided by the percentage change in price. In general, if there is a large responsiveness of quantity demanded (PED > 1), demand is referred to as being elastic; if there is a small responsiveness (PED < 1), demand is inelastic.
price elasticity of supply (PES)
A measure of the responsiveness of the quantity of a good supplied to changes in its price, given by the percentage change in quantity supplied divided by the percentage change in price. In general, if there is a large responsiveness of quantity supplied (PES > 1), supply is referred to as being elastic; if there is a small responsiveness (PES < 1), supply is inelastic.
price floor
A minimum price set by the government for a particular good, meaning that the price that can be legally charged by the sellers of the good cannot be lower than the legal minimum price. Results in a surplus of the product.
price inelastic demand
Relatively low responsiveness of demand to changes in price; PED (price elasticity of demand < 1.
price inelastic supply
Relatively low responsiveness of supply to changes in price; PES (price elasticity of supply) < 1.
price mechanism
The system where prices are determined by demand and supply in competitive markets, resulting from the free interaction of buyers (demanders) and sellers (suppliers); these interactions determine the allocation of resources.
price war
Competitive price-cutting by firms; usually in oligopoly. As each one tries to capture market shares from rival firms; results in lower profits for firms.
price-maker
Any firm that has the ability to influence the price of its product; arises whenever the firm faces a downward slopping demand curve; applies to varying degrees in all market structures except perfect competition.
price-taker
A firm that accepts a price at which it
sells its product. Refers to firms in perfect competition, which being small and numerous have no control over price, and therefore accept the price determined in the market.
price incentives
The ability of prices, and changes in prices, to convey information to consumers and producers that motivates them to respond by offering them incentives to behave in their best-self-interest; firms according to the law of supply and consumers according to the law of demand; compare with prices as signals, which together with prices as incentives lead to an efficient allocation of resources (assuming no market failures).
primary commodity
Any product that is produced in the primary sector, which includes agriculture, forestry, fishing and the extractive industries; also known as ‘commodity’.
production possibilities
Al possible combinations of the maximum amounts of two goods that can produced by an economy, given fixed and unchanging resources and technology, when there is full employment of resources and efficiency in production.
primary sector
A part of an economy that is dominated by agriculture, also including fishing, forestry, and all extractive activities (such as mining).
privatisation
A transfer of ownership from the public sector (the government) to the private sector, i.e. private owners
primary products
All products produced in the primary sector of an economy; also known as commodities; see primary sector.
progressive taxation
Taxation where, as income increases, the fraction of income paid as taxes increases; there is an increasing average tax rate.
prices as signals
The ability of prices, and changes in prices, to communicate information to consumers and producers about the existence of excess demand or excess supply, on the basis of which they make economic decisions, which together with prices as incentives lead to an efficient allocation of resources (assuming no market failures).
producer surplus
Refers to the difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good. In a diagram, it is shown as the area under the price received by producers and above the supply curve up to the quantity sold.
public good
A good that is non-rivalrous (its consumption by one person does not reduce consumption by someone else and non-excludable (it is not possible to exclude someone from using the good). Since ti si not possible to exclude someone from using the good even though they do not pay for it, firms do not have an incentive to produce it. Public goods are therefore provided by the government. This is a type of market failure.
proportional taxation
Taxation where, as income increases, the fraction of income paid as taxes remains constant; there is a constant average tax rate.
profit maximisation
The goal of firms, according to the standard theory of the firm. It involves making profit as large as possible, and is achieved by producing the level of output where the difference between total revenue and total costs is the largest, or where marginal cost is equal to marginal revenue.
property rights
The laws and regulations that define rights to ownership, use and transfer of property.
profit
A payment, per unit of time, to owners of entrepreneurship/management
product differentiation
Occurs when each firm in an industry tries to make its product different from those of its competitors; usually in order to create some market power (monopoly power); products can be differentiated by physical differences, quality differences, location, services and product image.
purchasing power parity (PPP) exchange rates
Special exchange rates between currencies that makes the buying power of each currency equal to the buying power of US$1, and therefore equal to each other. The use of PPP exchange rates to convert GDP (or GNI or any other output or income variable) eliminates the influence of price level differences across countries and is very important for making cross-country comparisons.
quantitative easing
A tool used by central banks to increase the money supply in the economy and facilitate
commercial bank lending as part of expansionary
monetary policy; involves the buying of bonds by the central bank on a large scale.
quintiles
Division of a population into five equal groups with respect to the distribution of a variable, such as income; for example, the lowest income quintile refers to 20% of the population with the lowest income.
quota
A type of trade protection that involves setting a legal limit to the quantity of a good that can be imported over a particular time period (typically a year). (More generally, a ‘quota’ si a limited or fixed number of things.)
recession
An economic contraction, where there si
falling real GDP (negative growth) and increasing unemployment of resources which last six months or more.
rational consumer choice
In the microeconomic theory of consumer behavior, consumers make choices about what goods and services to buy based on the following assumptions. Al consumers (i) have consistent tastes and preferences, (ii) have perfect information, and (in) try to maximise their utility (make it as great as possible).
real GNI
Gross national income (GNI) measured in
constant prices, i.e. prices that prevail in one particular year, called a ‘base year’; this is useful for making comparisons of changes in GNI over time that have taken into account the influence of changing prices; to be distinguished from nominal GNI.
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’.
real interest rate
The interest rate that has been corrected for inflation; real interest rate = nominal
interest rate - rate of inflation.
real GDP
Gross domestic product (GDP) measured in constant prices, i.e. prices that prevail in one particular year, called a ‘base year”; this is useful for making comparisons of changes in GDP over time that have taken into account the influence of changing prices; to be distinguished from nominal GDP.
rationing
A method used to apportion or divide something up between its interested users; in economics it refers to the method used to make resource allocation and output/income distribution decisions.
rational producer behavior
The basis of standard theory of the firm according to which firms try to maximise profit.
real value
Value that has eliminated the influence of changes in the price level.
redistribution of income
Refers to changing the distribution of income, giving rise to a new distribution.
regional trade agreement
A trade agreement (or agreement to lower international trade barriers) between several countries that are located within a geographical region (such as NAFTA, or North American Free Trade Agreement). May be contrasted with bilateral trade agreement and multilateral trade agreement.
regressive taxation
Taxation where, as income increases, the fraction of income paid as taxes decreases; there is a decreasing average tax rate.
relative poverty
The inability of an individual or a family
to afford an adequate standard of goods and services, where the adequate standard is relative and changes over time; this standard is defined as what is ‘typical’ in a society, taken to be a particular percentage (often 50%) of society’s median income. As incomes increase and the median income rises, the standard also rises.
remittances
A transfer of money from one country to another, in most cases by foreign workers who send money from their earnings in the country of residence to their family in their home country.
reserve assets
Refers to foreign currency reserves that the central bank maintains and can buy or sell to influence the value of the country’s currency exchange rate; in the balance of payments appears as an item in the financial account.
resource allocation
Assigning available resources, or factors or production, to specific uses chosen among many possible and competing alternatives; involves answering the ‘what to produce’ and ‘how to produce’ basic economic questions.
resources
Factors of production, used by firms as inputs in the production process; see factors of production.
restricted choice
A term in behavioural economics, it is a choice that is limited by the government or other authority.
revaluation (of a currency)
Refers to an increase in the value of a currency in the context of a fixed or pegged exchange rate system (compare with appreciation, which is an increase in currency value in the contest of a floating or managed exchange rate system).
revenues
The payments that firms receive when they sell their goods and services.
rivalrous
A characteristic of a good according to which its consumption by one person reduces its availability for someone else; most goods are rivalrous. It is one of the two characteristics of ‘private goods’.
rules of thumb
A term from behavioural economics, they are simple guidelines based on experience and common sense, simplifying complicated decisions that would have to be based on the complex consideration of every possible choice.
satisficing
A goal of firms to achieve satisfactory results, rather than pursue a single maximising
objective, such as to maximise profits or revenues; based on the argument that large, modern firms have numerous objectives which may partly overlap or conflict, thus forcing them to compromise and reconcile conflicts, rather than pursue optimal results.
scarcity
One of the key concepts of this course; it is
the condition in which available resources (land, labour, capital, entrepreneurship) are limited; they are not enough to produce everything that human beings need and want. One of the key concepts of this course
screening
In the event of asymmetric information, this is a method used by the buyer when the buyer
has limited information; for example the buyer may research the seller or product online, or may informally ask friends in order to get more information.
seasonal unemployment
A type of unemployment that occurs when the demand for labour ni certain industries changes on a seasonal basis because of variations in needs; for example, farm workers are hired during peak harvesting seasons and let off for the rest of the year.
short run (in macroeconomics)
In macroeconomics, ti is the period of time during which the prices of resources, particularly the price of labour (wages) do not change (they are constant).
short run (in microeconomics)
In microeconomics, it is a time period during which at least one input is fixed and cannot be changed by the firm.
short-run aggregate supply
The total quantity of goods and services (real output or real GDP) produced in an economy in the short run (when wages and other resource prices are held constant), ceteris paribus.
short-run aggregate supply (SRAS) curve
A curve showing the relationship between real GDP produced and the economy’s price level when wages (and other resource prices) are held constant, ceteris paribus; the SRAS curve is upward sloping.
short-term growth
Growth of an economy (growth in real output) over relatively short periods of time; shown by (i) a movement of a point inside the production possibilities curve (PPC) to a point closer to the PPC (see actual growth), or (ii) by upturns in the business cycle usually due to increases in aggregate demand.
shortage
In the context of demand and supply, si the amount by which quantity demanded is greater than quantity supplied.
signalling
In the event of asymmetric information this is a method used by the seller when the seller has more information, which attempts to convince the buyer that the product is of good quality; for example use of warranties or establishment of brand names.
short-run equilibrium level of output
In the monetarist / new classical model, it is the level of output (real GDP) determined by the intersection of the aggregate demand and short run aggregate supply curves; in the Keynesian model, it is the level of output determined by the intersection of the aggregate demand and Keynesian aggregate supply curves. In both models, equilibrium may occur where there is (i) a recessionary (deflationary) gap, (ii) an inflationary gap, or (iii) full employment output.
social enterprise
A type of commercial organisation that aims to achieve particular social goals in an effort to improve people’s well-being and promote social change; may be either for-profit or not-for-profit organisations.
socially optimum output
Refers to a level of output that is the best from the socially point of view, determined by the achievement of allocative efficiency (or economic efficiency); occurs when marginal social benefits are equal to marginal social costs (MSB = MSC).
specialisation
Occurs when a firm or a country concentrates production on one or a few goods and services. In international trade theory, specialisation forms the basis for the gains from trade, arising when countries specialise according to their comparative advantage, and when firms specialise in production of goods and services that offer them economies of scale.
speculation (currency)
Buying and selling of something in the hope of making a profit. ‘Currency speculation’ involves buying and selling currencies based on expectations of changes in the value of a
currency (exchange rates) in order to make a profit in the future.
structural unemployment
A type of unemployment that occurs as a result of technological changes and changing patterns of demand (causing changes in demand for labour skills), as well as changes in the geographical location of jobs, and labour market rigidities (lack of labour market flexibility)
supply ofmoney
The amount of money in circulation, determined by the central bank of a country; in combination with the demand for money, the supply of money determines the equilibrium rate of interest. (In practice central banks have difficulties in accurately controlling the supply of money.)
supply curve
A curve showing the relationship between the price of a good and the quantity of the good supplied, ceteris paribus
surplus
In general, this is the excess of something over something else to which it is being compared. (ii) In the context of demand and supply, it is the extra supply that results when quantity supplied is greater than quantity demanded. (ii) In the case of consumer and producer surplus, it is the extra benefit consumers get by paying less for a good than the amount they are willing to pay, or the extra benefit producers get by receiving a higher price for the good they are selling than the price they are willing to receive. (iii) In the case of the government budget, a surplus occurs when government revenues are greater than government expenditures. (iv) In the balance of payments, a surplus in an account occurs when the credits (inflows of money from abroad) are larger than the debits (outflows of money to other countries).
sustainable debt
A level of debt where the borrowing government has enough revenues to meet its debt obligations (payment of interest and repayment of borrowed amount) without overdue debt payments, while also allowing economic growth at an acceptable rate.
Sustainable Development Goals (SDGs)
A set of 17 goals developed at the United Nations Conference on Sustainable Development in Rio de Janeiro in 2012; continue and expand upon the work begun years earlier by the Millennium Development Goals (MDGs), which ran until 2015. Are used by international organisations and national governments in their fight against
poverty and efforts to achieve sustainable economic development.
substitution effect
Part of an explanation of the law of demand; there is an inverse relationship between price and quantity demanded because as price falls consumers substitute the now less expensive good for other products (the other part is the income effect).
sustainable development
Development involving the use of resource in the present to meet present needs and wants in ways that do not deplete or degrade them, so that future generations will have enough resources to meet their own needs; refers to growth and development that does not deplete or degrade resources.
sustainability
One of the key concepts of this course; refers to maintaining the ability of the environment and the economy to continue to produce and satisfy needs and wants into the future for future generations, depends crucially on the preservation of the environment over time. Related to the concept of sustainable development, meaning ‘Development which meets the needs of the present without compromising the ability of future generations to meet their own needs’ (according to the Brundtland Commission). One of the key concepts of this course
supply
Indicates the various quantities of a good that firms (or a firm) are willing and able to produce and sell at different possible prices during a particular time period, ceteris paribus
substitute goods
Two or more goods that satisfy a similar need, so that one good can be used in place of another. If two goods are substitutes, an increase in the price of one leads to an increase in the demand for the other.
supply-side policies
A variety of policies that focus on aggregate supply, namely factors aiming to shift the long-run aggregate supply (LRAS) curve to the right, in order to achieve long-term economic growth. They do not attempt to stabilise the economy (i.e. to reduce the severity of the business cycle). There are two major categories of supply-side policies: market-based and interventionist.
subsidy
An amount of money paid by the government to firms for a variety of reasons: to prevent an industry from failing, to support producers incomes, or as a form of protection against imports (due to the lower costs and lower prices that arise from the subsidy). A subsidy given to a firm results in a higher level of output and lower price for consumers. May also be paid to consumers as financial assistance or for income redistribution.
tariffs
Taxes on imported goods; they are the most common form of trade restriction. Tariffs may serve two purposes: to protect a domestic industry from foreign competition (a protective tariff; or to raise revenue for the government (a revenue tariff).
theory of absolute advantage
If countries specialise in and export the goods in which they have an absolute advantage (can produce with fewer resources), there results an improvement in resource allocation and increased production and consumption in each country.
theory of comparative advantage
As long as opportunity costs in two (or more) countries differ, it is possible for all countries to gain from specialisation and trade according to their comparative advantage; this results in an improvement in the global allocation of resources, resulting in greater global output and consumption. Is a more powerful explanation of the gains from trade than the theory of absolute advantage.
total costs
The total costs incurred by a firm that undertakes production of something.
total product
The total quantity of output produced by a firm.
total revenue
The amount of money received by firms when they sell a good (or service); it is equal to the price (P) of the good times the quantity (Q) of the good sold. Therefore total revenue= P*Q
tradeable permits
Permits that can be issued to firms by a government authority or an international body, and that can be traded (bought and sold) in a market, the objective being to limit the total amount of pollutants emitted by the firms. If a firm can produce its product by emitting a lower level of pollutants than the level set by its permits, it can sell its extra permits in the market. If a firm needs to emit more pollutants than the level set by its permits, it can buy more permits in the market.
trade creation
The replacement of higher-cost products (imported or domestically produced) by lower cost imports that results when a trading bloc is formed and trade barriers are removed.
trade diversion
The replacement of lower cost products (imported or domestically produced) by higher cost imports that results when a trading bloc is formed and trade barriers are removed.
trade liberalisation
The policy of liberalising (freeing up) international trade by eliminating trade protection and barriers to trade (i.e. tariffs, quotas, etc.).
trade protection
Government intervention in international trade through the imposition of trade restrictions (or barriers) to prevent the free entry of imports into a country and protect the domestic economy from foreign competition.
trading bloc
A group of countries that have agreed to reduce tariff and other barriers to trade for the purpose of encouraging the development of free or freer trade and co-operation between them. See also free trade area, customs union and common market.
tragedy of the commons
A story about cattle grazing on commonly owned land, illustrating rivalry and non-excludability of common pool resources as the land becomes overused and degraded.
transactions in non-produced, non-financial
assets
Refers to one of the two items in the capital
account of the balance of payments, including the purchase or use of natural resources that have not been produced (land, mineral rights, forestry rights, water, fishing rights, airspace and electromagnetic spectrum);
transfer payments
Payments made by the government to individuals specifically for the purpose of redistributing income, thus transferring income from those who work and pay tax toward those who cannot work and need assistance. Groups receiving transfer payments may include older people, sick people, very poor people, children of poor families, unemployed people and others; referred to as ‘vulnerable groups’.
undervalued currency
A currency whose value is lower than its free-market value; may occur if the exchange rate is fixed (or pegged), or in a managed exchange
rate system, but not in a freely floating exchange rate system.
unemployment rate
A measure of the amount of unemployment ni an economy, expressed as a percentage, calculated by taking the total number of unemployed people in an economy and dividing by the labour force, and multiplying by 100.
unenmployment
The number of unemployed people, defined as all people above a particular age (i.e. not children) who are not working and who are actively looking for a job.
unfair competition
Practices that countries may use in order to gain a competitive advantage over other countries in order to unfairly increase their exports at
the expense of other countries, for example maintaining an undervalued currency.
unitary PED
A price elasticity of demand value of one; see price elasticity of demand.
unitary PES
A price elasticity of supply value of one; see price elasticity of supply.
universal basic income
A method intended to provide everyone in a country with a sum of money that they would receive regardless of any other income they may have: its purpose is to reduce income inequalities and poverty.
unsustainable production
Production that uses resources unsustainably, leading to their depletion or degradation.
utility
A subjective concept, it is the satisfaction that consumers gain from consuming something.
wage
A payment, per unit of time, to those who provide labour; this includes all wages and salaries, as well as supplements (such as bonuses and commissions).
wealth
The money or things of value that people own minus debts to banks or other financial institutions. May include savings deposits (money saved in a bank); stocks in the stock market; bonds; land, houses and other property; valuable paintings or jewellery.
wealth taxes
Taxes on ownership of wealth, most commonly property taxes, based on the value of property owned, and inheritance taxes, based on the value of property inherited.
weighted price index
A measure of average prices in one period relative to average prices in a reference period called a base period; a weighted price index si a price index that ‘weights’ the various goods and services according to their relative importance. In the consumer price index (CPI), goods an services are weighted according to their relative importance in consumer spending.
welfare
In general, refers to the well-being of a population. In microeconomics, it is measured by the amount of social surplus (consumer and producer surplus) that is generated in a market. Welfare is greatest, i.e. social surplus is greatest, in competitive market equilibrium when there are no externalities, and marginal social benefits are equal to marginal social costs (MSB= MSC).
welfare loss
Refers to loss of a portion of social surplus that arises when marginal social benefits are not equal to marginal social costs (MSB ‡ MSC, due to market failure.
what / how much to produce
One of the three basic economic questions; refers to the choice that must be made in response to the question what particular goods and services an economy is to produced and in what quantities.
World Bank
A development assistance organisation, composed of 189 member countries which are its
joint owners, that extends long-term credit (loans) to developing country governments for the purpose of promoting economic development and structural change.
World Trade Organisation (WTO)
An international organisation that provides the institutional and legal framework for the trading system that exists between member nations worldwide, responsible for liberalising trade, operating a system of trade rules and providing a forum for trade negotiations between governments, and for settling trade disputes.
