Glossary of IB Economics Terms
IB HL and SL Economics Glossary
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Absolute poverty involves incomes that are at or below a minimum income level which may be defined as a poverty line (such as living on less than US$2 (PPP) a day (or US$1 or US$1.25) needed to secure the basic necessities of life (such as food, shelter, clothing)
Aggregate demand is the total spending in an economy consisting of consumption, investment, government expenditure and net exports
Allocative efficiency exists where price is equal to marginal cost (or marginal social cost) and resources are allocated in such a way that neither too much nor too little is produced from society’s point of view.
Anti-dumping is government legislation [= the imposition of tariff] against the selling of imported goods at a price below their production costs
Appreciation is an increase of the value of the currency, expressed in terms of another currency, in a floating exchange rate system.
Balance of payments components
Balance of payments components include the balance of trade in goods, the balance of trade in services, (investment or factor) income (interest, dividends, profit), and (current or net) transfers. This could be referred to as “exports of goods and services” and “imports of goods and services” but cannot be referred to as simply imports and exports.
Barriers of entry
Barriers of entry are obstacles prevents potential new comers from entering the market,
Bilateral trade agreement
Bilateral trade agreement is a trade agreement between two countries which aims to lower trade barriers, or to increase trade
Business confidence is related to the expectations of businesses about the future of economic conditions, (which may be optimistic or pessimistic) and affects the level of investment.
Business cycle is the periodic fluctuations in real national income/output/GDP around the productive potential or long-term trend of the economy. Its stages are slump/trough, recovery/expansion, boom and recession
Cartel is a group of producers in an industry that join together to regulate supply (or fix or increase prices)
Capital flight occurs when foreign currencies (or other financial assets) flow out of a country to seek a “safe haven” in another country
Central bank (responsibilities)
Central bank (responsibilities) include being a regulator of commercial banks, being banker to the government, controlling interest rates and money supply and maintenance of price stability and control of exchange rate policy
Centrally planned economy
Centrally planned economy is an economic system where resources are allocated by the government or a central planning authority
Ceteris paribus is a Latin expression which means "let all other things remain equal"
Comparative advantage (HL) implies that one country is able to produce a good at a lower opportunity cost than another.
Complement goods are goods which are used together. Examples computers and computer software
Complementary goods are goods that are consumed with each other (joint demand) or that they are goods that have negative cross price elasticity of demand
Consumer surplus is the difference between how much the consumers in the market are prepared to pay and how much they actually pay.
Consumption is spending by households on domestic consumer goods and services over a period of time
Crowding out is a situation where the government spends more (government expenditure) than it receives in revenue (mainly taxation), and needs to borrow money, forcing up interest rates thereby reducing investment and consumption
Current account (balance)
Current account (balance) is a record of the revenues earned from the export of goods and services and the expenditure on imports of goods and services.
current account deficit
current account deficit is where the value of total imports of goods and services plus net income flows are greater than the value of total exports of goods and services
current account surplus
current account surplus is where revenues from the exports of goods and services plus net income flows are greater than the spending on the imports of goods and services
Customs Union a form of economic integration where member countries agree to liberalize trade (trade freely amongst themselves) and adopt a common external tariff (or common trade policies towards non-members)
Demand refers to the quantities of a product that consumers are willing and able to buy at various prices in a given time period, ceteris paribus.
Dumping is the selling of a good in another country at either a price below its cost of production or a price below the price charge in its home market.
Deflation is a sustained decrease in the average level of prices (general price level) in an economy
Demerit good is a good considered to be harmful to people that would be over-provided by the market and so over-consumed or a good whose consumption creates negative externalities, or a good whose consumption creates costs for third parties, not involved in the purchase or sale of the product.
Depreciation is a fall in the value of one currency against another currency in a floating exchange rate system.
Devaluation is a reduction in the value of a currency, conducted by the central bank, in a fixed exchange rate system.
Developing countries are characterized by low per capita income, high rates of poverty, a low standard of living and a low HDI ranking/value
Disinflation refers to a decrease in the rate of increase of the Average Price Level OR a decrease in the rate of inflation.
Diversification is a strategy to increase the variety of goods and services produced in order to avoid (the risks associated with) overspecialization
Economic development is a broader concept than economic growth involving welfare improvements to the standard of living including health, education and shelter.
Economic growth is increased real output for an economy over time and measured as an increase in real GDP
Economies of scale
Economies of scale are any fall in long run unit (average) costs that come about as a result of a firm increasing its scale of production (output)
Equilibrium price is a market clearing price, a price level that settles as a result of quantity supplied being exactly the same as quantity demanded. It occurs at the intersection of demand and supply.
Expenditure approach is a method used to calculate GDP by summing total spending on domestic output in an economy OR that it is a method of calculating GDP based on summing consumption, investment, government expenditure and net exports (ie C + I + G + X - M)
Foreign direct investment (FDI)
Foreign direct investment (FDI) is the long-term investment in another country usually by a multinational corporation (MNC)
Gini Coefficient is a measure of inequality in the distribution of income and can be shown as the area between the Lorenz curve and the diagonal divided by the total area beneath the diagonal (half square). Therefore, it can only yield any number between 0 and 1
Gross domestic product
Gross domestic product is the total value/output of final goods and services produced in an economy (in a given time period).
Gross National Income (GNI)
Gross National Income/Gross National Product (GNI/GDP) is made up of GDP plus net property income (current transfers) from abroad.
Import substitution policies
Import substitution policies are designed to encourage the domestic production of goods, rather than importing them. The strategies encourage protectionism.
Income elasticity of demand
Income elasticity of demand (YED) is a measure of the responsiveness of demand for a good to a change in income
An Indirect tax is an expenditure tax on a good or service. It is shown as an upward shift in the supply curve as costs of production rises when an indirect tax is imposed
Infant industries are new industries which do not benefit from economies of scale that need protection to compete with imports
Inferior goods are goods which demand increases as income rises. Inferior goods have positive income elasticity
Inflationary gap is a situation where the economy is (in equilibrium) at a level of output that is greater than the full employment level of output or above potential output
International Monetary Fund (IMF)
International Monetary Fund (IMF) functions of the IMF include ensuring the stability of the international monetary system, promoting international monetary cooperation and lending money to help members in balance of payments difficulties
Law of demand
The law of demand states that, assuming other things remain constant, there is an inverse relationship between the price and the quantity demanded of the good itself, ceteris paribus
Law of diminishing marginal returns
Law of diminishing marginal returns states that as extra units of the variable factor are applied to a fixed factor, the output from each additional unit of the variable factor will eventually diminish
Less economially developed countries (LEDCs)
Less economically developed countries (LEDCs) – characteristics include low levels of GDP per capita, high levels of poverty, relatively large agricultural sector, large informal sectors, high birth rates (population growth rates), poor infrastructure, underdeveloped capital markets (banking sector), heavily indebted, unable to access international markets, over-specialized on a narrow range of products, small tax base, dependency on primary sector exports
A market is where buyers and sellers come together to establish an equilibrium price and quantity for a good or service.
Managed float implies periodic intervention by a Central Bank in order to influence the exchange rate
Marginal revenue is the extra revenue gained from selling an additional unit of a good or service
Market failure is the failure of markets to produce at the socially efficient level of output
A maximum price is also known as a price ceiling. It is a price set by the government below the equilibrium price.
Merit goods are goods or services with strong positive externalities] that would be under-provided by the market and so under-consumed.
Micro - credit
Micro-credit A loan that allows poor people to set up a small-scale business, is loaned to borrowers who do not have security/collateral, and contributes to the empowerment of women
Millennium Development Goals (MDGs)
Millennium Development Goals (MDGs) include eradicating extreme poverty and hunger, achieving universal primary education, promoting gender equality and empower women, reducing child mortality,improving maternal health, combating HIV/AIDS, malaria and other diseases, ensuring environmental sustainability, and developing a global partnership for development.
Minimum price or price floor. It is a price set by the government above the market price. It is set to protect producers supplying essential goods from low prices
Monetary policy is a demand-side policy with the Central Bank using changes in the money supply or interest rates to affect AD
Monetary union is a common market with a common currency, common central bank, and common interest rates (monetary policy)
Monopolistic competition is a market when there are many buyers and sellers, producing differentiated products, with no barriers to entry.
Multinational corporations (MNCs)
Multinational corporations (MNCs) are companies that have productive units in more than one country. Reasons they might invest in LDCs include: gaining access to new markets, cutting costs by avoiding the need to comply with legislation which exists in the domestic economy, gaining access to resources, cheaper labour and raw materials, avoiding import duties by producing in the target market.
Multiplier (HL) is the ratio of the induced change in national income to the increase in the level of injections and it is equal to the reciprocal of the mps + mpt + mpm.
Negative externalities are (spillover) costs to a third party caused by the production, or consumption of a good (or service) or that they occur when MSC is greater than MSB in the market for a good or service.
Normal goods are goods with positive income elasticity. As income rises the demand for normal goods rises
Normal profits are the amount of revenue needed to cover the total costs of production, including the opportunity costs
Perfect competition is a market structure where there is a very large number of small firms, producing homogenous products. There are low barriers to entry. As a result firms cannot influence price and are price takers.
Potential growth is an increase in the potential output of an economy through an increase in the quantity/quality of resources
Price discrimination takes place when a producer charges a different price to different consumers for an identical good or service
Price elasticity of demand (PED)
Price elasticity of demand (PED) is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price
Price elasticity of supply (PES)
Price elasticity of supply (PES) is a measure of the responsiveness of the quantity supplied of a good or service to a change in its price
Producer surplus is the difference between the price that producers in the market are prepared to sell their goods or service and how much they actually receive.
Progressive tax is where the higher the level of income, the higher the percentage of taxation that is paid (or the higher the average rate of taxation)
Quotas are import barriers that set limits on the quantity or value of imports into a country.
Rationing is a way that scarce goods (or services or resources) are allocated or the distribution/allocation of a good (or service or resources) among users (consumers), or a method of distributing a good when there is a shortage.
Regressive taxes are where the proportion of income paid in tax falls as the income of the taxpayer rises or where the average rate of tax falls as income rises
Supply refers to the quantities of a product that suppliers are willing and able to sell at various prices per period of time, ceteris paribus
Savings is income that is not spent, present consumption foregone, a withdrawal from the circular flow of income or money stored in financial institutions.
Subsidies are a sum of money the government gives to an industry in order reduce cost of production or reduce the price of a good.
structural unemployment is long term unemployment caused as a result of a fall in the demand for a particular type of labor occurring as a result of the changing structure of an economy due to changes in the demand/supply and/or technology. It occurs when there is a mismatch between the skills of unemployed workers and the jobs available or as a result of rigidities in the labor market
Supply-side policies they are policies designed to shift the AS curve to the right. They may include tax cuts, reductions in welfare payments, promotion of training etc.
Sustainable development (Sustainability) is the development needed to meet the needs of the present generation without compromising the ability of future generations to meet their own needs
Terms of trade (HL)
Terms of trade (HL) an index (ratio) that shows the value of a country’s average export prices relative to their average import prices. It shows the volume of imports attainable by a country by a unit (quantity) of its exports OR the rate at which exports of a country are exchanged for imports. Formula is index of export prices/index of import prices x 100.
The law of supply
The law of supply states that as the price of a good rises, the quantity supplied increases, ceteris paribus
Tradeable permits are permits to pollute, issued by a governing body, which sets a maximum amount of pollution allowable. Firms may trade these permits for money.
Transfer payments are a payment received for which no good or service is exchanged, or a payment made by the government to individuals (for the purpose of redistributing income), or a form of aid where money is transferred from one country to another. e.g. a student grant or a pension.
underemployment exists when workers are employed part-time even though they are available for full-time employment, or workers are employed but work less than they would have wanted to, or when workers are carrying out jobs for which they are over-qualified.
Unemployment is people of working age (those in the labor force) actively seeking work at the current wage rate but cannot find one.
unemployment rate is the number of workers without a job, who are willing and able to work, expressed as a percentage of the workforce.
World Bank is an international organization whose main aims are to provide aid and advice to developing countries, as well as reducing poverty levels