absolute poverty = the number of people with an income level below a predefined 'poverty

line', which is the minimum income necessary to satisfy basic physical needs

aggregate demand (AD) ​= the total amount of real output (goods and services) that all buyers
in an economy (consumers, firms, government and foreigners) are willing and able to buy at
different possible price levels, in a year, ceteris paribus

aggregate supply (AS) ​= the total amount of real output (goods and services) produced in an
economy in a year at different price levels; there are three kinds of AS curves: short-run
aggregate supply (SRAS), long-run aggregate supply (LRAS) and Keynesian AS

automatic stabilizers = features in the economy that limit economic fluctuations (recessionary
and inflationary gaps) without any government action, thus stabilizing the economy; the most
important are progressive income taxes and unemployment benefits

balanced budget = government revenues are equal to government spending, over the period of
a year

budget deficit​= government revenues < government spending, over the period of a year,
usually made possible by government borrowing

budget surplus ​= government revenues> government spending, over the period of a year

business confidence ​= a measure of the degree of optimism of firms regarding the future of
the economy

business cycle = short-term fluctuations (increases and decreases) in real GDP over lime,
consisting of four phases: peak, contraction, trough, and expansion

capital expenditures ​= spending by the government on public investments (roads, airports,

public hospitals and schools, etc)

central bank ​= a financial institution concerned with carrying out monetary policy and exchange
rate policy, as well as regulating commercial banks and acting as banker to both commercial
banks and the government

consumer confidence = a measure of the degree of optimism of consumers regarding the

future of the economy

consumer price index (CPI) ​= a measure of the cost of living of the typical household and how
this changes over lime; the CPI compares the cost of buying a fixed basket of goods and
services from one year to the next; by calculating the value of the same basket from year to
year, the CPI offers an estimate of how prices change on average from year to year
consumption​ = spending by consumers to buy goods and services

contractionary policy​= policy carried out by the government (fiscal policy) or the central bank
(monetary policy) intended to lower AD and close an inflationary gap

core rate of inflation (= underlying rate of inflation) = a measure of the rate of inflation based
on a basket of goods and services that excludes goods with highly volatile prices (ex food and
energy), in order to determine the underlying course of inflation

cost-push inflation ​= inflation caused by a decrease in SRAS, hence a leftward shift in the
SRAS curve, resulting mainly from increases in costs of production or supply shocks

crowding out = a possible weakness of expansionary fiscal policy involving increases in

government spending financed by borrowing, causing an increase in interest rates that reduces
consumption and investment spending, thus counteracting the increase in AD

current expenditures ​= spending by the government for its day-to-day operations (wages of
government workers, supplies, subsidies)

cyclical unemployment​(= demand-deficient unemployment)=unemployment caused by

decreases in AD, leading to the downward phase of the business cycle

deflation​ = a sustained decrease in the general price level

deflationary gap = occurs when short-run equilibrium GDP is less than potential GDP due to
insufficient aggregate demand

demand-pull inflation​= inflation caused by an increase in AD, hence a rightward shift in the AD
curve, resulting from an increase in any of the components of AD (C, I, G, X-M)

demand-side policies ​= policies that focus on changing AD for the purpose of reducing
short-term economic fluctuations, i.e. close deflationary and inflationary gaps, and hence
achieve low unemployment and a low and stable rate of inflation

deregulation​= policies to eliminate or lower the amount of government regulation of an industry

(ex regulation of prices or quantity of output produced, both used to protect firms from
competition), thus exposing firms in the industry to greater competition

direct taxes = taxes on income and wealth, paid directly to the government (ex personal
income taxes, corporate income taxes)

disinflation​= a fall in the rate of inflation (ex 7% in 2010; 5% in 2011)

economic growth = growth in real GDP over a period of lime, usually expressed as a
percentage change in real GDP over lime; is often calculated in per capita terms (per person in
the population)

efficiency​= the use of resources in the best possibly way, so that

there is no waste of resources

equity = the condition of being fair, often interpreted to mean 'equality" in the context of income
distribution

expansionary policy = policy carried out by the government (fiscal policy) or the central bank
(monetary policy) intended to increase AD and close a deflationary gap

expenditure approach ​= an approach to measuring GDP that adds up total spending of all
buyers on all final goods and services within a year; includes C + I + G + (X - M)

fiscal policy = a type of demand-side policy by the government in order to manipulate AD (by
changing taxes and/or government spending) to achieve price stability and low unemployment

frictional unemployment​ = unemployment including workers who are in between jobs

full employment outpu​t(= potential output)= the level of real output produced by the economy
when unemployment is equal to natural unemployment

gini coefficient​= a measure of income inequality derived from the Lorenz curve = area between
the Lorenz curve and line of perfect income equality, divided by entire area under line of perfect
equality

government budget = a plan relating government revenue to government spending, usually for
a period of a year

green GDP​= a measure of GDP that takes into account environmental destruction due to
production or consumption activities; green GDP= GDP - value of environmental destruction

gross domestic product (GDP)​= the total value of all final goods and services produced within
the boundaries of a country, in a year

gross national income (GNI or GNP)​= the total income received by the residents of a country
in a year, regardless of where the factors of production owned by the residents are located

hidden unemployment​= people without a job not included in official unemployment figures
because they are not actively seeking a job (ex "discouraged workers") as well as
underemployed people counted as fully employed in official unemployment figures
income approach = an approach to measuring GDP that adds up all income earned by the
factors of production in the course of producing total output within a year; includes wages, rent,
interest and profits

indirect taxes ​= taxes on spending to buy goods and services, paid indirectly to the
government through the sellers (ex sales taxes, VAT)

industrial policies = a type of interventionist supply-side policy intended to promote specific

industries; include tax reductions, tax exemptions, low-interest loans, subsidies and grants for
industries that are held to be important to support growth

inflation​= a sustained increase in the general price level

inflation targeting = a policy pursued by some central banks focusing on targeting a particular
rate of inflation and carrying out monetary policy (manipulation of interest rates) to achieve the
targeted rate

inflationary gap = occurs when short-run equilibrium GDP is greater than potential GDP due to
excess aggregate demand

injection ​= money that enters the circular flow of income in the form of investment spending,
government spending or export revenues (spending by foreigners)

interest rate ​= payment for borrowed money over a certain time period, expressed as a
percentage of the borrowed amount; the "price" of money services

investment ​= spending by firms or the government to buy capital

goods (machines, equipment, as well as infrastructure)

Keynesian AS ​= an AS curve with a horizontal section (when the economy is in recession), an

upward-sloping section (when the economy approaches full employment output) and a vertical
section (when the economy has reached maximum capacity output)

leakage = money that leaves the circular flow of income in the form of saving, taxes, and
spending on imports

long run aggregate supply (LRAS) = an AS curve showing real output produced as being
independent of the price level; the LRAS is vertical at real GDP where unemployment= natural
unemployment

Lorenz curve = visual representation of income shares received by percentages of the

population; the further away a Lorenz curve is from the line of perfect equality, the more unequal
the distribution of income; forms the basis of computing the gini coefficient
monetary policy​= a type of demand-side policy undertaken by the central bank in order to
manipulate AD (by changing interest rates) to achieve price stability and low unemployment

natural unemployment​= the sum of frictional, seasonal and structural unemployment; is the
unemployment level of the economy when it is producing potential output(= full employment
output)

net exports​ = the value of exports minus the value of imports

nominal GDP (or nominal GNI) = a measure of output and income in terms of current prices
(prices at any given moment in time)

output approach = an approach to measuring GDP that adds up the value of each good and
service (PxQ) produced in the economy within a year, thus obtaining the value of all final goods
and services

potential output​(= full employment output) = the level of real GDP produced when the
economy is on its long-term growth trend, where cyclical unemployment= 0 and unemployment=
natural unemployment

poverty​= the inability to satisfy basic physical needs (ex, food, clothing, shelter, etc) due to low
income

producer price index (PPI) ​= a measure of changes in costs of production based on average
prices of factors of production; since the PPI measures price level changes at early stages in
production, it is useful in predicting changes in future inflation (measured by the CPI)

productivity​= output per worker; it increases as a result of investments in physical, human and
natural capital; a major cause of economic growth

progressive tax ​= the percentage of income paid as tax (average tax rate) increases as income
increases

proportional tax​= the percentage of income paid as tax (average tax rate) remains constant as
income increases

real GDP (or real GNI) = a measure of output and income in terms of constant prices that
prevail in one particular year; therefore real values eliminate the influence of price level changes
over time

recession = falling real GDP over a period of at least two consecutive quarters (six consecutive
months)
regressive tax = the percentage of income paid as tax (average tax rate) decreases as income
increases

relative poverty = the number of people with an income level below a predefined level that
changes over time, defined as a percentage of society's median income; poverty is "relative" to
other people's income; reflects the idea that people should be able to afford a lifestyle typical of
their society

seasonal unemployment​= unemployment including workers who are unemployed on a

seasonal basis, ex ski instructors in the summer

short run aggregate supply (SRAS) = an AS curve showing the total amount of real output
produced in a year to be directly related to the price level

structural unemployment​= unemployment that is usually long-term, arising from changing

demand for different labor skills (due to technological change or structural changes in the
economy), changes in the geographical location of industries, and labor market rigidities

supply-side policies​= policies that focus on the supply side of the economy, aiming to promote
long-term economic growth and hence increase potential output (increase LRAS or Keynesian
AS); may be interventionist (involving government intervention in the economy) or market-based
(based on development of free competitive markets)

transfer payments = transfers of income from taxpayers to vulnerable groups who are people
in need, including unemployment benefits, child allowances, pensions, housing benefits and
others

underemployment​= people who are employed, but who (i) work part-time when they would
rather work full-time, and (ii) work at a different skill or lower skill level than what they were
trained for (ex an engineer working as a waiter)

unemployment rate ​= the number of people in the labor force actively looking for work but
without a job, expressed as a percentage of the labor force (= number of unemployed / labor
force x 100)

Macroeconomics HL terms

average tax rate (ATR) ​= tax paid/ taxable income x 100

marginal propensity to consume ​= fraction of additional income spent to consume (buy)

domestic products
marginal propensity to import (MPM) ​= fraction of additional income (Y) spent on buying
imports (M)

marginal propensity to save (MPS) ​= fraction of additional income (Y) that goes toward saving
(S)

marginal propensity to tax (MPT) ​= fraction of additional income (Y) paid as taxes {T)

Marginal tax rate​= tax rate applied to an individual's income in the highest tax bracket

Multiplier​= a multiplied effect on AD, and hence on real GDP due to a change in spending
caused by an injection

Phillips curve​= curve showing relationship between rate of inflation and rate of unemployment.
Short run Phillips curve shows an inverse relationship but long run Phillips curve is vertical at
the natural rate of unemployment indicating that unemployment is independent of the price level

Stagflation= arises from a decrease in SRAS which causes a rising price level (cost push
inflation) and a fall in output