Glossary

Glossary of subject-specific terms

This is not an exhaustive list of terms that may be assessed. Any technical term within the guide can
be assessed.

Glossary term Glossary definition

Abnormal profit This arises when average revenue is greater than average cost (greater than the
minimum return required by a firm to remain in a line of business).
Absolute advantage A country has an absolute advantage in the production of a good if it can
produce more of it with the same resources or, equivalently, if it can produce
the same amount using fewer resources compared to another country.
Absolute poverty People living below the minimum income necessary to satisfy basic physical
needs (food, clothing, and shelter); as of October 2015, the World Bank
international poverty line is set at US$1.90 PPP per day.
Abuse of market power When a firm acts with the intention to eliminate competitors or to prevent entry
of new firms in a market.
Actual growth Occurs when real output (real GDP) increases through time and is a result of
greater or better use of existing resources. In the PPC model it can be illustrated
by a movement from a point inside a PPC to another point in the northeast
direction.
Administrative barriers Trade barriers in the form of regulations that aim to limit imports into a country.
These barriers may take the form of product safety standards, sanitary standards
or pollution standards but may also include more stringent than necessary
application of customs procedures.
Adverse selection A type of market failure involving asymmetric information, where the party with
the incomplete information is induced to withdraw from the market. The buyer,
for example, of a used car, may hesitate to buy without knowing about the
quality of the vehicle. The seller, for example of health insurance, may hesitate
to sell a policy without knowing the health of the buyer.
Aggregate demand (AD) Planned spending on domestic goods and services at different average price
levels, per period of time. Consists of consumption, investment and
government expenditures plus net exports.
Aggregate demand A curve showing the planned level of spending on domestic output at different
curve average price levels.
Aggregate supply (AS) The planned level of output domestic firms are willing and able to offer at
different average price levels.
Aggregate supply curve A curve showing the planned level of output that domestic firms are willing and
able to offer at different average price levels.
Allocative efficiency Achieved when just the right amount of goods and services are produced from
society’s point of view so that scarce resources are allocated in the best possible
way. It is achieved when, for the last unit produced, price (P) is equal to marginal
cost (MC), or more generally, if marginal social benefit (MSB) is equal to marginal
social cost (MSC).

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Glossary term Glossary definition

Allocative inefficiency When either more or less than the socially optimal amount is produced and
consumed so that misallocation of resources results. MSB ≠ MSC.
Anchoring Refers to situations when people rely on a piece of information that is not
necessarily relevant as a reference point when making a decision.
Anti-dumping Typically refers to tariffs that aim at raising the artificially low price of a dumped
imported good to the level of the higher domestic price. A dumped good is one
that is exported at a price below the cost of producing it.
Anti-monopoly Laws and regulations that are intended to restrict anti-competitive behaviour of
regulation firms that are abusing their market power.
Appreciation When the price of a currency increases in a floating exchange rate system.
Appropriate technology Technology that relies mostly on the relatively abundant factor an economy is
endowed with.
Asymmetric information A type of market failure where one party in an economic transaction has access
to more or better information than the other party.
Automatic stabilizers Institutionally built-in features (like unemployment benefits and progressive
income taxation) that tend to decrease the short-term fluctuations of the
business cycle without the need for governments to intervene.
Average costs Total costs per unit of output produced.
Average revenue Revenue earned per unit sold; average revenue is thus equal to the price of the
good.
Average tax rate The ratio of the tax paid by an individual over their income expressed as a
percentage.
Balance of payments A record of the value of all transactions of a country with the rest of the world
over a period of time.
Balance of trade in Part of the balance of payments, it is the value of exports of goods of a country
goods minus the value of imports of goods over a given period of time.
Balance of trade in Part of the balance of payments, it is the value of exports of services of a country
services minus the value of imports of services over a given period of time.
Barriers to entry Anything that deters entry of new firms into a market, for example, licenses or
patents.
Behavioural economics A subdiscipline of economics that relies on elements of cognitive psychology to
better understand decision-making by economic agents. It challenges the
assumption that economic agents (consumers or firms) will always make
rational choices with the aim of maximizing with respect to some objective.
Biases Systematic deviations from rational choice decision-making.
Bilateral trade An agreement between two countries to phase-out or eliminate trade related
agreement barriers.
Bounded rationality A term introduced by Herbert Simon that suggests consumers and businesses
have neither the necessary information nor the cognitive abilities required to
maximize with respect to some objectives (such as utility), and thus choose to
satisfice. They therefore are rational only within limits.
Bounded self-control The idea that individuals, even when they know what they want, may not be
able to act in their interests. Findings of bounded self-control include evidence

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Glossary term Glossary definition

of procrastination (for example, among students, professionals and others) that
may result in self-harm, and submitting to temptation (for example, dieters).
Bounded selfishness The idea that people do not always maximize self-interest but also have concern
for the well-being of others as shown by volunteer work and charity
contributions.
Budget deficit When government expenditures exceed government (tax) revenues usually
over a period of a year.
Business confidence A measure of the degree of optimism that businesses have about the economic
future.
Business cycle The short-term fluctuations of real GDP around its long-term trend (or potential
output).
Business tax Tax levied on the income of a business or corporation.
Capital Physical capital refers to means of production that include machines, tools,
equipment and factories; the term may also refer to the infrastructure of a
country. Human capital refers to the education, training, skills and experience
embodied in the labour force of a country.
Capital account A subaccount of the balance of payments that includes credit and debit entries
for non-produced, non-financial assets as well as capital transfers between
residents and non-residents.
Capital flight Occurs when money and other assets flow out of a country to seek a “safe
haven” in another country.
Capital gains tax A tax on the profits realized from the sale of financial assets such as stocks or
bonds.
Capital transfers Include financial or non-financial assets for items including debt forgiveness,
investment, non-life insurance claims. They are part of the capital account of the
balance of payments.
Carbon (emissions) taxes Taxes levied on the carbon content of fuel. They are a type of Pigouvian tax.
Central bank An institution charged with conducting monetary and exchange rate policy,
regulating behaviour of commercial banks, and providing banking services to
the government and commercial banks.
Ceteris paribus A Latin expression meaning “other things being equal”.
Choice architecture The design of environments based on the idea that the layout, sequencing, and
range of choices available affect the decisions made by consumers.
Circular economy An economic system that looks beyond the linear take-make-dispose model
and aims to redefine growth, focusing on society-wide benefits. It is based on
three principles: design out waste, keep products and materials in use, and
regenerate natural systems.
Circular flow of income A simplified illustration that shows the flows of income and expenditures in an
economy.
Collective self- In the case of a common pool resource, such as a fishery, users solve the
governance problem of overuse by devising rules concerning the obligations of the users,
the monitoring of the use of the resource, penalties of abuse, and conflict
resolution.

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Glossary term Glossary definition

Collusive oligopoly A market where firms agree to fix price and/or to engage in other
anticompetitive behaviour.
Common market When a group of countries agree not only to free trade of goods and services
but also to free movement of capital and labour.
Common pool resources A diverse group of natural resources that are non-excludable, but their use is
rivalrous, for example, fisheries.
Comparative advantage When a country can produce a good at a lower opportunity cost compared to
another country.
Competitive market A market with many firms acting independently where no firm has the ability to
control the price.
Competitive market Occurs if in a free competitive market, quantity demanded is equal to quantity
equilibrium supplied.
Competitive supply When goods that a firm is producing use the same resources in their production
process. The goods thus compete with each other for the use of the same
resources.
Complements Goods that are jointly consumed, for example, coffee and sugar.
Composite indicator An indicator that is comprised as an average of more than one economic
variable, for example, the HDI.
Concentration ratios The proportion of industry sales accounted for by the largest firms; the greater
this proportion, the greater the degree of market power of the firms in the
industry.
Consumer confidence A measure of the degree of optimism that households have about their income
and economic prospects.
Consumer nudges Small design changes that include positive reinforcement and indirect
suggestions that can influence the behaviour of consumers.
Consumer price index The average of the prices of the goods and services that the typical consumer
(CPI) buys expressed as an index number. The CPI is used as a measure of the cost of
living in a country and to calculate inflation.
Consumer surplus The difference between how much a consumer is at most willing to pay for a
good and how much they actually pay.
Consumption (C) Spending by households on durable and non-durable goods and on services
over a period of time.
Contractionary fiscal Refers to a decrease in government expenditures and/or an increase in taxes
policy that aim at decreasing aggregate demand and thus reducing inflationary
pressures.
Contractionary A policy employed by the central bank involving an increase in interest rates
monetary policy and aimed at decreasing aggregate demand and thus inflationary pressures.
Referred to also as tight monetary policy.
Corporate indebtedness The sum of what a corporation owes to banks or other holders of its debt.
Corporate social A corporate goal adopted by many firms that aims to create and maintain an
responsibility ethical and environmentally responsible image.
Cost-push inflation Inflation that is a result of increased production costs (typically because of rising
money wages or rising commodity prices) and illustrated by a leftward shift of
the SRAS curve.

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Credit items Refers to transactions within the balance of payments of a country that lead to
an inflow of currency (for example, the export of goods); these transactions
enter the account with a plus sign.
Credit rating A grade assigned by certain agencies (such as Moody’s or Standard and Poor’s)
on the borrowing risks a prospective issuer of debt (for example, of a bond)
presents to lenders.
Crowding out The idea that expansionary fiscal policy is not very effective in increasing
aggregate demand because the increased borrowing needs of the government
to finance the increased expenditures could lead to increased interest rates.
Thus, reducing private sector investment, consumer spending, and other
components of AD.
Current account A subaccount of the balance of payments that records the value of net exports
in goods and services, net income and net current transfers of a country over a
period of time.
Current account deficit Exists when the sum of net exports of goods and services plus net income plus
net current transfers is negative (or simply when debits or outflows are greater
than credits or inflows).
Current account surplus Exists when the sum of net exports of goods and services plus net income plus
net current transfers is positive (or simply when credits or inflows are greater
than debits or inflows).
Current transfers An entry in the current account that records payments between residents and
non-residents of a country without something of economic value being
received in return and that affect directly the level of disposable income (for
example, workers remittances, pensions, aid and grants, and so on).
Customs union An agreement between countries to phase out or eliminate tariffs and other
trade barriers and establish a common external barrier toward non-members.
Cyclical (demand- Unemployment that is a result of a decrease in aggregate demand and thus of
deficient) economic activity; it occurs in a recession.
unemployment
Debit items Refers to transactions within the balance of payments of a country that lead to
an outflow of currency (for example, the import of services); these transactions
enter the account with a minus sign.
Debt relief (cancellation) A reduction of the debt burden of developing countries organized by the World
Bank and the IMF.
Debt servicing Refers to the repayment of principal and interest on the debt of a person, a firm
or a country.
Default choice When a choice is made by default, meaning that when given a choice it is the
option that is selected when one does not do anything.
Deflation A sustained decrease in the average price level of a country.
Deflationary/ Arises when the equilibrium level of real output is less than potential output as
recessionary gap a result of a decrease in AD.
Demand The relationship between possible prices of a good or service and the quantities
that individuals are willing and able to buy over some time period, ceteris
paribus.

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Demand curve A curve illustrating the relationship between possible prices of a good or service
and the quantities that individuals are willing and able to buy over some time
period, ceteris paribus. It is normally downward sloping.
Demand management Policies that aim at manipulating aggregate demand through changes in
interest rates (monetary policy) or changes in government expenditures and
taxation in order to influence growth, employment and inflation.
Demand-pull inflation Inflation that is caused by increases in aggregate demand.
Demand side policies Refers to economic policies that aim at affecting aggregate demand and thus
macroeconomic variables such as growth, inflation and employment; demand
side policies include fiscal policy and monetary policy.
Demerit goods Goods or services that not only harm the individuals who consume these but
also society at large, and that tend to be overconsumed. Usually they are due to
negative consumption externalities.
Depreciation A decrease in the value of a currency in terms of another currency in a floating
or managed exchange rate system.
Deregulation Policies that reduce or eliminate regulations related to the operation of firms so
that production costs decrease—resulting in increased competition and higher
levels of output.
Devaluation A decrease in the value of a currency in a fixed exchange rate system.
Development aid Aid aimed at assisting developing countries in their development efforts.
Includes project aid, program aid and debt relief. It is concessional meaning
there are low interest rates and long repayment periods.
Direct taxes Taxes on income, profits or wealth paid directly to the government.
Discount rate The interest rate that a central bank charges commercial banks for short-term
loans (also referred to as the refinancing rate).
Disinflation When the average price level continues to rise but at a slower rate so that the
rate of inflation is positive but lower.
Dumping When a firm sells abroad at a price below average cost or below the domestic
price.
Economically least According to the UN these are low-income countries facing severe structural
developed countries constraints to sustainable development, with low levels of human assets, highly
(ELDCs) vulnerable to economic and environmental shocks.
Economic development A multidimensional concept involving a sustained increase in living standards
that implies higher levels of income and thus greater access to goods and
services, better education and health, a better environment to live in as well as
individual empowerment.
Economic growth Refers to increases in real GDP over time.
Economic integration Economic interdependence between countries usually involving agreements
between two or more countries to phase-out or eliminate trade and other
barriers between them.
Economics Economics is the study of how to make the best possible use of scarce or limited
resources to satisfy unlimited human needs and wants.
Economic well-being A multidimensional concept relating to the level of prosperity and quality of
living standards in a country.

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Economies of scale Falling average costs that a firm experiences when it increases its scale of
operations.
Efficiency In general, involves making the best use of scarce resources. May refer to
producing at the lowest possible cost or to allocative efficiency where marginal
social costs are equal to marginal social benefits or where social surplus is
maximum.
Elasticity A measure of the responsiveness of an economic variable (such as the quantity
demanded of a product) to a change in another economic variable (such as its
price or income).
Elasticity of demand for A measure of the responsiveness of the volume of exports to a change in their
exports price.
Elasticity of demand for A measure of the responsiveness of the volume of imports to a change in their
imports price.
Engel curve A curve showing the relationship between consumers’ income and quantity
demanded of a good. It indicates whether a good is normal or inferior.
Entrepreneurship Refers to the ability of certain individuals to organize the other factors of
production (land, labour, capital) and their willingness to take risks.
Equilibrium A state of balance that is self-perpetuating in the absence of any outside
disturbance.
Equity The concept or idea of fairness.
Excess demand Occurs when quantity demanded at some price is greater than quantity
supplied.
Excess supply Occurs when quantity supplied at some price is greater than quantity
demanded.
Exchange rate The value of one currency expressed in term of another currency; for example,
€1 = US$1.5.
Excludable A characteristic that most goods have that refers to the ability of producers to
charge a price and thus exclude whoever is not willing or able to pay for it from
enjoying it.
Expansionary fiscal Refers to an increase in government expenditures and/or a decrease in taxes
policy that aim at increasing aggregate demand and thus real output and
employment.
Expansionary monetary Monetary policy aiming at increasing aggregate demand through a decrease in
policy interest rates; also referred to as easy monetary policy.
Expenditure approach One of three analytically equivalent approaches of measuring GDP that adds all
the expenditures made on final domestic goods and services over a period of
time by households, firms, the government and foreigners.
Expenditure reducing Contractionary demand side policies aiming at decreasing national income and
thus expenditures on imports so that a current account deficit narrows.
Expenditure switching Policies aimed at switching expenditures away from imports towards
domestically produced goods and services by making imports more expensive
in order to narrow a current account deficit. It includes lowering the exchange
rate as well as adopting trade protection.

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Exports Goods and services produced in one country and purchased by consumers in
another country.
Export promotion Growth policies aiming at expansion of export revenues as the vehicle of
economic growth; often contrasted to import substitution.
Export revenue The revenues collected by exporting firms.
Export subsidy Payments made by the government to exporting firms on the basis of the
number of units exported.
External balance A situation where the value of a country’s exports is balanced by the value of its
imports over a period of time, such that a current account surplus or deficit does
not persist over long periods.
Externalities External costs or benefits to third parties when a good or service is produced or
consumed. An externality arises when an economic activity imposes costs or
creates benefits on third parties for which they are not compensated or do not
pay for respectively.
Factors of production Resources used in the production of goods and services; include land (natural
resources), labour, capital and entrepreneurship.
Financial account In the balance of payments this records inflows and outflows of portfolio and
FDI funds over a period of time, official borrowing and changes in reserve
assets.
Firm An entity such as a business that uses factors of production in order to produce
and sell goods and services and earn profits. It is an important decision maker in
a market economy.
Firms Productive units that transform inputs (factors of production) into output
(goods and services), usually aiming at earning profits.
Fiscal policy A demand-side policy using changes in government spending and/or direct
taxation to influence aggregate demand and thus growth, employment and
prices.
Fixed exchange rate An exchange rate system where the exchange rate is fixed, or pegged, to the
value of another currency (or to the average value of a selection of currencies)
and maintained there with appropriate central bank intervention.
Floating exchange rate An exchange rate system where the exchange rate is determined solely by the
market demand and market supply of the currency in the foreign exchange
market without any central bank intervention.
Foreign aid Refers to flows of grants or loans from developed to developing countries that
are non-commercial from the point of view of the donor and for which the
terms are concessional (that is, the interest rate is lower than the market rate
and the repayment period longer).
Foreign direct When a firm establishes a productive facility in a foreign country or acquires
investment (FDI) controlling interest (at least 10% of the ordinary shares) in an existing foreign
firm.
Foreign sector In an open economy the term refers to exports and imports.
Framing In behavioural economics, the term refers to the way choices are presented as a
simple change of the “frame”, that may affect the choice made. For example,
highlighting the positive or the negative aspects of the same choice may lead to
different decisions.

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Free goods Goods such as air or sea water that are not considered scarce and thus do not
have an opportunity cost.
Free market economy An economy where the means of production are privately owned and where
market forces determine the answers to the fundamental questions (what/how
much, how and for whom) that all economies face.
Free rider problem Arises when individuals consume a good or service without paying for it
because they cannot be excluded from enjoying it.
Free trade International trade that is not subject any kind of trade barriers, such as tariffs or
quotas.
Free trade area/ An agreement between two or more countries to phase-out or eliminate trade
agreement barriers between them, members of the agreement are free to maintain their
own trade policy towards non-members.
Frictional Unemployment of individuals who are in-between jobs, as people quit to find a
unemployment better job or to move to a different location.
Full employment A goal of macroeconomic policy that aims at fully utilizing the scarce factor of
production labour. Full employment exists when the economy is producing at
its potential level of real output and thus there is only natural unemployment
(the AD–AS model considers the AD and AS curves together). In the production
possibilities curve (PPC model), full employment exists when the economy is
producing on the PPC.
Full employment level of The level of output that is produced by the economy when there is only natural
output unemployment.
Game theory A branch of mathematics that studies the strategic interaction of decision-
makers that may be individuals, firms, countries, and so on.
Gender inequality index A composite indicator that measures gender inequalities in three dimensions of
(GII) human development, namely reproductive health, empowerment and
economic status.
Gini coefficient A measure of the degree of income inequality of a country that ranges from
zero (perfect income equality) to one (perfect inequality). Diagrammatically it is
the ratio of the area between the Lorenz curve and the diagonal over the area of
the half-square.
Government (national) The sum of all past budget deficits minus any budget surpluses; the total
debt amount the government owes to domestic and foreign creditors.
Government spending Refers to all spending by the government that is distinguished into current
(G) expenditures, capital expenditures and transfer payments.
Gross domestic product The value of all final goods and services produced within an economy over a
(GDP) period of time, usually a year or a quarter.
Gross national income The income earned by all national factors of production independently of where
(GNI) they are located over a period of time; it is equal to GDP plus factor income
earned abroad minus factor income paid abroad.
Growth in production When the production possibilities of a country increase because of more/better
possibilities resources and/or better technology becoming available; illustrated by a shift
outwards of the PPC.
Happiness Index An index that is used to measure economic well-being of a population using
several quality of life dimensions.

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Happy Planet Index An index that combines four elements to show how efficiently residents of
different countries are using environmental resources to lead long, happy lives.
The elements are well-being, life expectancy, inequality of outcomes and
ecological footprint.
Homogeneous product Goods that are considered identical across firms in the eyes of consumers;
examples include mostly primary sector goods like corn, wheat or copper.
Household The money that households owe.
indebtedness
Households Groups of individuals in the economy who share the same living
accommodation, who pool their income and jointly decide the set of goods and
services to consume.
Human capital The education, training, skills, experience and good health embodied in the
labour force of a country.
Human Development A composite index of development that reflects the three basic goals of
Index (HDI) development, which are a long and healthy life, improved education, and a
decent standard of living. The variables measured are life expectancy at birth,
mean years of schooling and expected years of schooling, and GNI per capita
(PPP US$).
Humanitarian aid Aid given to alleviate short-term suffering, consisting of food aid, medical aid,
and emergency relief aid usually as a result of a natural catastrophe or war.
Imperfect competition A market structure where firms have a degree of market power as they face a
negatively sloped demand curve and can thus set price.
Imperfect information When the information about a market or a transaction is incomplete.
Import expenditure The value of imports of goods and services.
Imports The value of goods and services purchased domestically that are produced
abroad.
Import substitution A growth strategy where domestic production is substituted for imports in an
attempt to shift production away from the primary sector and industrialize. This
strategy requires that the domestic industry is protected from import
competition.
Incentive-related Policies that aim at improving economic incentives of individuals and firms.
policies
Incentive role of prices Prices provide producers and consumers the incentive to respond to price
changes. Given a price change, producers have the incentive to change the
quantity supplied in accordance with the law of supply, while consumers have
the incentive to change the quantity demanded based on the law of demand.
Income A flow of earnings from using factors of production to produce goods and
services. Wages and salaries are the factor reward to labour and interest is the
flow of income for the ownership of capital.
Income approach One of the three equivalent ways that GDP can be measured, by adding all the
incomes generated in the production process (wages, profits, interest and rent)
for a given time period.
Income effect The law of demand is explained by the substitution and the income effect. The
income effect states that if the price of a good increases then the real income of

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consumers decreases and, typically, they will tend to buy less of the good—thus
working in the same direction as the substitution effect.
Income elasticity of The responsiveness of demand for a good or service to a change in income.
demand (YED)
Indirect taxes Taxes on expenditure to buy goods and services.
Industrial policies A type of interventionist supply-side policies whereby the government chooses
to support specific industries through preferential tax cuts, subsidies, subsidized
loans and other means as they are considered pivotal in the growth prospects
of the economy.
Inequality adjusted A composite indicator consisting of an average of a country’s achievements in
Human Development health, education and income all adjusted for the degree of inequality
Index (IHDI) characterizing each.
Infant industry Refers to a new industry that should be protected from foreign competition
until it is large enough to achieve economies of scale that will allow it to be
internationally competitive. It is used as an argument in favour of trade
protection in developing countries.
Inferior goods Lower quality goods for which higher quality substitutes exist; if incomes rise,
demand for the lower quality goods decreases.
Inflation A sustained increase in the average level of prices.
Inflationary gap The case where equilibrium real output exceeds potential output as a result of
an increase in AD.
Inflation rate The percentage change between two periods of the average price level, usually
measured through the CPI.
Informal economy Refers to the part of an economy where activity is not officially recorded,
regulated or taxed. The activities of the informal economy are not included in a
country’s national income figures.
Infrastructure Physical capital typically financed by governments that is essential for economic
activity to take place, including roads, power, telecommunications and
sanitation, generating significant positive externalities.
Injections Within the circular flow model these refer to spending on domestic output that
does not originate from households and thus includes investment spending by
firms, government expenditures and exports.
Interest rate The cost of borrowing money or the reward for saving money over a period of
time expressed as a percentage.
International Monetary An international financial institution of 189 countries whose objectives include
Fund (IMF) to improve global monetary cooperation and secure financial stability by
monitoring the economic and financial policies of its members and providing
them with advice and with loans, if they face balance of payments difficulties.
International trade Trade that involves the exports and imports of goods or services between
countries.
Interventionist supply A set of policies that aim to increase an economy’s productive capacity that
side policies relies on a greater role for the government; these include expenditures on
infrastructure, education, health care, research and development, and all
industrial policies.

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Investment (I) Spending by firms on capital goods such as machines, tools, equipment and
factories.
J-curve Following devaluation or a sharp depreciation, a trade deficit will typically
widen before it starts improving thus tracing the letter “J” if plotted against
time, because the Marshall-Lerner condition is satisfied only after a period of
several months following the decreased value of the currency.
Joint supply Goods jointly produced, for example beef and cattle hides; producing one
automatically leads to the production of the other.
Keynesian aggregate An aggregate supply curve that shows the level of real output produced in an
supply curve economy in relation to the price level. It consists of three sections: a horizontal
section, an upward-sloping section and a vertical section. Changes in real GDP
or the price level depend on aggregate demand and how close to capacity the
economy is operating.
Keynesian multiplier The idea that an increase (or, more generally, a change) in any injection will lead
to a greater increase (change) in real GDP or national income because an
increase in spending generates additional income that leads to further
spending, and thus more income. Its size depends on the size of the
withdrawals from the circular flow, as these reflect income not spent on
domestic output.
Keynesian revolution An economic school of thought based upon the works of John Maynard Keynes,
challenging the classical (laissez faire) viewpoint and advocating an
interventionist role for the government in managing the level of aggregate
demand and thus of economic activity.
Labour One of the four factors of production that refers to the physical and mental
contribution of workers to the production process.
Labour market flexibility The labour market is considered flexible if it can adjust fast and fully to changes
in labour demand and labour supply conditions.
Labour union An organization of workers whose goals include improving working conditions
and achieving higher compensation for members. Unions permit workers to
negotiate more effectively with employers.
Laissez faire The view that if market forces are left alone unimpeded by government
intervention the outcome will be efficient.
Land One of the four factors of production that refers to the natural resources with
which an economy is endowed; also referred to as “gifts of nature”.
Land rights Property (ownership) legal rights over land holdings that include rights to
possess, occupy and use the land.
Law of demand A law stating that as the price of a good falls, the quantity demanded will
increase over a certain period of time, ceteris paribus.
Law of diminishing A short-run law of production stating that as more and more units of the
marginal returns variable factor (usually labour) are added to a fixed factor (usually capital) there
is a point beyond which total product continues to rise but at a diminishing rate
or, equivalently, marginal product starts to decrease.
Law of diminishing The idea that as an individual consumes additional units of a good, the
marginal utility additional satisfaction enjoyed decreases.
Law of supply A law stating that as the price of a good rises, the quantity supplied will rise over
a certain period of time, ceteris paribus.

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Leakages Income not spent on domestic goods and services. It includes savings, taxes and
import expenditure.
Long-run aggregate Aggregate supply that is dependent upon the resources and technology in the
supply (LRAS) economy, thus being independent of the price level. It is vertical at the level of
potential output. It can only be increased by improvements in the quantity
and/or quality of factors of production as well as improved technology.
Long-run Phillips curve A curve showing the monetarist view that there is no trade-off between
inflation and unemployment in the long run and that there exists a natural rate
of unemployment at the level of potential output.
Long run in The period of time when all factors of production are variable.
microeconomics
Long run in The period of time when the prices of all factors of production, especially wages,
macroeconomics change to match changes in the price level.
Long-term growth Growth over long periods of time. In the PPC model this is shown by outward
shifts of the PPC. When shown in the AD–AS model (the AD–AS model considers
the AD and AS curves together), it is shown by rightward shifts in the LRAS
curve.
Long-term growth trend Refers to average growth over long periods of time shown in the business cycle
diagram as the line that runs through short-term fluctuations, indicating
changes in potential output
Lorenz curve A curve showing what percentage of the population owns what percentage of
the total income or wealth in the economy. It is calculated in cumulative terms.
The further the curve is from the line of absolute equality (along the diagonal),
the more unequal the distribution of income.
Loss (economic) Occurs when total costs of a firm are greater than total revenues. It is equal to
total cost minus total revenue.
Luxury goods Goods that are not considered essential by consumers therefore they have a
price elastic demand (PED > 1), or income elastic demand (YED > 1).
Macroeconomics The study of aggregate economic activity. It investigates how the economy as a
whole works.
Managed exchange rate An exchange rate that floats in the foreign exchange markets but is subject to
intervention from time to time by domestic monetary authorities, in order to
prevent undesirable movements in the exchange rate.
Mandated choices Choices made by consumers who are required to state whether or not they wish
to take part in an action.
Manufactured products Products or goods that have been produced by workers often working with
capital goods.
Marginal benefit The extra or additional benefit enjoyed by consumers that arises from
consuming one more unit of output.
Marginal costs The extra or additional costs of producing one more unit of output.
Marginal propensity to The proportion of extra or additional income that is spent by households on
consume (MPC) goods and services (consumption).
Marginal propensity to The proportion of extra or additional income that is spent by households on
import (MPM) imported goods and services.

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Marginal propensity to The proportion of extra or additional income that is saved by households.
save (MPS)
Marginal propensity to The proportion of extra or additional income that is paid in taxes, also referred
tax (MPT) to as the marginal tax rate.
Marginal revenue The extra or additional revenue that arises for a firm when it sells one more unit
of output.
Marginal social benefit The extra or additional benefit/utility to society of consuming an additional unit
(MSB) of output, including both the private benefit and the external benefit.
Marginal social cost The extra or additional cost to society of producing an additional unit of output,
(MSC) including both the private cost and the external costs.
Marginal tax rate The proportion of a person’s extra or additional income that is paid in tax,
usually expressed as a percentage.
Marginal utility The extra or additional utility derived from consuming one more unit of a good
or service.
Market Any arrangement where buyers and sellers interact to carry out an economic
transaction.
Market-based supply A set of policies based on well-functioning competitive markets in order to
side policies promote long-term economic growth, shown by increases in long-run
aggregate supply.
Market concentration The extent to which the total sales in a market are accounted for by the largest
firms, providing an indication of the degree of market power in the industry. It is
measured by the concentration ratio.
Market demand The sum of the individual demand curves for a product of all the consumers in a
market.
Market equilibrium In a market this occurs at the price where the quantity of a product demanded is
equal to the quantity supplied. This is the market clearing price since there is no
excess demand or excess supply.
Market failure The failure of markets to achieve allocative efficiency. Markets fail to produce
the output at which marginal social benefits are equal to marginal social costs;
social or community surplus (consumer surplus + producer surplus) is not
maximized.
Market mechanism The system in which the forces of demand and supply determine the prices of
products. Also known as the price mechanism.
Market-oriented Approaches or policies that are based on the actions of private decision-makers
approaches operating in markets with a minimum amount of government intervention.
Market power The ability of a firm (or group of firms) to raise and maintain price above the
level that would prevail under perfect competition (or P > MC).
Market share The percentage of total sales in a market accounted for by one firm.
Market supply The horizontal sum of the individual supply curves for a product of all the
producers in a market.
Marshall-Lerner A condition stating that a depreciation or devaluation of a currency will lead to
condition an improvement in the current account balance if the sum of the price elasticity
of demand for exports plus the price elasticity of demand for imports is greater
than one.

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Maximum price A price set by a government or other authority that is below the market
equilibrium price of a good or service, also known as a price ceiling.
Merit goods Goods or services considered to be beneficial for people that are under-
provided by the market and so under-consumed, mainly due to positive
consumption externalities.
Microeconomics The study of the behaviour of individual consumers, firms, and markets and the
determination of market prices and quantities of goods, services, and factors of
production.
Microfinance The provision of small loans to poor entrepreneurs who lack access to
traditional banking services.
Minimum income A measure of poverty that is based on the beliefs of people regarding what is
standards essential in order to achieve a minimum acceptable standard of living.
Minimum lending rate The interest rate that is charged by a central bank when it lends to commercial
banks. Also known as discount rate or refinancing rate.
Minimum price A price set by a government or other authority above the market equilibrium
price of a good or service, also known as a price floor.
Minimum reserve A requirement by the central bank that sets the minimum amount of reserves
requirements that commercial banks must maintain to back their loans.
Minimum wage A type of price floor where the wage rate or the price of labour is set above the
market equilibrium wage rate.
Mixed economy An economy that has elements of a planned economy and elements of a free
market economy. In reality, all economies are mixed. What is different is the
degree of the mix from country to country.
Monetarist/new classical An economic school of thought arguing that the price mechanism along with
counter revolution well-functioning competitive markets are sufficient to lead the economy to full
employment. In this school of thought, government intervention is not
necessary to manage the level of aggregate demand.
Monetary policy A demand-side policy using changes in the money supply or interest rates to
achieve economic objectives relating to output, employment and inflation.
Monetary union Where two or more countries share the same currency and have a common
central bank.
Money Anything that is generally accepted as a means of payment for goods and
services. It usually consists of currency and checking accounts.
Money creation The process of creating new money by commercial banks, which occurs when
they make loans.
Money supply The total amount of money available at a particular time, consisting of currency
plus checking accounts.
Monopolistic A market structure where there are many sellers, producing differentiated
competition products, with no barriers to entry.
Monopoly A market structure where there is only one firm in the industry, so the firm is the
industry. There are high barriers to entry.
Moral hazard A type of market failure involving asymmetric information where a party takes
risks but does not face their full costs by changing behaviour after a transaction
has taken place. It is very common in insurance markets.

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Multidimensional An international measure of poverty covering over 100 of the economically least
Poverty Index (MPI) developed countries. It complements traditional income-based poverty
measures by capturing the deprivations that each person faces at the same time
with respect to education, health and living standards.
Multilateral Assistance provided by multilateral organizations such as the World Bank when
development assistance they lend to developing countries for the purpose of helping them in their
development objectives.
Multilateral trade An agreement between many countries to lower tariffs or other protectionist
agreement measures, currently carried out within the framework of the WTO.
National income The income earned by the factors of production of an economy, equal to wages
plus interest, plus rents, plus profits.
National income The services provided by a statistical entity in every country that measure the
accounting economy’s national income and output as well as other economic activity.
National income The statistical data used to measure a nation’s income and output, and perform
statistics national income accounting.
Natural monopoly A monopoly that can produce enough output to cover the entire needs of a
market while still experiencing economies of scale. Its average costs will
therefore be lower than those of two or more firms in the market.
Natural rate of The rate of unemployment that occurs when the economy is producing at its
unemployment potential output or full employment level of output. It is equal to the sum of
structural, frictional and seasonal unemployment.
Necessity The degree to which a good is necessary or essential.
If the increase in demand for a necessity good is less than proportional to the
rise in income; then the necessity good is income elastic.
If the change in quantity demanded for a necessity good is less than
proportional to a change in price; then the necessity good is price inelastic.

Negative externalities of Negative effects suffered by a third party whose interests are not considered
consumption when a good or service is consumed, so the third party are therefore not
compensated.
Negative externalities of Negative effects suffered by a third party whose interests are not considered
production when a good or service is produced, so the third party are therefore not
compensated.
Net exports (X - M) Export revenues minus import expenditure.
Nominal gross domestic The total money value of all final goods and services produced in an economy in
product a given time period, usually one year, at current values (not adjusted for
inflation).
Nominal gross national The total income earned by all the residents of a country (regardless of where
income their factors of production are located) in a given time period, usually a year, at
current prices (not adjusted for inflation).
Nominal interest rates Interest rates that have not been adjusted for inflation.
Non-collusive oligopoly Firms in an oligopoly do not resort to agreements to fix prices or output.
Competition tends to be non-price. Prices tend to be stable.
Non-excludable A characteristic of a good, service or resource where it is impossible to prevent a
person, or persons, from using it.

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Non-governmental Organizations that are not part of the government that promote economic
organization (NGO) development and/or humanitarian ideals and/or sustainable development.
Non-price competition Competition between firms that is based on factors other than price, usually
taking the form of product differentiation.
Non-produced, non- A measure of the net international sales and purchases of non-produced assets
financial assets (such as land) and intangible assets (such as patents and copyrights).
Non-rivalrous A characteristic of some goods such that their consumption by one individual
does not reduce the ability of others to consume them. It is a characteristic of
public goods.
Normal goods A good where the demand for it increases as income increases.
Normal profit The minimum return that must be received by a firm in order to stay in business.
A firm earns normal profit when total revenue is equal to total cost, or when
average revenue or price is equal to average cost.
Normative economics Deals with areas of the subject that are open to personal opinion and belief,
thus not subject to refutation.
Nudge theory Nudges (prompts, hints) are used to influence the choices made by consumers
in order to improve the well-being of people and society.
OECD Better Life Index An index to compare well-being across countries, based on several dimensions
that the OECD has identified as essential, in the areas of material living
conditions and quality of life.
Official borrowing International borrowing by a government, often undertaken to help cover a
current account deficit.
Official Development Aid that is provided to a country by another government or multilateral agency.
Assistance (ODA) It is the most important part of foreign aid.
Oligopoly A market structure where there are a few large firms that dominate the market,
with high barriers to entry.
Open market operations A tool of monetary policy involving the buying or selling of (short-term)
government bonds by the central bank in order to increase or decrease the
money supply, thus influencing the rate of interest.
Opportunity cost The next best alternative foregone when an economic decision is made.
Output approach One of the three equivalent ways that GDP can be measured, it adds up the
value of final goods and services produced in a given time period.
Overvalued currency A currency whose value or exchange rate is greater than its equilibrium
exchange rate, usually achieved through central bank intervention; may occur
in a pegged or managed exchange rate system.
Payoff matrix A table showing all possible outcomes of decisions taken by decision-makers in
game theory.
Per capita Per person. Per capita values are found by dividing the variable by the size of
the population.
Perfect competition A market structure where there is a very large number of small firms, producing
identical products, with no barriers to entry or exit, and perfect information. All
the firms are thus price takers.
Perfect information Where all stakeholders in an economic transaction have access to the same
information.

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Perfectly elastic demand Occurs with a horizontal demand curve signifying that any amount can be
bought at a particular price. (PED is infinite.)
Perfectly elastic supply Occurs with a horizontal supply curve signifying that any amount can be offered
at a particular price. (PES is infinite.)
Perfectly inelastic Where a change in the price of a good or service leads to no change in the
demand quantity demanded of the good or service. (PED is equal to zero.)
Perfectly inelastic supply Where a change in the price of a good or service leads to no change in the
quantity supplied of the good or service. (PES is equal to zero.)
Personal income taxes Taxes paid by individuals or households on their incomes, regardless of the
source of the income, such as wages, salaries, interest income or dividends.
Phillips curve A curve showing the relationship between the rate of unemployment and the
rate of inflation.
Pigouvian taxes An indirect tax that is imposed to eliminate the external costs of production or
consumption.
Planned economy An economy where the means of production (land and capital) are owned by
the state. The state determines what/how much to produce, how to produce,
and for whom to produce.
Portfolio investment The purchase of financial assets such as shares and bonds in order to gain a
financial return in the form of interest or dividends. Appears in the financial
account of the balance of payments.
Positive economics Deals with areas of the subject that are capable of being falsified, or shown to
be correct or not.
Positive externalities of The beneficial effects that are enjoyed by third parties whose interests are not
consumption accounted for when a good or service is consumed, therefore they do not pay
for the benefits they receive.
Positive externalities of The beneficial effects that are enjoyed by third parties whose interests are not
production accounted for when a good or service is produced, therefore they do not pay for
the benefits they receive.
Potential output Output produced by an economy when it is at full employment equilibrium, or
long-run equilibrium according to the monetarist/new classical model.
Poverty Arises when the lack of material possessions or money prevent an individual or
a family from achieving a minimum satisfactory standard of living.
Poverty line A level of income determined by a government or international body (such as
the World Bank) that is just enough to ensure a family can satisfy minimum
needs in terms of food, clothing and housing.
Poverty trap/cycle Any circular chain of events starting and ending in poverty—for example, low
income leads to low savings, leads to low investment, leads to low growth, leads
to low income.
Preferential trade Where a country agrees to give preferential access (for example, reduced tariffs)
agreement for certain products to one or more trading partners.
Price ceiling (maximum A price imposed by an authority and set below the equilibrium price. Prices
price) cannot rise above this price.
Price competition Competition between firms that is based on price, for example, a firm that
wants to increase its sales at the expense of other firms will lower its price.

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Price controls Prices imposed by an authority, set above or below the equilibrium market
price.
Price deflator A price index that removes the impact of changes in the price level when
measuring nominal economic variables.
(Price) elastic demand Where a change in the price of a good or service leads to a proportionately
larger change in the quantity demanded of the good or service in the opposite
direction. (PED is greater than one.)
Price elasticity of A measure of the responsiveness of the quantity demanded of a good or service
demand (PED) to a change in its price.
Price elasticity of supply A measure of the responsiveness of the quantity supplied of a good or service to
(PES) a change in its price.
(Price) elastic supply Where a change in the price of a good or service leads to a proportionately
larger change in the quantity supplied of the good or service in the same
direction. (PES is greater than one.)
Price expectations The forecasts or views that consumers or firms hold about future price
movements that play a role in determining demand.
Price floor (minimum A price imposed by an authority and set above the market price. Prices cannot
price) fall below this price.
(Price) inelastic demand Where a change in the price of a good or service leads to a proportionately
smaller change in the quantity demanded of the good or service in the opposite
direction. (PED is less than one.)
(Price) inelastic supply Where a change in the price of a good or service leads to a proportionately
smaller change in the quantity supplied of the good or service in the same
direction. (PES is less than one.)
Price maker A firm that is able to influence the price at which it sells its product. Includes
firms in all market structures except perfect competition.
Price mechanism The system where the forces of demand and supply determine the prices of
products. Also known as the market mechanism.
Price taker A firm that is unable to influence the price at which it sells its product, being
forced to accept the price determined in the market. It includes firm in perfect
competition.
Price war Occurs when firms successively cut their prices in an effort to match the price
cuts of other firms, resulting in lower profits, possibly losses.
Primary commodities Raw materials that are produced in the primary sector. Examples include
agricultural products, metals and minerals.
Primary sector Anything derived from the factor of production land. Includes agricultural
products, metals and minerals.
Privatization The sale of public assets to the private sector. May be a type of supply-side
policy.
Producer surplus The benefit enjoyed by producers by receiving a price that is higher than the
price they were willing to receive.
Product differentiation The process by which firms try to make their products different from the
products of other firms in an effort to increase their sales. Differences involve
product quality, appearance, services offered and many others.

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Production possibilities A curve showing the maximum combinations of goods or services that can be
curve (PPC) produced by an economy in a given time period, if all the resources in the
economy are being used fully and efficiently and the state of technology is
fixed.
Productive capacity The greatest capability of an economy to produce, usually measured by
maximum possible output of an economy.
Profit maximization A possible objective of firms that involves producing the level of output where
profits are greatest: where total revenue minus total cost is greatest or where
marginal revenue equals marginal cost.
Progressive taxation Taxation where the fraction of tax paid increases as income increases. The
average tax rate increases.
Property rights The exclusive, legal, authority to own property and determine how that
property is used, whether it is owned by the government or by private
individuals.
Proportional tax A system of taxation where tax is levied at a constant rate as income rises.
Public goods Goods or services that have the characteristics of non-rivalry and non-
excludability, for example, flood barriers.
Purchasing power parity A method used to make the buying power of different currencies equal to the
(PPP) buying power of US$1. PPP exchange rates are used to make comparisons of
income or output variables across countries while eliminating the influence of
price level differences.
Quantitative easing An expansionary monetary policy where a central bank buys (long term)
government bonds or other financial assets, in order to stimulate the economy
and increase the money supply.
Quantity demanded The quantity of a good or service demanded at a particular price over a given
time period, ceteris paribus.
Quantity supplied The quantity of a good or service supplied at a particular price over a given time
period, ceteris paribus.
Quota An import barrier that set limits on the quantity or value of imports that may be
imported into a country.
Rational consumer Occurs when consumers make choices based on the following assumptions:
choice they have consistent tastes and preferences, they have perfect information and
they arrange their purchases so as to make their utility as great as possible
(maximize it). It is assumed in standard microeconomic theory.
Rational producer Occurs when firms try to maximize profit. This is an assumption in standard
behaviour microeconomic theory.
Rationing A method used to divide or apportion goods and services or resources among
the various interested parties.
Real GDP The total value of all final goods and services produced in an economy in a
given time period, usually one year, adjusted for inflation.
Real GDP per person Real GDP divided by the population of the country.
(per capita)
Real GNI per person (per Real GNI divided by the population of the country.
capita)

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Real interest rates Interest rates that have been adjusted for inflation.
Recession Occurs when real GDP falls for at least two consecutive quarters.
Refutation A method used in the natural sciences and social sciences where any
proposition must be subjected to an empirical test in order to see if it can be
disproven or refuted. If it is disproven or refuted, then the proposition must be
rejected.
Regional trade An agreement between a group of countries usually within a geographical
agreement region to lower or eliminate trade barriers.
Regressive taxation Taxation where the fraction of tax paid decreases as income increases. The
average tax rate decreases. All indirect taxes are regressive.
Relative poverty A comparative measure of poverty according to which income levels do not
allow people to reach a standard of living that is typical of the society in which
they live. It is defined as a percentage of society’s median income.
Remittances The transfer of money by foreign workers to individuals, often family members,
in their home country.
Reserve assets Foreign currencies and precious metals held by central banks as a result of
international trade. Reserves may be used to maintain or influence the
exchange rate for the country’s currency. Reserves appear as an item in the
financial account of the balance of payments.
Resource allocation Apportioning available resources or factors of production to particular uses for
production purposes.
Restricted choices This is when the choice of a consumer is restricted by the government or other
authority.
Revaluation An increase in the value of a currency in a fixed exchange rate system.
Revenues Payments received by firms when they sell their output.
Rivalrous Goods and services are considered to be rivalrous when the consumption by
one person, or group of people, reduces the amount available for others.
Rules of thumb Rules of thumb are mental shortcuts (heuristics) for decision-making to help
people make a quick, satisfactory, but often not perfect, decision to a complex
choice.
Satisficing A business or firm objective to achieve a satisfactory outcome with respect to
one or several objectives, rather than to pursue any one objective at the
possible expense of others by optimizing (maximizing), for example, profit,
revenue or growth. It is essentially a mix of the words “satisfy” and “suffice”.
Say’s Law A proposition stating that the supply of goods creates its own demand.
Scarcity The limited availability of economic resources relative to society’s unlimited
needs and wants of goods and services.
Screening In asymmetric information, the use of a screening process by the participant
with less information to gain more information regarding a transaction, and so
reduce adverse selection.
Seasonal Unemployment that arises when people are out of work because their usual job
unemployment is out of season, for example, agricultural workers during winter months.
Shortage Arises when the quantity demanded of a good or services is more than the
quantity supplied at some particular price.

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Short-run aggregate The total quantity of real output (real GDP) offered at different possible price
supply (SRAS) levels in the short run (when wages and other resource prices are constant).
Short run in The period of time when the prices of factors of production, especially wages,
macroeconomics are considered fixed.
Short run in The period of time when at least one factor of production is fixed.
microeconomics
Short-run Phillips curve A curve showing the inverse relationship between the rate of unemployment
and the rate of inflation, which suggests a trade-off between inflation and
unemployment.
Short-term fluctuations Periods of growth of real GDP followed by periods of contraction, which are part
of economic activity of the business cycle.
Signalling In asymmetric information, the participant with more information sending a
signal revealing relevant information about a transaction to the participant with
less information, to reduce adverse selection.
Social/community The sum combination of consumer surplus and producer surplus.
surplus
Social enterprise A company whose main objective is to have a social impact rather than to make
a profit for their owners or shareholders. It operates by providing goods and
services for the market in an entrepreneurial and innovative fashion and uses its
profits primarily to achieve social objectives.
Socially optimum This occurs where there is allocative efficiency, or where the marginal social cost
output of producing a good is equal to the marginal social benefit of the good to
society. Alternatively, it occurs where the marginal cost of producing a good
(including any external costs) is equal to the price that is charged to consumers
(P = MC for the last unit produced).
Social sciences Academic studies of human societies and how people in society interact with
each other.
Specialization Refers to when a firm or country focuses on the production of one or a few
goods or services. This forms the basis of theory of comparative advantage in
international trade.
Speculation Refers to a process where something is bought or sold with a view to making a
short term profit, for example, currency speculation where currencies are
bought or sold so that a profit can be made when the exchange rate changes.
Stakeholder An individual or group of individuals who have an interest, or stake, in an
economic activity or outcome.
Structural A kind of long-term unemployment that arises from a number of factors
unemployment including: technological change; changes in the patterns of demand for
different labour skills; changes in the geographical location of industries; labour
market rigidities.
Subsidies An amount of money paid by the government to a firm, per unit of output, to
encourage production and lower the price to consumers.
Subsidy (international) An amount of money paid by the government to a firm, per unit of output, to
encourage production and provide the firm an advantage over foreign
competition.
Substitutes Goods that can be used in place of each other, as they satisfy a similar need.

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Substitution effect When the price of a product falls relative to other product prices, consumers
purchase more of the product as it is now relatively less expensive. This forms
part of an explanation of the law of demand.
Supply Quantities of a good that firms are willing and able to supply at different
possible prices, over a given time period, ceteris paribus.
Supply curve A curve showing the relationship between the price of a good or service and the
quantity supplied, ceteris paribus. It is normally upward sloping.
Supply-side policies Government policies designed to shift the long-run aggregate supply curve to
the right, thus increasing potential output in the economy and achieving
economic growth.
Surplus An excess of something over something else. It occurs:
• when quantity supplied is greater than quantity demanded at a particular
price
• when tax revenues are greater than government spending (budget
surplus)
• on an account when credits are greater than debits in the balance of
payments.
See also “consumer surplus” and “producer surplus”.
Sustainability Refers to the preserving the environment so that it can continue to satisfy needs
and wants into the future. Relates to the concept of “sustainable development”.
Sustainable debt Refers to a level of government debt such that the borrowing government can
make its payments of interest and debt repayment while at the same being able
to meet the economy’s growth objectives.
Sustainable Refers to the degree to which the current generation is able to meet its needs
development today but still conserve resources for the sake of future generations.
Tariff A tax that is placed on imports to protect domestic industries from foreign
competition and to raise revenue for the government.
Total costs All the costs of a firm incurred for the use of resources to produce something.
Total revenue The amount of revenue received by a firm from the sale of a particular quantity
of output (equal to price times quantity sold).
Tradable permits Permits to pollute, issued by a governing body, that sets a maximum amount of
pollution allowable. These permits may be traded (bought or sold) in a market
for such permits.
Trade creation In international trade it occurs when higher cost imports are replaced by lower
cost imports due to the formation of a trading bloc or a trade agreement.
Trade diversion In international trade it occurs when lower cost imports are replaced by higher
cost imports due to the formation of a trading bloc or a trade agreement.
Trade liberalization The process of reducing barriers to international trade.
Trade protection Government intervention aiming to limit imports and/or encourage exports by
setting up trade barriers that protect from foreign competition.
Trading bloc A group of countries that have agreed to reduce protectionist measures like
tariffs and quotas between them.
Tragedy of commons A situation with common pool resources, where individual users acting
independently, according to their own self-interest, go against the common

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good of all users by depleting or spoiling that resource through their collective
action.
Transfer payments Payments made by the government to vulnerable groups in a society, including
older people, low income people, unemployed and many more. The objective is
to transfer money from taxpayers to those who cannot work, to prevent them
from falling into poverty.
Undervalued currency A currency whose value or exchange rate is lower than its equilibrium exchange
rate, usually achieved through central bank intervention; may occur in a pegged
or managed exchange rate system.
Unemployment When a person (who is above a specified age and is available to work) is actively
looking for work, but is without a job.
Unemployment benefits Payments, usually made by the government, to people who are unemployed
(and actively seeking employment).
Unemployment rate The number of unemployed workers expressed as a percentage of the total
workforce.
Unfair competition In international trade this refers to practices of countries trying to gain an unfair
advantage through such methods as undervalued exchange rates.
Unitary elastic demand Occurs when a change in the price of a good or service leads to an equal and
opposite proportional change in the quantity demanded of the good or service
(PED = 1).
Unitary elastic supply Occurs when a change in the price of a good or service leads to an equal
proportional change in the quantity supplied of the good or service (PES = 1).
Universal basic income A regular cash payment given to all persons in an economy that is independent
of any other source of income they may have. It is intended to reduce poverty
and income inequality.
Sustainable The UN set out 17 global goals including those that aim to end all forms of
development goals poverty, fight inequalities and tackle climate change.
(SDGs)
Utility A measure of the satisfaction derived from consuming a good or service.
Wage Payment received by the factor of production labour, which is a certain amount
per unit of time.
Wealth The total value of all assets owned by a person, firm, community, or country
minus what is owed to banks or other financial institutions.
Weighted price index A measure of average prices over a period of time that gives a weight to each
item according to its relative importance in the consumers’ budgets. It is used to
measure changes in the price level.
Welfare loss A loss of a part of social surplus (consumer plus producer surplus) that occurs
when there is market failure so that marginal social benefits are not equal to
marginal private benefits.
World Bank An international organization that provides loans and advice to economically
less developed countries for the purpose of promoting economic development
and reducing poverty.
World Trade An international body that sets the rules for global trading and resolves
Organization (WTO) disputes between its member countries. It also hosts negotiations concerning
the reduction of trade barriers between its member nations.

104 Economics teacher support material