Glossary

Glossary of subject-specific terms

Glossary term Glossary definition

Absolute advantage This is where a country is able to produce more output than other countries
using the same input of factors of production.
Absolute poverty Absolute poverty is measured in terms of the basic need for survival. It is the
amount of income a person needs to have in order to stay alive.
Actual growth This occurs when previously unemployed factors of production are brought in
to use. It is represented by a movement from a point within a PPC to a new
point nearer to the PPC.
Adverse selection This occurs when a buyer and seller do not have the same information, causing
a transaction to take place based upon uneven terms.
Aggregate demand The total spending in an economy consisting of consumption, investment,
government expenditure and net exports.
Aggregate demand curve A curve showing the relationship between the average price level and real
GDP.
Aggregate supply (AS) The total amount of domestic goods and services supplied by businesses and
the government, including both consumer goods and capital goods.
Allocative efficiency The level of output where marginal cost is equal to average revenue. The firm
sells the last unit it produces at the amount that it cost to make it. The socially
optimum level of output.
Allocative inefficiency This occurs where the marginal social cost of producing a good is not equal to
the marginal social benefit of the good to society. In different words, it occurs
where the marginal cost of producing a good (including any external costs) is
not equal to the price that is charged to consumers.
Anchoring Anchors are mental reference points, relating to ideas or values, which are used
to make decisions. Value is often set by anchors or imprints in our minds that
we then use as mental reference points when making decisions. When an idea
or a value is firmly anchored in a person’s mind, it can lead to automatic
decisions and behaviours.
Anti-monopoly Policies that are intended to regulate the market share of an individual
regulation company in order to enforce competition
Appreciation An increase in the value of one currency in terms of another currency in a
floating exchange rate system.
Appropriate technology Technology that caters to the particular economic, social, and environmental
characteristics of its users.
Asymmetric information This is where one party in an economic transaction has access to more or better
information than the other party.
Automatic stabilizers The features of government fiscal policy (for example, unemployment benefits
and direct tax revenues) that automatically counter-balance fluctuations in
economic activity. For example, government spending on unemployment

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Glossary term Glossary definition

benefits automatically rise and direct tax revenues automatically fall when
economy activity is slow.
Average tax rate The proportion of a person’s income that is paid in tax, usually expressed as a
percentage.
Balance of payments It is a record of the value of all the transactions between the residents of a
country with the residents of all other countries over a given period of time.
Balance of trade in goods A measure of the revenue received from the exports of tangible (physical)
goods minus the expenditure on the imports of tangible goods over a given
period of time.
Balance of trade in A measure of the revenue received from the exports of services minus the
services expenditure on the imports of services over a given period of time.
Behavioural economics This is a branch of economic research that adds elements of psychology to
traditional models in an attempt to better understand decision-making by
economic actors. It challenges the assumption that actors will always make
rational choices with the aim of maximising utility.
Bounded rationality This suggests that most consumers and businesses do not have enough
information to make fully-informed choices and so opt to satisfice, rather than
maximise their utility.
Bounded self-control In reality, consumers are often not rational in their self-control and do not stop
consuming, even when it is sensible to stop. They consume even though the
price of the good or service is greater than the marginal utility they gain from
consumption.
Bounded selfishness Concern for the well-being of others.
Budget deficit A situation that exists when planned government spending exceeds planned
government revenue. A government may “run a budget deficit” in order to
increase aggregate demand in the economy.
Business confidence An economic indicator that measures the degree of optimism
that business managers feel about the state of the economy and the prospects
of their companies/ organizations.
Business cycle A diagram showing the periodic/cyclical fluctuations in economic activity. The
business cycle shows that economies typically move through a pattern of
economic growth with the phases: recovery, boom, slowdown, recession.
Capital The factor of production that comes from investment in physical capital and
human capital. Physical capital is the stock of manufactured resources (e.g.
factories, roads, tools) and human capital is the value of the workforce
(improved through education or better health care).
Capital account A measure of the buying and selling of assets between countries. The assets are
often separated to show assets that represent ownership and assets that
represent lending.
Capital flight This occurs when money and other assets flow out of a country to seek a “safe
haven” in another country.
Capital transfers A measure of net monetary movements gained or lost through actions such as
the transfer of goods and financial assets by migrants entering or leaving the
country, transfers relating to the sale of fixed assets, gift taxes, inheritance
taxes, and death duties.

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Glossary term Glossary definition

Carbon (emissions) taxes Taxes levied on the carbon contents of fuel.
Central bank The government’s bank. The institution that is responsible for an economy’s
monetary policy.
Ceteris paribus A Latin expression meaning “other things being equal”.
Choice architecture Choice architecture suggests that the decisions that we make are affected by
the layout, sequencing, and range of choices that are available.
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 model of the economy that shows the flow of money through the
economy.
Coase theorem This theorem states that when an externality is created and there is a conflict
due to assigned property rights, the two parties can bargain with each other to
reach an efficient outcome regardless of who actually has the initial property
rights. In this theorem, it is assumed that there are no costs associated with the
bargaining that takes place between the two parties.
Collusive oligopoly This is where a few firms act together to avoid competition by resorting to
agreements to fix prices or output in an oligopoly.
Common access Common access resources are natural resources over which there is no
resources established private ownership—they are non-excludable, but rivalrous.
Common market A customs union with common policies on product regulation, and free
movement of goods, services, capital, and labour.
Comparative advantage This is where a country is able to produce a good at a lower opportunity cost of
resources than another country.
Competitive supply This exists where products are produced by the same factors of production,
and so compete for these resources for their production.
Complements Goods are used in combination with each other. For example, digital cameras
and memory cards.
Concentration ratios Functions showing the percentage of market share (or output) held by the
largest X firms in an industry, expressed in the form CR , where X represents the
X

number of the largest firms. Most commonly, it is expressed as CR . 4

Consumer confidence An economic indicator that measures the degree of optimism

that consumers feel about the state of the economy and their own personal
financial situation.
Consumer nudges Positive reinforcement and indirect suggestions used to influence the
behaviour and decision making of consumers.
Consumer price index A measure of the average rate of inflation which calculates the change in the
(CPI) price of a representative basket of goods and services purchased by the
“average” consumer.
Consumer surplus The additional benefit/utility received by consumers by paying a price that is
lower than they are willing to pay.
Consumption (C) Spending by households on consumer goods and services over a period of
time.

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Glossary term Glossary definition

Contractionary monetary A monetary policy designed to decrease aggregate demand and thus the level
policy of economic activity.
Corporate social An approach taken by firms where they attempt to produce responsibly/
responsibility ethically towards the community and environment, demonstrating a positive
impact on society.
Cost-push inflation Inflation that is caused by an increase in the costs of production in an economy,
i.e. a shift of the SRAS curve to the left.
Credit creation The ability of commercial banks to expand the deposits of money that they
receive by lending multiples of the amount, thus increasing the overall money
supply.
Crowding out A situation where the government spends more than it receives in revenue and
needs to borrow money, forcing up interest rates and “crowding out” private
investment and private consumption.
Current account A measure of the flow of funds from trade in goods and services, plus net
investment income flows (profit, interest, and dividends) and net transfers of
money (foreign aid, grants, and remittances).
Current account deficit This is where revenue from the exports of goods and services and income flows
is less than the expenditure on the import of goods and services and income
flows in a given year.
Current account surplus This is where the revenue from the export of goods and services and income
flows is greater than the expenditure on the import of goods and services and
income flows in a given year.
Current transfers These are recorded in the balance of payments whenever an economy receives
goods, services, income, or financial items without something in return.
All transfers not considered to be capital are current.
Customs union An agreement made between countries, where the countries agree to trade
freely among themselves, and they also agree to adopt common external
barriers against any country attempting to export to the customs union.
Cyclical (demand- Disequilibrium unemployment that exists when there is insufficient demand in
deficient) unemployment the economy and wages do not fall to compensate for this.
Debt relief (cancellation) The act of eliminating the debt owed by an economically least developed
country in order to allow it to achieve development objectives.
Default choices This is when consumers are automatically enrolled in a system, so that the
consumer will “make” this choice if he/she takes no action.
Deflation A persistent fall in the average level of prices in an economy.
Deflationary/recessionary The situation where total spending (aggregate demand) is less than the full
gap employment level of output, thus causing unemployment.
Demand The willingness and ability of consumers to purchase a quantity of a good or
service.
Demand curve This shows the relationship between the price of a good or service and the
quantity demanded. It is normally downward sloping.
Demand management A (Keynesian) policy emphasising the importance of government intervention
in managing the level of aggregate demand in the economy, through fiscal and
monetary policies.

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Glossary term Glossary definition

Demand-pull inflation Inflation that is caused by increasing aggregate demand in an economy, i.e. a
shift of the AD curve to the right.
Demerit goods Goods or services considered to be harmful to people that would be over-
provided by the market and so over-consumed.
Depreciation A fall in the value of one currency in terms of another currency in a floating
exchange rate system.
Deregulation A type of supply-side policy where the government reduces the number or
type of regulations governing the behaviour of firms.
Devaluation A decrease in the value of a currency in a fixed exchange rate system.
Development aid Aid that consists of grants, concessional long-term loans, project aid, and
programme aid.
Disinflation A fall in the rate of inflation.
Disposable income The remaining income available for an individual to spend or save, after
taxation.
Dumping It is the selling of a good in another country at a price below its unit cost of
production.
Economic development A broad concept involving improvement in standards of living, reduction
in poverty, improved health and education along with increased freedom and
economic choice.
Economic growth The growth of the real value of output in an economy over time. Usually
measured as growth in real GDP.
Economic well-being A multi-dimensional concept relating to the level of prosperity and quality of
living standards in a country.
Economically least Those countries classified by the UN as being “low-
developed countries income countries confronting severe structural impediments to sustainable
(ELDC’s) development. They are highly vulnerable to economic and environmental
shocks and have low levels of human assets”.
Economics “Economics is the science that studies human behaviour as a relationship
between ends and scarce resources which have alternative uses”. Lionel
Robbins (1932)
Economies of scale Unit cost advantages that a business may experience as an outcome of
increasing its scale of operations.
Efficiency Efficiency is a quantifiable concept, determined by the ratio of useful output to
total input.
Elasticity A measure of the responsiveness of something to a change in one of its
determinants.
Elasticity of demand for A measure of the responsiveness of the quantity demanded of exports when
exports there is a change in the price of exports.
Elasticity of demand for A measure of the responsiveness of the quantity demanded of imports when
imports there is a change in the price of imports.
Engel curve A curve showing the relationship between income and quantity demanded.
Entrepreneurship The factor of production involving organising and risk-taking.
Equilibrium A state of rest, self-perpetuating in the absence of any outside disturbance.

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Glossary term Glossary definition

Equity The concept or idea of fairness.
Excess demand This occurs where the price of a good is lower than the equilibrium price, such
that the quantity demanded is greater than the quantity supplied.
Excess supply This occurs where the price of a good is higher than the equilibrium price, such
that the quantity supplied is greater than the quantity demanded.
Exchange rate The value of one currency expressed in term of another, for example, €1 = US
$1.5.
Expansionary monetary A monetary policy designed to increase aggregate demand and thus the level
policy of economic activity.
Expenditure reducing Policies implemented by the government that attempt to reduce overall
expenditure in the economy, including expenditure on imports.
Expenditure switching Policies implemented by the government that attempt to switch the
expenditure of domestic consumers away from imports towards domestically
produced goods and services.
Export promotion Strategies based on openness and increased international trade. Growth is
achieved by concentrating on increasing exports, and export revenue, as a
leading factor in the AD of the economy. Growth in the international market
should be translated into growth in the domestic market, over time.
Export revenue Value of exports earned by producers
Exports Goods and services produced in one country and purchased by consumers in
another country.
External balance The value of exports of goods and services minus the value of imports of goods
and services.
Externalities External costs or benefits to a third party, when a good or service is produced
or consumed.
Factors of production The four resources that allow an economy to produce its output: land, labour,
capital and entrepreneurship (management).
Fairtrade A scheme where products from producers in economically least developed
countries can be certified to display the registered Fairtrade mark encouraging
consumers to buy them because they know that the producers of the products
have been paid a fair price and the products have been produced under
approved conditions.
Financial account A measure of the net change in foreign ownership of domestic financial assets.
Firms Firms represent the productive units in the economy that turn the factors of
production into goods and services.
Fiscal policy A demand-side policy using changes in government spending and/or direct
taxation to achieve economic objectives relating to inflation and
unemployment.
Fixed exchange rate An exchange rate regime where the value of a currency is fixed, or pegged, to
the value of another currency, or to the average value of a selection of
currencies, or to the value of some other commodity, such as gold.
Floating exchange rate An exchange rate regime where the value of a currency is allowed to be
determined solely by the demand for, and supply of, the currency on the
foreign exchange market.

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Glossary term Glossary definition

Foreign aid The international transfer of capital, goods, or services from a country, or
international organization, for the benefit of a recipient country and its
population.
Foreign direct A long-term investment by a multinational corporation in a foreign country,
investment (FDI) (where the foreign investor owns more than 10% of the domestic company).
Foreign sector The segment of the circular flow of income that includes exports and imports.
Framing This is the way that choices are described and presented. Changing the framing
of a choice may affect tastes and preferences.
Free goods The few things, such as air and salt water, that are not limited in supply
(relatively scarce) and so do not have an opportunity cost.
Free market economy An economy where the means of production are privately held by individuals
and firms. Demand and supply (market forces) determine what/how much to
produce, how to produce, and for whom to produce.
Free rider problem This occurs when people who benefit from consuming resources, goods, or
services do not have to pay for them, which results in overconsumption.
Free trade International trade that takes place without any barriers, such as tariffs, quotas,
or subsidies.
Free trade agreement An agreement made between countries, where the countries agree to trade
freely among themselves, but are able to trade with countries outside the free
trade area in whatever way they wish.
Frictional unemployment Equilibrium unemployment that exists when people have left a job and are in
the process of searching for another job.
Full employment level of The level of output that is produced by the economy when there is only natural
output unemployment.
Gini coefficient (index) A coefficient (index) that measures the ratio of the area between a Lorenz curve
and the line of absolute equality to the total area under the line of equality. The
higher the figure, the more unequal is the distribution.
Government (national) The total outstanding borrowing of a government, made up of
debt internal debt (owing to national creditors) and external debt (owing to foreign
creditors).
Government spending Spending by governments on goods and services.
(G)
Gross domestic product The total money value of all final goods and services produced in an economy
(GDP) in a given time period, usually one year.
Gross national income The total money value of all final goods and services produced in an economy
(GNI) in one year, plus net property income from abroad (interest, rent, dividends
and profit).
Growth in production This occurs when the PPC curve shifts outwards, caused by an increase in the
possibilities quantity and/or quality of factors of production.
Happiness Index An index which is used to measure the collective happiness and well-being of a
population.
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.

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Glossary term Glossary definition

The elements are well-being, life expectancy, inequality of outcomes, and
ecological footprint.
Households Households represent the groups of individuals in the economy who perform
two functions. They are the consumers of goods and services and they are the
owners and providers of the factors of production that are used to make the
goods and services.
Human Development A composite index that brings together three variables that reflect the three
Index (HDI) basic goals of development, 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$).
Human Opportunity This index measures how individual circumstances, such as place of residence,
Index (HOI) gender, and education of the household head, can affect a child’s access to
basic opportunities such as water, education, electricity and sanitation. It is
created by the World Bank.
Humanitarian aid Aid given to alleviate short-term suffering, consisting of food aid, medical aid,
and emergency relief aid.
Imperfect competition A market structure showing some, but not all, features of perfect competition.
Imperfect information This exists where some stakeholders in an economic transaction have more
access to knowledge than others.
Import expenditure Value of spending on imports.
Import substitution Strategies to encourage the domestic production of goods, rather than
importing them. It should mean that industries producing the goods
domestically should grow, as will the economy, and then should be
competitive on world markets in the future. The strategies encourage
protectionism.
Imports Goods and services purchased by consumers in one country that have been
produced in another country
Incentive effect Prices give producers the incentive to either increase or decrease the quantity
that they supply. A rising price gives producers the incentive to increase the
quantity supplied, as the higher price may allow them to earn higher revenues.
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 effect When a decrease in the price of a good or service that is being consumed
means that consumers experience an increase in real income, usually allowing
them to purchase more of the product. The income effect may be negative.
Income elasticity of A measure of the responsiveness of the demand for a good or service to a
demand (YED) change in income.
Indirect taxes These are taxes on expenditure. They are added to the selling price of a good or
service.
Infant industry 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.

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Inferior goods A good where the demand for it decreases as income increases and more
superior goods are purchased.
Inflation A sustained increase in the general or average level of prices and a fall in the
value of money.
Inflation rate The percentage change of a price index over a certain time period.
Inflationary gap The situation where total spending (aggregate demand) is greater than the full
employment level of output, thus causing inflation.
Informal market The part of an economy that is neither taxed nor monitored by the
government. The activities of the informal economy are not included in a
country’s national income figures.
Infrastructure The large-scale capital usually provided by government that is necessary for
economic activity to take place.
Injections The investment, government expenditure and export revenues that add
spending to the circular flow of income.
Interest rate The price of credit/borrowed money.
International Monetary An organization working to foster global monetary cooperation, secure
Fund (IMF) financial stability, facilitate international trade, and reduce poverty.
International trade Trade that involves the exchange of goods or services between two countries.
Investment (I) The addition of capital stock to the economy or expenditure by firms on capital.
J-curve The J-curve suggests that in the short term, even if the Marshall-Lerner
condition is fulfilled, a fall in the value of the currency will lead to a worsening
of the current account deficit, before things improve in the long term.
Joint supply Goods which are produced together, or where the production of one good
involves the production of another product (for example, as a by-product of
production).
Keynesian multiplier The ratio of an induced change in the level of national income to an original
change in one or more of the injections into the circular flow of income (i.e.
investment, government spending, or export revenue).
Keynesian revolution An economic school of thought based upon the works of John Maynard
Keynes, challenging the classical (laissez faire) viewpoint and advocating the
role of government in managing the level of aggregate demand.
Labour The human factor of production. It is the physical and mental contribution of
the existing work force to production.
Labour market flexibility This refers to the speed with which labour markets adapt to fluctuations and
changes in production, the economy, or society.
Labour union An organization of workers whose goals include the improvement of working
conditions and payments to workers. Unions work on behalf of workers
through negotiations (collective bargaining) with management.
Laissez faire The view that markets should be left alone, with minimal intervention by
government.
Land The physical factor of production. It consists of natural resources, some of
which are renewable (for example, wheat) and some of which are non-
renewable (for example, iron ore).

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Glossary term Glossary definition

Law of demand As the price of a good falls, the quantity demanded will normally increase.
Law of supply As the price of a good rises, the quantity supplied will normally rise.
Leakages The savings, taxes and import expenditure that remove spending from the
circular flow of income.
Long run aggregate Aggregate supply that is dependent upon the resources in the economy and
supply (LRAS) that can only be increased by improvements in the quantity and/or quality of
factors of production.
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 that can only be affected by supply-side policies.
Lorenz curve A curve showing what percentage of the population owns what percentage of
the total income in the economy. It is calculated in cumulative terms. The
further the curve is from the line of absolute equality (45-degree line), the more
unequal is the distribution of income.
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
resist fluctuations that they consider to be undesirable. Also known as a “dirty
float”.
Mandated choices Mandated choices are when consumers are required to state whether or not
they wish to take part in an action.
Manufactured goods Goods that have been processed by workers.
Marginal costs Marginal costs are the additional costs of producing one more unit of output.
Marginal propensity to The proportion of each extra amount of income that is spent by households on
consume (MPC) domestically produced goods and services, (consumption), expressed as a
decimal.
Marginal propensity to The proportion of each extra amount of income that is spent by households on
import (MPM) imported goods and services, expressed as a decimal.
Marginal propensity to The proportion of each extra amount of income that is saved by households,
save (MPS) expressed as a decimal.
Marginal propensity to The proportion of each extra amount of income that is taken in tax, expressed
tax (MPT) as a decimal.
Marginal social benefit The extra benefit/utility to society of consuming an additional unit of output,
(MSB) including both the private benefit and the external benefit.
Marginal social cost The extra cost to society of producing an additional unit of output, including
(MSC) both the private cost and the external costs.
Marginal tax rate The proportion of a person’s additional income that is paid in tax, usually
expressed as a percentage.
Marginal utility The extra utility derived from consuming one more unit of a good or service.
Market A market is where buyers and sellers come together to carry out an economic
transaction.

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Market demand The horizontal sum of the individual demand curves for a product of all the
consumers in a market.
Market equilibrium The point where the quantity of a product demanded is equal to the quantity
of a product supplied. This creates the market clearing price and quantity
where there is no excess demand or excess supply.
Market failure The failure of markets to produce at the point where community surplus
(consumer surplus + producer surplus) is maximised.
Market mechanism This is the system in which the forces of demand and supply determine the
prices of products. Also known as the price mechanism.
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.
Market supply The horizontal sum of the individual supply curves for a product of all the
producers in a market.
Marshall-Lerner This condition states that a depreciation, or devaluation, of a currency will only
condition lead to an improvement in the current account balance if the sum of the
elasticity of demand for exports plus the elasticity of demand for imports is
greater than one.
Merit goods Goods or services considered to be beneficial for people that would be under-
provided by the market and so under-consumed.
Microeconomics The study of the behaviour of individual consumers, firms, and industries and
the determination of market prices and quantities of good, services, and factors
of production.
Microfinance The provision of small loans to poor entrepreneurs who lack access to
traditional banking services.
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.
Mixed economy An economy that has elements of planning and elements of the free market. 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 which argues that changes in the money
revolution supply are the most significant determinants of the rate of economic growth
and the behaviour of the business cycle. In this school of thought, policy
makers should not intervene 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 inflation and unemployment.
Monetary union This is where two or more countries share the same currency and have a
common central bank.
Money supply The total value of monetary assets available in an economy at a specific time.
Monopolistic A market structure where there are many buyers and sellers, producing
competition differentiated products, with no barriers to entry or exit.
Monopoly A market structure where there is only one firm in the industry, so the firm is
the industry. Monopolies may, or may not, have barriers to entry.
Moral hazard This occurs when a party provides misleading information and changes
behaviour after a transaction has taken place.

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Multidimensional An international measure of acute poverty covering over 100 economically
Poverty Index (MPI) least 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.
National income The total value of the final output of all new goods and services produced in a
country in one year.
Natural rate of The rate of unemployment that is consistent with a stable rate of inflation. It is
unemployment the rate where the long run Phillips curve touches the x-axis.
Necessity goods A good where the demand for it increases as income increases, but the increase
in demand is less than proportional to the rise in income.
Negative externalities of They are the negative effects that are suffered by a third party when a good or
consumption service is consumed.
Negative externalities of They are the negative effects that are suffered by a third party when a good or
production service is produced.
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
product in a given time period, usually one year, at current values (not adjusted for
inflation).
Nominal interest rates Interest rates that have not been adjusted for inflation.
Non-collusive oligopoly This is where 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 Non-excludability exists when it is impossible to prevent a person, or persons,
from consuming a good or service.
Non-government A non-government organization that exists to promote economic
organization (NGO) development and/or humanitarian ideals and/or sustainable development.
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.
Normal goods A good where the demand for it increases as income increases.
Normative economics This deals with areas of the subject that are open to personal opinion and
belief.
Nudge theory This is generally used to describe situations where nudges (prompts, hints) are
used to improve the life and wellbeing of people and society.
OECD Better Life Index An index to compare well-being across countries, based on 11 topics 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 to help to cover a current account
deficit.
Official foreign aid Aid that is provided to a country by another government or multilateral
agency.
Oligopoly A market structure where there are a few large firms that dominate the market.
Open market operations The buying or selling of government securities in the open market in order to
increase or decrease the amount of money in the economy.
Opportunity cost The next best alternative foregone when an economic decision is made.

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Glossary term Glossary definition

Perfect competition A market structure where there are a very large number of small firms,
producing identical products that are incapable of affecting the market supply
curve. Because of this, the firms are price takers. There are no barriers to entry
or exit and all the firms have perfect knowledge of the market.
Perfect information This exists where all stakeholders in an economic transaction have access to the
same knowledge.
Perfectly elastic demand This is where an increase in the price of a good or service leads to a fall in the
quantity demanded of the good or service to zero. (PED would be infinity.)
Perfectly elastic supply This is where a fall in the price of a good or service leads to a fall in the quantity
supplied of the good or service to zero. (PES would be infinity.)
Perfectly inelastic This is where a change in the price of a good or service leads to no change in
demand the quantity demanded of the good or service. (PED would be equal to zero.)
Perfectly inelastic supply This 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 would be equal to zero.)
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 negative
externalities.
Planned economy An economy where the means of production are collectively owned (except
labour). The state determines what/how much to produce, how to produce,
and for whom to produce.
Porter hypothesis This hypothesis states that strict environmental regulations can lead to
efficiency and encourage innovations for firms that help improve commercial
competitiveness.
Portfolio investment The purchase of financial investments such as shares and bonds in order to
gain a financial return in the form of interest or dividends.
Positive discrimination The practice of giving advantage to groups that have been treated unfairly in
the past.
Positive economics Positive economics deals with areas of the subject that are capable of being
proven to be correct or not.
Positive externalities of The beneficial effects that are enjoyed by a third party when a good or service
consumption is consumed.
Positive externalities of The beneficial effects that are enjoyed by a third party when a good or service
production is produced.
Poverty The scarcity or the lack of a certain amount of material possessions or money.
Poverty trap/cycle Any circular chain of events starting and ending in poverty, such as low income
means low savings means low investment means low growth means low
incomes.
Preferential trade This is where a country agrees to give preferential access (for example, reduced
agreement tariffs) to certain products from 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 controls Prices imposed by an authority, set above or below the equilibrium market
price.

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Glossary term Glossary definition

Price deflator A coefficient that removes the impact of inflation when measuring economic
statistics.
(Price) elastic demand This is where a change in the price of a good or service leads to a proportionally
larger change in the quantity demanded of the good or service. (PED would be
greater than one.)
(Price) elastic supply This is where a change in the price of a good or service leads to a proportionally
larger change in the quantity supplied of the good or service. (PES would be
greater than one.)
(Price) inelastic demand This is where a change in the price of a good or service leads to a proportionally
smaller change in the quantity demanded of the good or service. (PED would
be less than one.)
(Price) inelastic supply This is where a change in the price of a good or service leads to a proportionally
smaller change in the quantity supplied of the good or service. (PES would be
less than one.)
Price elasticity of A measure of the responsiveness of the quantity demanded of a good or
demand (PED) service when there is a change in its price.
Price elasticity of supply A measure of the responsiveness of the quantity supplied of a good or service
(PES) when there is a change in its price.
Price expectations The forecasts or views that consumers hold about future price movements that
play a role in determining consumer demand.
Price floor (minimum A price imposed by an authority and set above the market price. Prices cannot
price) fall below this price.
Price mechanism The system where the forces of demand and supply determine the prices of
products. Also known as the market mechanism.
Primary commodities Raw materials that are produced in the primary sector.
Primary sector Extracts or harvests products directly from the earth in order to produce raw
materials or food.
Privatisation A type of supply-side policy where the government sells public assets to the
private sector.
Producer surplus The additional benefit received by producers by receiving a price that is higher
than the price they were willing to receive.
Production possibility 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 maximum possible output of an economy.
Profit maximisation Profit maximisation is producing at the level of output where profits are
greatest: where marginal revenue equals marginal cost.
Property rights The exclusive, legal, authority to own and determine how a resource is used,
whether that resource is owned by the government or by individuals.
Proportional tax A system of taxation in which tax is levied at a constant rate as income rises.
Public goods Goods or services which would not be provided at all by the market. They have
the characteristics of non-rivalry and non-excludability, for example, flood
barriers.

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Glossary term Glossary definition

Public/private A contractual arrangement between a public agency (federal, state or local)
partnerships and a private sector firm.
Purchasing power parity A theory which states that exchange rates between currencies are in
(PPP) equilibrium when their purchasing power is the same in each of the two
countries.
Quantitative easing An expansionary monetary policy where a central bank buys predetermined
amounts of government bonds, or other financial assets, in order to stimulate
the economy and increase the money supply.
Quantity demanded The willingness and ability to purchase a quantity of a good or service at a
certain price over a given time period.
Quantity supplied It is the willingness and ability to produce a quantity of a good or service at a
given price over a given time period.
Quasi-public goods Goods which may satisfy the two public good conditions (non-rivalry and non-
excludability) only to a certain extent or only some of the time.
Quota Import barriers that set limits on the quantity or value of imports that may be
imported into a country.
Rationing An artificial control on the distribution of scarce resources.
Real GDP The total money 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 (per Real GDP divided by the population of the country.
capita)
Real GNI per person (per Real GNI divided by the population of the country.
capita)
Real interest rates Interest rates that have been adjusted for inflation.
Relative poverty Relative poverty is a comparative measure of poverty. A person is said to be in
relative poverty if they do not reach some specified level of income, for
example, 50% of average earnings for the country.
Remittances Remittances are 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 governments (central banks) as
a result of international trade. Reserves may be held so that the government
may maintain a desired exchange rate for the country’s currencies.
Restricted choices This is when the choice of a consumer is restricted, but still exists.
Revaluation An increase in the value of a currency in a fixed exchange rate system.
Rivalrous Goods and services are considered to be rivalrous when the consumption by
one person, or group of people, prevents others from consuming the good.
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 This occurs when entrepreneurs endeavour to cover their opportunity costs,
but do not push themselves significantly further, even though they might be
able to earn higher profits. It is essentially a mix of the words “satisfy” and
“suffice”.

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Glossary term Glossary definition

Say’s Law Say’s Law states that the production of goods creates its own demand.
Scarcity This is the limited availability of economic resources relative to society’s
unlimited demand for goods and services.
Screening The use of a screening process to gain more information regarding a
participant in a transaction, in order to reduce asymmetric information, and so
reduce adverse selection.
Seasonal unemployment Equilibrium unemployment that exists when people are out of work because
their usual job is out of season, for example, a ski instructor in the summer.
Short-run aggregate Aggregate supply that varies with the level of demand for goods and services
supply (SRAS) and that is shifted by changes in the costs of factors of production.
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.
Signalling The sending of a signal revealing relevant information to a participant in a
transaction in order to reduce asymmetric information, and so reduce adverse
selection.
Signalling effect Prices give signal to both producers and consumers. A rising price gives a signal
to producers that they should increase their quantity supplied, and signals to
consumers that they should decrease the quantity demanded and vice versa.
Social conformity The prevailing social norms or social customs will influence our daily
behaviour/choice making.
Social enterprise A company in the social economy, 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.
Social safety net A collection of social welfare services provided by the state, or other
institutions, targeted to to vulnerable, resource-deprived households, to
prevent them from falling into poverty.
Social sciences Studies of people in society and how they interact with each other.
Social/community The combination of consumer surplus and producer surplus.
surplus
Socially optimum output This occurs where the marginal social cost of producing a good is equal to the
marginal social benefit of the good to society. In different words, 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)
Stakeholder This is someone who has an interest, or stake, in an economic activity.
Standard of living The level of wealth, comfort, material goods, and necessity goods available to a
certain socioeconomic class in a country.
Structural Equilibrium unemployment that exists when in the long-term the pattern of
unemployment demand and production methods change and there is a permanent fall in the
demand for a particular type of labour. There is a mismatch between skills and
the jobs available.
Subsidies Subsidies are financial support paid by governments to firms.

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Glossary term Glossary definition

Subsidy (international) An amount of money paid by the government to a firm, per unit of output, to
encourage output and to give the firm an advantage over foreign competition.
Substitutes Goods which can be used in place of each other. For example, Adidas running
shoes and Nike running shoes.
Substitution effect When the price of a product falls, relative to other products, there is an
incentive to purchase more of the product, since the marginal utility/price ratio
has improved.
Supply This is the willingness and ability of producers to produce a quantity of a good
or service.
Supply curve This shows the relationship between the price of a good or service and the
quantity supplied. 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.
Sustainability Meeting the needs of the present generation without compromising the ability
of future generations to meet their own needs.
Sustainable development The level of development needed to meet the needs of the present generation
without compromising the ability of future generations to meet their own
needs.
Tariff A duty (tax) that is placed upon imports to protect domestic industries from
foreign competition and to raise revenue for the government.
Tastes The subjective, individual preferences of consumers.
Total revenue The aggregate revenue gained 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, which sets a maximum amount
of pollution allowable. Firms may trade these permits for money.
Trade liberalisation The process of reducing barriers to international trade.
Trade protection Trade protection is an economic policy aiming to limit imports and/or
encourage exports by setting up trade barriers.
Tragedy of commons A situation with common access resources, where individual users acting
independently, according to their own self-interest, go against the common
good of all users by depleting or spoiling that resource through their collective
action.
UN sustainable A collection of 17 global goals set by the United Nations to mobilize efforts to
development goals end all forms of poverty, fight inequalities and tackle climate change, while
(SDGs) ensuring that no one is left behind.
Unemployment The state of being eligible for work, actively looking for work, but 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.
Unitary elastic demand This is where 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 would be equal to one.)

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Glossary term Glossary definition

Unitary elastic supply This is where 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
would be equal to one.)
Universal basic income A regular cash payment given to all on an individual basis, without means test
or work requirement.
Utility A measure of the satisfaction derived from purchasing a good or service.
Wealth The total value of all assets owned by a person, firm, community, or country.
Weighted price index An approach to calculating the change in the price level by giving a weight to
each item according to its importance in the consumers’ budgets.
Welfare loss A loss of economic efficiency that can occur when equilibrium for a good or
service is not allocatively efficient.
World Bank An organization whose main aims are to provide aid and advice to
economically least developed countries, as well as reducing poverty levels and
encouraging and safeguarding international investment.
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.

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