Economics Defnitions

Microeconomics

Demand: The
Demand: The quantity o a good or service that consumers are
willing and able to purchase at a given price in a given time period.

Supply: The
Supply: The willingness and ability o producers to produce
produce a
quantity o a good or service at a given price in a given time period.

Consumer surplus: The
surplus: The extra satisaction gained by consumers
rom paying a price that is lower than that which they are prepared
to pay.

Producer surplus: The
surplus: The excess o actual earnings that a producer
makes rom
rom a given quantity o output over and above the amount
the producer would be prepared to accept or that output.

Allocative efciency: !esources are allocated in the most e"cient

way rom society#s point o view.

Productive efciency: !esources
efciency: !esources are allocated in the most
e"cient way rom the producer#s point o view.

Price elasticity o demand (PED): $ measure o the

responsiveness
responsiveness o quantity demanded to a change in price o a
product.

Price elasticity o supply (PES): $ measure o the

responsiveness
responsiveness o quantity supplied to a change in price o a
product.

Cross elasticity o demand (XED): $ measure o how much the

demand or a product changes when there is a change in price o
another product.

Income elasticity o demand (YED): $ measure o the

responsiveness
responsiveness o quantity demanded to a change in the
consumer#s income.

Indirect ta: $ tax that is imposed upon expenditure. %t is placed

on the selling price o a product raising the frm#s costs.

Speci!c ta: $ type o indirect tax. %t is a fxed amount o tax

imposed upon a product or example &' tax per unit.

Percenta"e (ad valorem) ta: $ type o indirect tax where the

tax is a percentage o the selling price.

Direct ta: $ tax that is imposed on income or wealth.

Su#sidy: $mount o money paid by the government to a frm per
unit o output.

Price ceilin": $ maximum price set by the government below the

equilibrium price preventing producers rom raising the price above
it.

Price $oor: $ minimum price set by the government above the

equilibrium price preventing producers rom reducing the price
below it.

%ar&et ailure: $n ine"cient allocation o goods and services in a

ree market economy usually shown by the existence o negative
externalities o production or consumption.

'e"ative eternality: This occurs when the production or

consumption o a good or service has a negative e(ect upon a third
party.

'e"ative eternality o production:  This occurs when the

production o a good or service creates external costs that are
damaging to third parties.

rada#le emission permits: These are issued by the government

and give frms the licence to create pollution up to a set level. )nce
they are issued the frms can buy sell and trade the permits on the
market.

'e"ative eternality o consumption:  This occurs when the

consumption o a good or service creates external costs that are
damaging to third parties.

Asymmetric inormation: *hen one party in an economic

transaction has access to more inormation or better inormation
than the other party.

Macroeconomics

DP: The total value o all fnished goods and services produced in

an economy in a year + the total o all economic activity in a
country regardless o who owns the productive assets.

'P*'I: The total income that is earned by a country#s actors o

production regardless o where the assets are located.
,-%  ,D/ 0 net property income rom abroad

''I: ,-% 1 depreciation

+eal DP: -ominal ,D/ ad2usted or in3ation

DP per capita: ,D/ divided by the si4e o the population

reen DP: ,D/ that takes into account any environmental costs
incurred orm the production o the goods and services included in
the ,D/ fgures.
,reen ,D/  ,D/ 1 environmental costs o production

,usiness cycle: $ cycle showing periods o rising and alling

growth o an economy.

+ecession: Two consecutive quarters o negative ,D/ growth.

A""re"ate demand: The total spending on goods and services in a

period o time at every given price level.
$D  5 0 % 0 , 0 6 1 M

Consumption: The total spending by consumers on domestic

goods and services.

Investment: The addition o capital stock to the economy.

-iscal policy: The set o a government#s policies relating to its

spending and taxation rates.

%onetary policy: The set o o"cial policies governing the supply

o money and the level o interest rates in an economy.

A""re"ate supply: The total amount o goods and services that all

industries in the economy will produce at every given price level.

S.ort run: $ period o time when the actors o production do not

change.

/on" run: $ period o time in which all actors o production and

costs are variable.

In$ationary "ap: The economy is in equilibrium at a level o

output that is greater than the ull employment level o output.

De$ationary "ap: The economy is in equilibrium at a level o

output that is less than the ull employment level o output.

.e multiplier e0ect: $ny increase in aggregate demand will

result in a proportionally larger increase in national income.

1nemployment: /eople o working age who are without work

available or work and actively seeking employment.

1nemployment rate: -umber o people who are unemployed

expressed as a percentage o the total labour orce.
In$ation: $ sustained increase in the average price level in the
economy.

De$ation: $ sustained all in the average price level in the

economy.

Disin$ation: $ alling rate o in3ation.

P.illips curve: This shows the inverse relationship between the

in3ation rate and the unemployment rate o an economy.

Economic "ro2t.: $n increase in real ,D/ over time + an increase

in the amount o goods and services produced per head o the
population over a period o time.

ini inde: $ ratio o the area between the line o equality and a
country#s 7oren4 curve 8a9 to the total area under the line o equality
8a9 0 8b9.

ini coefcient: $ measurement o the income distribution o a

country:s residents. This number which ranges between ; and '
and is based on residents: net income helps defne the gap between
the rich and the poor with ; representing perect equality and '
representing perect inequality.

%nternational Economics

International trade: The exchange o goods and services between

countries.

A#solute advanta"e: $ country has absolute advantage in the

production o a good i it can produce it using ewer resources than
another country.

Comparative advanta"e: $ country has comparative advantage

in the production o a good i it can produce it at a lower opportunity
cost than another country.

3orld rade 4r"ani5ation (34): $n international organi4ation

that sets the rules or global trading and resolves disputes between
its member countries.

-ree trade: <ree trade is said to take place between countries

when there are no barriers to trade put in place by governments or
international organi4ations. ,oods and services are allowed to move
reely between countries.

Dumpin": The selling by a country o large quantities o a

commodity at a price lower than its production cost in another
country.
Protectionism: $ny economic policy that is aimed at supporting
domestic producers at the expense o oreign producers.

ari0: $ tax imposed on imported goods.

6uota: $ physical limit on the numbers or value o goods that can

be imported into a country.

Ec.an"e rate: The value o one currency expressed in terms o

another currency.

Ec.an"e rate re"ime: The way a country manages its exchange

rate. There are three main types 1 fxed 3oating and managed.

-ied ec.an"e rate: $n exchange rate regime where the value o 
a currency is fxed to the value o another currency or to the value
o some other commodity such as gold.

+evaluation o currency: *hen the value o the currency is

raised.

Devaluation o currency: *hen the value o the currency is

lowered.

-loatin" ec.an"e rate: $n exchange rate regime where the

value o a currency is allowed to be determined solely by the
demand or and supply o the currency on the oreign exchange
market. There is no government intervention.

Appreciation o currency value: *hen the value o the currency

rises.

Depreciation o currency value: *hen the value o the currency

alls.

%ana"ed ec.an"e rate: $n exchange rate regime where the

currency is allowed to 3oat but with some element o intererence
rom the government. =sually the central bank will set an upper and
lower limit and allow the currency to 3oat reely between these
limits.

,alance o payments account: $ record o the value o all the

transactions between the residents o one country and the residents
o all other countries in the world over a given period o time
usually one year. There are two main parts 1 current and capital
account.

Current account: $ measure o the 3ow o unds rom trade in

goods and services plus other income 3ows.
5urrent account balance  balance o trade in goods 0 balance o
trade in services 0 net income 3ows 0 net current transers
5urrent account  capital account 0 fnancial account 0 net errors
and omissions

,alance o trade in "oods: $ measure o the revenue received

rom the exports o tangible goods minus the expenditure on the
imports o tangible goods over a given period o time.

,alance o trade in services: $ measure o the revenue received

rom the exports o services minus the expenditure on the imports
o services over a given period o time.

Income: $ measure o the net monetary movement o proft

interest and dividends moving into and out o the country over a
given period o time as a result o fnancial investment abroad.

Current transers: $ measurement o the net transers o money

or payments made between countries when no goods or services
change hands.

-inancial account: %t measures the net change in oreign

ownership to domestic fnancial assets. There are three components
1 direct investment portolio investment and reserve assets.

Direct investment: $ measure o the purchase o long>term

assets where the purchaser is aiming to gain a lasting interest in a
company in another economy.

Portolio investment: $ measure o stock and bond purchases

which are not direct investment since they do not lead to a lasting
interest in a company.

+eserve assets: The reserves o gold and oreign currencies which

all countries hold and which are itemi4ed in the o"cial reserve
account.

Ependiture7s2itc.in" policies: $ny policies implemented by the

government that attempt to switch the expenditure o domestic
consumers away rom imports towards domestically produced goods
and services.

Ependiture7reducin" policies: $ny policies implemented by the

government that attempt to reduce overall expenditure in the
economy so shiting $D to the let.

%ars.all7/erner condition: $ rule that tells us how successul a

depreciation or devaluation o a currency#s exchange rate will be as
a means to improve a current account defcit in the balance o
payments. %t states that reducing the value o the exchange rate will
only be successul i the total value o the /ED or exports and /ED
or imports is greater than one.
/EDexports 0 /EDimports ? '
 87curve: This curve shows what happens to a current account defcit
over time when the exchange rate is devalued or depreciated. The
current account defcit gets worse beore it gets better and this is
known as the @>curve e(ect.

Economic inte"ration: $ process whereby countries coordinate

and link their economic policies.

,ilateral trade a"reement: $n agreement relating to trade

between two countries where the aim is usually to reduce or
remove tari(s or quotas that have been placed on items traded
between the two countries.

radin" #loc: $ group o countries that 2oin together in some orm

o agreement in order to increase trade between themselves or to
gain economic benefts rom cooperation on some level.

Preerential tradin" areas: $ trading bloc that gives preerential

access to certain products rom certain countries usually carried out
by reducing 8but not eliminating9 tari(s.

-ree trade areas: $n agreement made between countries where

the countries agree to trade reely among themselves but are able
to trade with countries outside o the ree trade area in whatever
way they wish. E.g. -$<T$

Customs union: $n agreement made between countries where

the countries agree to trade reely among themselves and they also
agree to adopt common external barriers against any country
attempting to import into the customs union. E.g. E=

Common mar&et: $ customs union with common policies on

product regulation and ree movement o goods services capital
and labour. E.g. E=

Economic and monetary union: $ common market with a

common currency and a common central bank. E.g. Euro4one

Complete economic inte"ration:  The fnal stage o economic

integration at which point the individual countries involved would
have no control o economic policy ull monetary union and
complete harmoni4ation o fscal policy. This is what the Euro4one is
moving towards.

rade creation: This occurs when the entry o a country into a

customs union leads to the production o a good or service
transerring rom a high>cost producer to a low>cost producer.
rade diversion: This occurs when the entry o a country into a
customs union leads to the production o a good or service
transerring rom a low>cost producer to a high>cost producer.

erms o trade: $n index that shows the value o a country#s

average export prices relative to their average import prices.

weighted index of averageexport prices

 T)T   × 100
weighted index of average import prices

Development Economics

Economic development: $n increase in the standard o living o

people in an economy brought about by improving actors like
health education inrastructure and international policies.

ric&le7do2n e0ect: The rich spend more and some o this goes

to the poor.

+elative poverty: $ person is said to be in relative poverty i they

do not reach some specifed level o income e.g. less than A;B o
average incomes.

A#solute poverty: This is measured in terms o the basic

necessities or survival. %t is the amount a person needs in order to
live. E.g. =C&'.A per day.

Poverty cycle: $ny linked combination o barriers to growth and

development that orms a circle thus sel>perpetuating unless the
circle can be broken.

Purc.asin" po2er parity (PPP) ec.an"e rate:  This attempts

to equate the purchasing power o currencies in di(erent countries
calculated by comparing the prices o identical goods and services
in di(erent countries.

/ie epectancy at #irt.: $ measure o the average number o

years that a person may expect to live rom the time that they are
born.

Inant mortality rate: $ measure o the number o deaths o

babies under the age o one year per thousand live births in a given
year.

Adult literacy rate: $ measure o the proportion o the adult

population 8aged 'A or over9 that is literate expressed as a
percentage o the whole adult population or a country at a specifc
point in time.

'et enrolment ratio in primary education: $ measure o the

ratio o the number o children o primary school age enrolled in
primary school to the total number o children who are o primary
school age in the country.

9uman Development Inde (9DI): $ composite index that brings

together three goals that can be measured 1 a long and healthy lie
improved education and a decent standard o living.

enuine Pro"ress Indicator (PI):  This attempts to measure

whether a country#s growth has actually led to an improvement in
the welare o the people.

Inrastructure: The essential acilities and services such as roads

airports sewage treatment water systems railways telephone and
other utilities that are necessary or economic activity.

Corruption: The dishonest exploitation o power or personal gain.

-inancial mar&ets: The institutions where lending and borrowing is

carried out.

%icro7!nance: The provision o fnancial services such as small

loans savings accounts and insurance to poor countries.

%icro7credit: The provision o small loans to individuals who have

no access to traditional sources.

Import su#stitution: $ strategy that says that a developing

country should wherever possible produce goods domestically
rather than import them.

Eport promotion (eport7led "ro2t.):  This is where growth is

achieved by concentrating on increasing exports and export
revenue as a leading actor in the aggregate demand o the country.

rade li#erali5ation: The reduction or removal o trade barriers

that block the ree trade o goods and services between countries.

-air trade sc.emes: $n attempt to ensure that producers o ood

8and some non>ood9 products in developing countries receive a air
deal when they are selling their products.

-orei"n direct investment (-DI): 7ong>term investment by

private multinational corporations 8M-5s9 in countries overseas.

Aid: $ny assistance that is given to a country that would not have
been provided through normal market orces.

4fcial aid: $id that is organi4ed by a government or an o"cial

government agency o a donor country.

1nofcial aid: $id that is organi4ed by an -,) such as )xam.

'on7"overnmental or"ani5ation ('4): $ny non>proft
voluntary citi4ens# group that is organi4ed on a local national or
international level.

9umanitarian aid: $id given to alleviate short>term su(ering

which may be caused by such events as droughts wars or natural
disasters.

rant aid: $ type o humanitarian aid 1 short>term aid provided as

a git and does not have to be repaid. There are three types 1 ood
medical and emergency aid.

-ood aid: The provision o ood rom donor countries or money to

pay or ood which also includes money given or the transport
storage and distribution o ood.

%edical aid: The provision o medical services and provisions rom

donor countries as well as money to acilitate medical services.

Emer"ency aid: The provision o emergency supplies including

temporary shelters tents clothing uel heating and lighting.

Development aid: $id given in order to alleviate poverty in the

long run and improve the welare o individuals. %t is also called
)"cial Development $ssistance 8)D$9.

/on"7term loans: 7oans that are usually repayable by the

developing country over a period o '; to ; years.

ied aid: ,rants or loans that are given to a developing country

but only on the condition that the unds are used to buy goods and
services rom the donor country.

Proect aid: Money given or a specifc pro2ect in a country and is

oten given in the orm o grant aid that requires no repayment.

ec.nical assistance aid: This aims to raise the level o

technology in developing countries by bringing in oreign technology
and technicians who can instruct on its use and also to raise the
quality o human capital by the provision o training acilities and
export guidance.

Commodity aid: ,rant aid given by countries to increase

productivity in developing countries.

,ilateral aid: $id given directly rom one country to another.

%ultilateral aid: $id given by rich countries to international aid

agencies like the %M<.