IB Economics Definitions

Economics Defnitions Microeconomics Demand: The Demand: The quantity o a good or service that consumers are willing and able to purchase at a given price in a given time period. Supply: The Supply: The willingness and ability o producers to produce produce a quantity o a good or service at a given price in a given time period. Consumer surplus: The surplus: The extra satisaction gained by consumers rom paying a price that is lower than that which they are prepared to pay. Producer surplus: The surplus: The excess o actual earnings that a producer makes rom rom a given quantity o output over and above the amount the producer would be prepared to accept or that output. Allocative efciency: !esources are allocated in the most e"cient way rom society#s point o view. Productive efciency: !esources efciency: !esources are allocated in the most e"cient way rom the producer#s point o view. Price elasticity o demand (PED): $ measure o the responsiveness responsiveness o quantity demanded to a change in price o a product. Price elasticity o supply (PES): $ measure o the responsiveness responsiveness o quantity supplied to a change in price o a product. Cross elasticity o demand (XED): $ measure o how much the demand or a product changes when there is a change in price o another product. Income elasticity o demand (YED): $ measure o the responsiveness responsiveness o quantity demanded to a change in the consumer#s income. Indirect ta: $ tax that is imposed upon expenditure. %t is placed on the selling price o a product raising the frm#s costs. Speci!c ta: $ type o indirect tax. %t is a fxed amount o tax imposed upon a product or example &' tax per unit. Percenta"e (ad valorem) ta: $ type o indirect tax where the tax is a percentage o the selling price. Direct ta: $ tax that is imposed on income or wealth.

Su#sidy: $mount o money paid by the government to a frm per unit o output. Price ceilin": $ maximum price set by the government below the equilibrium price preventing producers rom raising the price above it. Price $oor: $ minimum price set by the government above the equilibrium price preventing producers rom reducing the price below it. %ar&et ailure: $n ine"cient allocation o goods and services in a ree market economy usually shown by the existence o negative externalities o production or consumption. 'e"ative eternality: This occurs when the production or consumption o a good or service has a negative e(ect upon a third party. 'e"ative eternality o production:  This occurs when the production o a good or service creates external costs that are damaging to third parties. rada#le emission permits: These are issued by the government and give frms the licence to create pollution up to a set level. )nce they are issued the frms can buy sell and trade the permits on the market. 'e"ative eternality o consumption:  This occurs when the consumption o a good or service creates external costs that are damaging to third parties. Asymmetric inormation: *hen one party in an economic transaction has access to more inormation or better inormation than the other party. Macroeconomics DP: The total value o all fnished goods and services produced in an economy in a year + the total o all economic activity in a country regardless o who owns the productive assets. 'P*'I: The total income that is earned by a country#s actors o production regardless o where the assets are located. ,-%  ,D/ 0 net property income rom abroad ''I: ,-% 1 depreciation +eal DP: -ominal ,D/ ad2usted or in3ation DP per capita: ,D/ divided by the si4e o the population

reen DP: ,D/ that takes into account any environmental costs incurred orm the production o the goods and services included in the ,D/ fgures. ,reen ,D/  ,D/ 1 environmental costs o production ,usiness cycle: $ cycle showing periods o rising and alling growth o an economy. +ecession: Two consecutive quarters o negative ,D/ growth. A""re"ate demand: The total spending on goods and services in a period o time at every given price level. $D  5 0 % 0 , 0 6 1 M Consumption: The total spending by consumers on domestic goods and services. Investment: The addition o capital stock to the economy. -iscal policy: The set o a government#s policies relating to its spending and taxation rates. %onetary policy: The set o o"cial policies governing the supply o money and the level o interest rates in an economy. A""re"ate supply: The total amount o goods and services that all industries in the economy will produce at every given price level. S.ort run: $ period o time when the actors o production do not change. /on" run: $ period o time in which all actors o production and costs are variable. In$ationary "ap: The economy is in equilibrium at a level o output that is greater than the ull employment level o output. De$ationary "ap: The economy is in equilibrium at a level o output that is less than the ull employment level o output. .e multiplier e0ect: $ny increase in aggregate demand will result in a proportionally larger increase in national income. 1nemployment: /eople o working age who are without work available or work and actively seeking employment. 1nemployment rate: -umber o people who are unemployed expressed as a percentage o the total labour orce.

In$ation: $ sustained increase in the average price level in the economy. De$ation: $ sustained all in the average price level in the economy. Disin$ation: $ alling rate o in3ation. P.illips curve: This shows the inverse relationship between the in3ation rate and the unemployment rate o an economy. Economic "ro2t.: $n increase in real ,D/ over time + an increase in the amount o goods and services produced per head o the population over a period o time. ini inde: $ ratio o the area between the line o equality and a country#s 7oren4 curve 8a9 to the total area under the line o equality 8a9 0 8b9. ini coefcient: $ measurement o the income distribution o a country:s residents. This number which ranges between ; and ' and is based on residents: net income helps defne the gap between the rich and the poor with ; representing perect equality and ' representing perect inequality. %nternational Economics International trade: The exchange o goods and services between countries. A#solute advanta"e: $ country has absolute advantage in the production o a good i it can produce it using ewer resources than another country. Comparative advanta"e: $ country has comparative advantage in the production o a good i it can produce it at a lower opportunity cost than another country. 3orld rade 4r"ani5ation (34): $n international organi4ation that sets the rules or global trading and resolves disputes between its member countries. -ree trade:
Protectionism: $ny economic policy that is aimed at supporting domestic producers at the expense o oreign producers. ari0: $ tax imposed on imported goods. 6uota: $ physical limit on the numbers or value o goods that can be imported into a country. Ec.an"e rate: The value o one currency expressed in terms o another currency. Ec.an"e rate re"ime: The way a country manages its exchange rate. There are three main types 1 fxed 3oating and managed. -ied ec.an"e rate: $n exchange rate regime where the value o  a currency is fxed to the value o another currency or to the value o some other commodity such as gold. +evaluation o currency: *hen the value o the currency is raised. Devaluation o currency: *hen the value o the currency is lowered. -loatin" ec.an"e rate: $n exchange rate regime where the value o a currency is allowed to be determined solely by the demand or and supply o the currency on the oreign exchange market. There is no government intervention. Appreciation o currency value: *hen the value o the currency rises. Depreciation o currency value: *hen the value o the currency alls. %ana"ed ec.an"e rate: $n exchange rate regime where the currency is allowed to 3oat but with some element o intererence rom the government. =sually the central bank will set an upper and lower limit and allow the currency to 3oat reely between these limits. ,alance o payments account: $ record o the value o all the transactions between the residents o one country and the residents o all other countries in the world over a given period o time usually one year. There are two main parts 1 current and capital account. Current account: $ measure o the 3ow o unds rom trade in goods and services plus other income 3ows. 5urrent account balance  balance o trade in goods 0 balance o trade in services 0 net income 3ows 0 net current transers

5urrent account  capital account 0 fnancial account 0 net errors and omissions ,alance o trade in "oods: $ measure o the revenue received rom the exports o tangible goods minus the expenditure on the imports o tangible goods over a given period o time. ,alance o trade in services: $ measure o the revenue received rom the exports o services minus the expenditure on the imports o services over a given period o time. Income: $ measure o the net monetary movement o proft interest and dividends moving into and out o the country over a given period o time as a result o fnancial investment abroad. Current transers: $ measurement o the net transers o money or payments made between countries when no goods or services change hands. -inancial account: %t measures the net change in oreign ownership to domestic fnancial assets. There are three components 1 direct investment portolio investment and reserve assets. Direct investment: $ measure o the purchase o long>term assets where the purchaser is aiming to gain a lasting interest in a company in another economy. Portolio investment: $ measure o stock and bond purchases which are not direct investment since they do not lead to a lasting interest in a company. +eserve assets: The reserves o gold and oreign currencies which all countries hold and which are itemi4ed in the o"cial reserve account. Ependiture7s2itc.in" policies: $ny policies implemented by the government that attempt to switch the expenditure o domestic consumers away rom imports towards domestically produced goods and services. Ependiture7reducin" policies: $ny policies implemented by the government that attempt to reduce overall expenditure in the economy so shiting $D to the let. %ars.all7/erner condition: $ rule that tells us how successul a depreciation or devaluation o a currency#s exchange rate will be as a means to improve a current account defcit in the balance o payments. %t states that reducing the value o the exchange rate will only be successul i the total value o the /ED or exports and /ED or imports is greater than one. /EDexports 0 /EDimports ? '

 87curve: This curve shows what happens to a current account defcit over time when the exchange rate is devalued or depreciated. The current account defcit gets worse beore it gets better and this is known as the @>curve e(ect. Economic inte"ration: $ process whereby countries coordinate and link their economic policies. ,ilateral trade a"reement: $n agreement relating to trade between two countries where the aim is usually to reduce or remove tari(s or quotas that have been placed on items traded between the two countries. radin" #loc: $ group o countries that 2oin together in some orm o agreement in order to increase trade between themselves or to gain economic benefts rom cooperation on some level. Preerential tradin" areas: $ trading bloc that gives preerential access to certain products rom certain countries usually carried out by reducing 8but not eliminating9 tari(s. -ree trade areas: $n agreement made between countries where the countries agree to trade reely among themselves but are able to trade with countries outside o the ree trade area in whatever way they wish. E.g. -$cost producer to a low>cost producer.

rade diversion: This occurs when the entry o a country into a customs union leads to the production o a good or service transerring rom a low>cost producer to a high>cost producer. erms o trade: $n index that shows the value o a country#s average export prices relative to their average import prices.  T)T 

weighted index of averageexport prices  × 100 weighted index of average import prices

Development Economics Economic development: $n increase in the standard o living o people in an economy brought about by improving actors like health education inrastructure and international policies. ric&le7do2n e0ect: The rich spend more and some o this goes to the poor. +elative poverty: $ person is said to be in relative poverty i they do not reach some specifed level o income e.g. less than A;B o average incomes. A#solute poverty: This is measured in terms o the basic necessities or survival. %t is the amount a person needs in order to live. E.g. =C&'.A per day. Poverty cycle: $ny linked combination o barriers to growth and development that orms a circle thus sel>perpetuating unless the circle can be broken. Purc.asin" po2er parity (PPP) ec.an"e rate:  This attempts to equate the purchasing power o currencies in di(erent countries calculated by comparing the prices o identical goods and services in di(erent countries. /ie epectancy at #irt.: $ measure o the average number o years that a person may expect to live rom the time that they are born. Inant mortality rate: $ measure o the number o deaths o babies under the age o one year per thousand live births in a given year. Adult literacy rate: $ measure o the proportion o the adult population 8aged 'A or over9 that is literate expressed as a percentage o the whole adult population or a country at a specifc point in time. 'et enrolment ratio in primary education: $ measure o the ratio o the number o children o primary school age enrolled in

primary school to the total number o children who are o primary school age in the country. 9uman Development Inde (9DI): $ composite index that brings together three goals that can be measured 1 a long and healthy lie improved education and a decent standard o living. enuine Pro"ress Indicator (PI):  This attempts to measure whether a country#s growth has actually led to an improvement in the welare o the people. Inrastructure: The essential acilities and services such as roads airports sewage treatment water systems railways telephone and other utilities that are necessary or economic activity. Corruption: The dishonest exploitation o power or personal gain. -inancial mar&ets: The institutions where lending and borrowing is carried out. %icro7!nance: The provision o fnancial services such as small loans savings accounts and insurance to poor countries. %icro7credit: The provision o small loans to individuals who have no access to traditional sources. Import su#stitution: $ strategy that says that a developing country should wherever possible produce goods domestically rather than import them. Eport promotion (eport7led "ro2t.):  This is where growth is achieved by concentrating on increasing exports and export revenue as a leading actor in the aggregate demand o the country. rade li#erali5ation: The reduction or removal o trade barriers that block the ree trade o goods and services between countries. -air trade sc.emes: $n attempt to ensure that producers o ood 8and some non>ood9 products in developing countries receive a air deal when they are selling their products. -orei"n direct investment (-DI): 7ong>term investment by private multinational corporations 8M-5s9 in countries overseas. Aid: $ny assistance that is given to a country that would not have been provided through normal market orces. 4fcial aid: $id that is organi4ed by a government or an o"cial government agency o a donor country. 1nofcial aid: $id that is organi4ed by an -,) such as )xam.

'on7"overnmental or"ani5ation ('4): $ny non>proft voluntary citi4ens# group that is organi4ed on a local national or international level. 9umanitarian aid: $id given to alleviate short>term su(ering which may be caused by such events as droughts wars or natural disasters. rant aid: $ type o humanitarian aid 1 short>term aid provided as a git and does not have to be repaid. There are three types 1 ood medical and emergency aid. -ood aid: The provision o ood rom donor countries or money to pay or ood which also includes money given or the transport storage and distribution o ood. %edical aid: The provision o medical services and provisions rom donor countries as well as money to acilitate medical services. Emer"ency aid: The provision o emergency supplies including temporary shelters tents clothing uel heating and lighting. Development aid: $id given in order to alleviate poverty in the long run and improve the welare o individuals. %t is also called )"cial Development $ssistance 8)D$9. /on"7term loans: 7oans that are usually repayable by the developing country over a period o '; to ; years. ied aid: ,rants or loans that are given to a developing country but only on the condition that the unds are used to buy goods and services rom the donor country. Proect aid: Money given or a specifc pro2ect in a country and is oten given in the orm o grant aid that requires no repayment. ec.nical assistance aid: This aims to raise the level o technology in developing countries by bringing in oreign technology and technicians who can instruct on its use and also to raise the quality o human capital by the provision o training acilities and export guidance. Commodity aid: ,rant aid given by countries to increase productivity in developing countries. ,ilateral aid: $id given directly rom one country to another. %ultilateral aid: $id given by rich countries to international aid agencies like the %M<.