Economics

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Economics IB Diploma
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Glossary

Absolute advantage Appellate body

A country is said to have an absolute advantage The ‘supreme court’ of the World Trade
in the production of a good if it can produce
more of it with the same resources; or, the same all trade related disputes that all parties must
amount using fewer resources. accept.

Absolute poverty Appreciation

Measures the number of people living below When the price of a currency (the exchange rate)
the minimum income necessary to satisfy basic
physical needs; the 2015 World Bank international system.
poverty line is set $1.90 (PPP) per day.
Appropriate technology
Abuse of monopoly power Technology that employs the relatively abundant
factor of production of a country.
eliminate competitors or to prevent entry of new
Autarky
Refers to the case where a country does not
Administrative barriers engage in any trade with other countries and thus
Regulations that result in a lower level of imports can only consume combinations of goods that it
into a country; e.g., health or safety regulations alone produces.
or bureaucratic barriers on imports.
Availability
Ad valorem taxes The case where people make judgments about
An indirect tax expressed as a percentage of the the likelihood of an event based on information
price of a product, e.g. a sales tax (GST, VAT). that is easily available.

Aggregate demand (AD) Average tax rate

The planned level of spending on domestic The ratio of the tax collected over the tax base
output at different average price levels per period
of time. and wealth). ATR = T/Y.

Aggregate supply (AS) Balance of payments

A record of the value of all transactions of a
are willing to offer at different average price country with the rest of the world; subdivided
levels per period of time. into the current account, the capital account and

Balance of trade
amount of a good is produced from society’s The difference between export revenues and
point of view. It is achieved if, for the last unit import expenditures on goods and services, over
produced, price is equal to marginal cost or, more a time period.

marginal social cost. Barriers to entry

Anchoring market.
A rule-of-thumb whereby initial exposure of an
Bilateral agreement
serves as a reference point that affects subsequent A preferential trade agreement between two
unrelated judgements decisions. countries.

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 Bounded rationality Commodities
Bounded rationality refers to the idea that people Primary sector agricultural and non-agricultural
make choices given the restricted information, time products traded in world markets and used as
constraints and cognitive limitations that they face. inputs in manufacturing e.g. corn, copper, oil etc.

Common market
An agreement between countries to not only
expenditures exceed government revenues. phase out or eliminate trade barriers but to also
permit free movement of labour and capital.
Budget surplus
A budget surplus results if government revenues Common pool resources
exceed government expenditures. Resources that are not owned by anyone but are
available for anyone to use without payment.
They are ‘non-excludable’ but their use is ‘rival’.
Refers to the degree of optimism or pessimism
that characterizes business in a country. Comparative advantage
A country is said to have a comparative advantage
Business cycle
in the production of good X if it can produce it at

its long-term trend. units of good Y, compared to another country.

Cap and trade Competitive supply
(See tradable pollution permits.) Goods that use the same resources in the
Capital
Produced means of production (machines, tools, Complement goods
equipment, factories, etc.). Goods that are jointly consumed.
Central bank Concentration ratio
An institution responsible for monetary and A measure of concentration in an industry where
exchange rate policy which provides banking typically the sales of the largest ‘n
services to the government and to commercial expressed as a percentage of total industry sales;
banks and which is considered the lender of e.g. the 4CR expresses the sales of the largest four
last resort.

Ceteris paribus
All other factors affecting the relationship The degree of optimism or pessimism
examined remaining constant. characterizing households which affects their
spending decisions.

An economic model showing the major Consumer Price Index (CPI)

A weighted average of the prices of the goods
and services that the typical consumer buys,
the foreign sector. expressed in index number form.
Collusion Consumer surplus
When two or more companies in an oligopolistic The difference between how much a consumer is
willing at the most to spend and how much he/
anti-competitive behaviour. she actually spends.
Commercial banks Consumption expenditures (C)
Expenditures by households on durables, non-
which they pay interest and extend loans for durables and services.
which they are paid interest.

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 Default choice
A decrease in government expenditures and/or The default choice is the option that a consumer
an increase in (direct) taxes aimed at decreasing “selects” if he or she does nothing and are
therefore made automatically.

Contractionary (tight) monetary policy

An increase in interest rates (a decrease in When the average price level of a country
the money supply) by the central bank aimed
at decreasing aggregate demand and thus

When real equilibrium output is less than

potential real output.

shifting aggregate supply to the left; usually, Demand

rising commodity prices are responsible, The relationship between various possible prices
especially oil prices or rising wages as a result of and the corresponding quantities that consumers
powerful labour unions. are willing and able to buy per period of time,
ceteris paribus.
Credit item (in BOP)

a country e.g. exports of goods and services or

foreigners purchasing domestic assets. as an economy approaches full employment.

Current account Demand-side policies

Records the value of exports and imports of
goods and services of a country, net income from the level of aggregate demand in order to affect
investments and net current transfers over a
period of time.
Demerit goods
Goods whereby their consumption generates
net exports of goods and services plus net income
from investments plus net current transfers is large incurs costs.
negative.
Depreciation
Current account surplus A decrease in the exchange rate of a currency
A current account surplus exists when the sum of
net exports of goods and services plus net income
Deregulation
from investments plus net current transfers is
positive. When the government decreases or eliminates
regulations (environmental and other) on the
Customs union operation of industries that are hoped to have a
An agreement between countries whereby positive supply side effect on the economy.
members abolish tariffs (and other barriers)
Devaluation
between them and establish a common external
tariff toward non-members.
exchange rate system.
Cyclical unemployment
Differentiated products

aggregate demand (and of sticky money wages). Products which are similar but not identical across
Cyclical unemployment rises as an economy sellers in an industry and are thus considered by
moves into recession. consumers as close but not perfect substitutes.

Debit item Direct taxes

a country e.g. imports of goods and services or

residents purchasing foreign assets.
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 Discount rate
The interest rate the central bank charges on The idea that scarce resources are used in the best
loans to commercial banks. possible way, thereby minimizing resource waste.

Discouraged workers Entrepreneurship

Unemployed workers who quit searching for a job The ability of certain individuals to organize
after looking for one for a long time and are thus the other three factors of production and the
not considered unemployed or part of the labour willingness to take risks.
force but who would gladly accept a job if one
became available. Entry barrier

market.

decreases which means that prices continue to Equilibrium price

rise but at a decreasing rate. The price at which the amount of the good
consumers are willing and able to buy per period
is equal to the amount producers are willing and
A policy initiative to move away from commodity able to offer per period, i.e. the price at which
concentration of exports so that a country, instead quantity demanded is equal to quantity supplied
of relying on only a few commodities to export, tries so that the market clears.
to export a bigger variety of goods and services.
Excess demand
Easy monetary policy When at some price, quantity demanded exceeds
(See expansionary monetary policy.) quantity supplied.

Economic costs Excess supply

When at some price, quantity supplied exceeds
production process that include the value of quantity demanded.

Exchange rate
Economic development The price of a currency expressed in terms of
Economic development is a multidimensional another currency.
concept as it refers to an improvement in living
standards which involves increases in per capita
income levels, reductions in poverty, increased An increase in government expenditures and/or
access to health care and education, increased a decrease in (direct) taxes aimed at increasing
employment opportunities, as well as reduced aggregate demand and thus real output and
inequalities of income and wealth. employment levels.

Economic growth Expansionary (loose) monetary policy

When real GDP of a country increases through time. A decrease in interest rates (an increase in the
money supply) by the central bank with the aim
Economic integration of increasing aggregate demand and thus real
Decreasing or eliminating trade and other barriers output and employment levels.
between countries and coordinating competition,
environmental and macroeconomic policies. Expenditure-reducing policies
Contractionary demand management policies
Economic losses that will lower national income and thus reduce
When total economic costs exceed total revenues

Expenditure-switching policies
Economic union Policies that will try to switch expenditures away
When a group of countries agrees not only to the from imports and towards domestic products by
free movement of goods and services and to the making imports relatively more expensive and
free movement of labour and capital, but also thus undesirable, e.g. through devaluation or
adopt common environmental, competition and through the imposition of tariffs.
other policies.

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 Externality Frictional unemployment
An externality arises when the production or Refers to individuals in-between jobs. It is a type of
consumption of a good imposes costs or creates unavoidable unemployment as people are constantly
in search of better employment opportunities.
does not get compensated or does not pay for,
respectively. Gross domestic product (GDP)

Financial account services produced within an economy over a

Records portfolio and foreign direct investments period of time, usually a year.
into and out of a country over a period of time as
well as changes in reserve assets. Gross national income (GNI)
GNI focuses on the nationality of the factors of
Fiscal policy production involved and the incomes they earn,
A demand-management policy whereby the independently of their location so that GNI =
government changes the level of government GDP + (factor income from abroad − factor
expenditures (G) and/or (direct) taxes (T) in income sent abroad).
order to affect aggregate demand and thus real
output, employment and the average price Hidden unemployment
price level.
unemployment statistics which includes
Fixed exchange rate system discouraged workers, involuntary part-timers,
When the exchange rate is set by the central bank workers forced into early retirement or working
at a level or within an announced range and is below their capacity.
then maintained there through buying and selling
Homogeneous products
of the currency in the foreign exchange market
and/or manipulating the interest rate. Products that consumers consider identical (and are

When the exchange rate is determined solely Human Development Index (HDI)
by market forces without any central bank The HDI measures average achievements of a
intervention. population in terms of health, education and access
to goods and services. These three dimensions are
Foreign aid measured by the following indicators: life expectancy
at birth, mean years of schooling and expected years
developed to developing countries that is non- of schooling and GNI per capita (in US$ PPP).
commercial from the point of view of the donor
and for which the terms are concessional, i.e. Incidence of an indirect tax
interest rate is lower than the market rate and The proportion of an indirect tax paid by the
repayment period longer. consumers and by the producers of the good.

Foreign direct investment (FDI) Income elastic demand

When a change in income leads to a
one country in productive facilities in another proportionately greater change in demand.
country. FDI includes both investing in new
Income elasticity of demand (YED)
facilities and acquiring a controlling percentage of
the shares of existing local companies. The responsiveness of demand to a change in
income.
Framing
Income, expenditure and output method
Framing refers to how options and opportunities
Three conceptually equivalent methods of
measuring GDP. The output method includes all

Free trade agreement (FTA) of time; the income method adds all incomes that
When two or more countries phase-out or eliminate
tariffs (and other barriers) between them while interest and rents); the expenditure method sums
maintaining existing barriers to non-members. all the expenditures made for the purchase of

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 Income inelastic demand Institutional framework
When a change in income leads to a Refers to the laws and regulations of product,
proportionately smaller change in demand. labour and capital markets in a country; more
generally to the legal and regulatory framework
Indebtedness
within which economic activity is conducted.
Within a development framework the external
(foreign) debt of a country. The money a Interdependence
developing country owes to foreign governments, In oligopolistic markets the outcome of any action
multilateral institutions and commercial banks. of one oligopolist depends on the reaction of the

Indirect taxes
Taxes on goods/services or on expenditure. Interest rate
The cost of borrowing or the reward for saving
Industrial policies money over a period of time expressed as a
A set of interventionist supply-side policies percentage.

industries thought to exhibit high growth Investment expenditures (I)

spillovers for the whole economy This support is

in the form of subsidized loans, preferential tax Joint supply
treatment as well as other methods. Two goods are jointly supplied if production of one
automatically leads to the production of the other.
Inferior goods
Goods for which demand decreases as consumer Labour market rigidities
incomes increase. Laws and regulations that do not permit the
labour market to changing conditions e.g. a high
minimum wage, high non-wage labour costs, high
A sustained increase in the average price level.

Land
When equilibrium real output exceeds the level of Natural resources that an economy is endowed with.
potential real output.
Leakages (withdrawals)
Informal economy
The informal economy lies outside the formal one to income not spent on domestic output but

recorded, regulated or taxed by the government. savings, taxes and spending on imports.
Street vendors in many cities are typically part of
Long-term growth
the informal economy.
Growth as a result of more or better resources
Infrastructure becoming available or of improved technology.

government, that decreases the overall cost Loose monetary policy

(See expansionary monetary policy.)
externalities are generated e.g. roads, highways,
Macroeconomics
harbours, electrical grids, telecommunications
networks, sanitation and sewage systems etc. The branch of economics concerned with the
economy as a whole and thus focuses on growth,
Injections
unemployment and the distribution of income.
to spending on domestic goods and services
Managed exchange rate system
that is independent of the level of domestic
income. It includes private investment spending, An exchange rate system in which the central bank
government spending and exports. periodically intervenes whenever the currency
moves in a direction or a speed considered

within a desired but undisclosed band.

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 a country’s trade policies cannot favour some
trading partners over others.
additional unit of a good.
Multilateral agreement
Marginal cost Trade agreements that are negotiated and
The additional cost incurred in producing an administered through the World Trade Organization.
additional unit of a good. Multinational corporations
Corporations that have established a presence
and manage facilities in more than one country.
A result of foreign direct investment.
consumption of an extra unit of a good.
Natural monopoly
Marginal social cost
A natural monopoly is said to exist if the
The extra cost incurred by society from the
available production technology in relation to
production of an extra unit of a good.

Marginal tax rate

The tax paid on the last ‘dollar’ of income
earned. MTR = T/ Y. Natural rate of unemployment
The level of unemployment that exists when the
Market
country is at its potential level of real output and
A mechanism that permits the interaction of the labour market is in equilibrium.
buyers and sellers of a good or a service.
Net exports
Market failure The difference between export revenues and
When market forces (demand and supply import expenditures on goods and services over a
conditions) alone fail to allocate scarce resources period of time.

enough of a good is produced/consumed. Normal goods

Goods for which demand increases if consumer
Maximum price income increases.
(See price ceiling.)

Merit goods
Goods and services whereby their consumption a certain line of business which is equal to what
its resources could have earned in their next best
alternative with the same risk.
at large.
Normative (economic) statements
Microeconomics A value judgement, an opinion; usually spotted
The branch of economics that focuses on the by words such as ‘ought to be’, ‘fair’, ‘unfair’ etc.

Nudges
Minimum price Nudges refer to small design changes capable of

behaviour of people.
Monetary union
When countries in an economic union agree to
share a currency and a central bank. Aid from governments or multilateral institutions
(organizations) such as the World Bank.
Monopoly
Oligopolistic market
high barriers to enter it exist.
either a homogeneous or a differentiated good
Most-Favoured Nation (MFN) principle
and with high barriers to entry.
A pillar of the WTO that requires non-
discriminatory treatment of members so that

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 Open market operations Price elasticity of demand (PED)
The buying and selling of short-term bonds by The responsiveness of quantity demanded to a
the central bank in order to increase or decrease change in price.
respectively the money supply.
Price elasticity of supply (PES)
Opportunity cost The responsiveness of quantity supplied to a
change in price.

Per capita GDP Price elastic supply

GDP divided by population. When a change in price leads to a proportionately
greater change in quantity supplied.
Per capita GNI
GNI divided by population.
A price set by the government above the market
Perfectly competitive markets
equilibrium price that aims at assisting producers,
usually farmers. Also refers to the case where a
homogeneous product that have no barriers to government sets a minimum wage in the labour
entry. market.
Portfolio investment Price inelastic demand
Refers to the acquisition of stocks and bonds and When a change in price leads to a proportionately
smaller change in quantity demanded.
provide them with ownership or management
rights. Price inelastic supply
When a change in price leads to a proportionately
Positive (economic) statements
smaller change in quantity supplied.
An (economic) statement that can (at least in
principle) be tested against data. Price war

Potential output oligopolistic markets.

The level of output an economy can produce
Privatization
and the labour market is in equilibrium, so that The transfer of state-owned assets to the private
only natural unemployment is present; at the sector.
potential level of output, the long run aggregate
Producer surplus
supply is vertical; it is referred to as the full
employment level of output.
minimum it needs to earn to be willing to offer a
Poverty cycle
A vicious circle in which low incomes leading
Production possibilities curve (or frontier)
to poverty are responsible for low savings which
Shows the maximum amount of good Y an
low labour productivity and thus to low income economy is able to produce for each amount of
levels.
employs all of its scarce resources with its given
Preferential trade agreements level of technology.
Any agreement between countries that decreases
or eliminates trade barriers.
The difference between total revenues and total
Price ceiling (maximum price) economic costs.
A price set by the government below the market
equilibrium price with the aim of assisting low Progressive taxation
income households. A tax is a progressive tax if higher income
individuals pay proportionately more so that the
Price elastic demand average tax rate rises as incomes increase.
When a change in price leads to a proportionately
greater change in quantity demanded.

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 Project aid Regressive tax
A tax is a regressive tax if higher income
projects, such as the construction of public individuals pay proportionately less so that the
infrastructure capital. average tax rate decreases as incomes increase.
Property rights Relative poverty
Legal ownership rights over an asset. Property Refers to individuals earning less than 50% of the
rights are part of the institutional framework of country’s median income.
an economy.
Remittances
Proportional taxation Money sent by migrant workers back home.
A tax is a proportional tax if higher income
Rent controls
individuals pay proportionately the same so that
the average tax rate remains constant as incomes Rent controls are examples of price ceilings that
increase. aim at making housing cheaper and thus more
affordable to low income consumers.
Protection
Reserve requirement ratio (RRR)
Refers to policies that aim to restrict import
penetration into a country. The percentage of deposits a commercial bank
has to maintain in its vaults or as deposits at the
Public goods central bank and cannot lend out.
A public good is one that has the following
Resources
two characteristics: it is non-excludable, and its
consumption is non-rival. Anything used in the production of goods and
services.
Quantitative easing (QE)
Revaluation
A relatively new tool of monetary policy whereby
the central bank buys long-term government
exchange rate system.
commercial banks with the aim of pumping cash Rules of thumb (heuristics)
into commercial banks and thus inducing them to
Decision-making shortcuts, which enable
lend more aggressively.
individuals to make quick decisions.
Quota
Scarcity
A quantitative restriction of imports aimed at
The excess of human wants over what can

Rationality
Seasonal unemployment
The assumption that all consumer behaviour
Unemployment that is particular to the time of
is purposeful and obeys certain assumptions
the year.
concerning preferences.
Shortage
Real GDP
When quantity demanded exceeds quantity
GDP measured in constant prices so that the
supplied, as a result of a price ceiling set by the
government.
Real GNI
Short-term growth
GNI measured in constant prices so that the effect
Economic growth that is the result of greater or
better use of existing resources.
Real interest rate
Social sciences
The difference between the bank interest rate and
Academic disciplines that study human behaviour
and social relationships.
Regional trading bloc (agreement) (RTB)
Social surplus
Trade agreements between groups of (usually
The sum of the consumer surplus and producer
neighbouring) countries that wish to decrease
surplus.
protection and integrate further within the group.

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 Total revenues
The product of the price per unit times the
unit of a good. quantity sold.
Structural unemployment Tradable pollution permits (cap and trade)
Unemployment that is a result of a mismatch A market-based solution to the problem of pollution-
between the skills that the unemployed possess
the maximum acceptable level of pollution and then
labour market rigidities.
Subsidies to a certain extent), which are tradable. Firms have
the incentive to engage in active trading until a new
allocation of permits emerges with the total level
a per unit of output basis that aim at decreasing
of pollution achieving the target but with minimal
production costs, and thus price, and increasing
production and consumption levels of a good.
Substitute goods Trade creation
Goods that are in competitive consumption as As a result of signing a customs union agreement,
they satisfy the same needs of consumers.
member instead of producing it itself.
Trade diversion
As a result of a group of countries entering a
remain in a certain line of business. customs union agreement, trade is diverted

Supply
The relationship between possible prices and the
Trade liberalization
offer per period of time. Policies that aim to decrease or eliminate trade
barriers.
Supply-side policies
Market-based or interventionist policies aimed at Transfer payments
increasing the productive capacity of an economy. Payments by the government to individuals that
Surplus
As a result of a minimum price imposed by the
pensions.
government, quantity supplied exceeds quantity
demanded. Unemployment
Sustainability When an individual is actively searching for a job
A process is sustainable if it meets the needs of the
present generation without compromising the ability Wealth
of future generations to meet their own needs. The value of all assets owned by an individual
Sustainable development minus what he or she owes to banks and other
institutions.
Development that meets the needs of the present
generation without compromising the ability of Welfare loss
future generations to meet their own needs. The decreases in social surplus as a result of
Tariff either more or less than the socially optimal level
A tax on imports aimed at protecting domestic of output produced and consumed.
Withdrawals
Tied aid (See leakages.)
Aid that has to be used to buy the donor’s World Trade Organization (WTO)
products (often unnecessary or of low priority
An international organization that includes
and/or more expensive).
164 countries which provides a forum for trade
Tight monetary policy negotiations, sets and enforces trade rules and is the
(See contractionary monetary policy.) arbitrator of trade related disputes among members.

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