IB Economics Definitions

Market Power: The ability of a firm or group of firms to maintain prices above the level expected under perfect competition.

Concentration Ratio: A measure showing the percentage of an industry's market share or output controlled by its largest firms.

Profit Maximisation: Producing at the output where profit is greatest, normally where marginal revenue equals marginal cost.

Marginal Costs: The additional costs associated with producing one more unit of output.

Total Revenue: The total revenue a firm receives from selling its output, calculated as price × quantity sold.

Economies of Scale: Reductions in unit costs that a business may experience as its scale of production increases.

Anti-Monopoly Regulation: Government policies intended to restrict excessive market concentration and promote competition.

Behavioural Economics

Behavioural economics examines how psychological, social, and cognitive factors influence economic decision-making. It challenges the traditional assumption that consumers and firms always behave rationally and consistently attempt to maximize utility.

Behavioural Economics: A branch of economics incorporating insights from psychology to better explain economic decision-making.

Bounded Rationality: The idea that people often lack the information or ability required to make completely rational decisions and may therefore settle for satisfactory outcomes.

Bounded Self-Control: The idea that consumers may continue consuming even when doing so is no longer economically rational.

Bounded Selfishness: The recognition that individuals may care about the well-being of others rather than acting entirely in their own self-interest.

Satisficing: Choosing an option that is considered satisfactory rather than necessarily selecting the option that maximizes the decision-maker's outcome.

Choice Architecture: The idea that the arrangement, sequence, and range of available choices can affect people's decisions.

Nudge Theory: The use of prompts or subtle interventions to influence decisions in ways intended to improve individual or social well-being.

Consumer Nudges: Positive reinforcement and indirect suggestions intended to influence consumer behaviour and decision-making.

Anchoring: The tendency to rely on established mental reference points when making decisions.

Framing: The way choices are described or presented, which can influence people's decisions.

Default Choices: Options that automatically apply when consumers take no action to select an alternative.

Mandated Choices: Situations where consumers are required to actively state whether they wish to participate.

Restricted Choices: Situations where the number of choices available to consumers is limited without eliminating choice completely.

Rules of Thumb: Mental shortcuts, or heuristics, used to make relatively quick and satisfactory decisions.

Social Conformity: The influence of prevailing social norms and customs on individual choices and behaviour.

Macroeconomics

Macroeconomics looks at the economy as a whole rather than individual markets. Major topics include economic growth, unemployment, inflation, aggregate demand and supply, fiscal policy, monetary policy, and the distribution of income.

Measuring Economic Activity

Macroeconomics: The study of aggregate economic activity and how an economy operates as a whole.

Gross Domestic Product (GDP): The total monetary value of all final goods and services produced within an economy during a specified period, normally one year.

Nominal GDP: GDP measured using current prices without adjusting for inflation.

Real GDP: GDP adjusted for changes in the price level.

Real GDP per Capita: Real GDP divided by the country's population.

Gross National Income (GNI): GDP plus net property income received from abroad.

Real GNI per Capita: Real GNI divided by the country's population.

National Income: The value of the final output of newly produced goods and services in a country over one year.

Economic Growth: An increase in the real value of an economy's output over time, usually measured using real GDP.

Price Deflator: A measure used to remove the effects of inflation from economic statistics.

Business Cycle: The recurring fluctuations in economic activity involving phases such as recovery, boom, slowdown, and recession.

Circular Flow of Income

Circular Flow of Income: A simplified model illustrating how money moves through an economy.

Consumption (C): Household spending on consumer goods and services.

Investment (I): Spending by firms on capital or additions to an economy's capital stock.

Government Spending (G): Government expenditure on goods and services.

Net Exports (X − M): Export revenue minus expenditure on imports.

Injections: Investment, government expenditure, and export revenue added to the circular flow of income.

Leakages: Savings, taxation, and import expenditure removed from the circular flow of income.

Foreign Sector: The part of the circular flow involving imports and exports.

Keynesian Multiplier: The ratio between an initial change in injections and the resulting change in national income.

Aggregate Demand and Aggregate Supply

Aggregate Demand (AD): Total planned spending within 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 quantity of domestically produced goods and services supplied within an economy.

Short-Run Aggregate Supply (SRAS): Aggregate supply that responds to demand and can shift when firms' production costs change.

Long-Run Aggregate Supply (LRAS): Aggregate supply determined by the quantity and quality of an economy's factors of production.

Full Employment Level of Output: The level of output produced when the economy experiences only natural unemployment.

Deflationary/Recessionary Gap: A situation where aggregate demand is below the full-employment level of output.

Inflationary Gap: A situation where aggregate demand exceeds the full-employment level of output.

Unemployment

Unemployment: The condition of being able and willing to work, actively seeking employment, but not having a job.

Unemployment Rate: The number of unemployed people expressed as a percentage of the labour force.

Natural Rate of Unemployment: The unemployment rate consistent with a stable rate of inflation.

Frictional Unemployment: Unemployment experienced while workers move between jobs.

Seasonal Unemployment: Unemployment arising because certain jobs are available only during particular seasons.

Structural Unemployment: Long-term unemployment resulting from changes in demand or production that create a mismatch between workers' skills and available jobs.

Cyclical (Demand-Deficient) Unemployment: Unemployment caused by insufficient aggregate demand in the economy.

Unemployment Benefits: Payments, usually from the government, provided to unemployed people who are seeking employment.

Inflation

Inflation: A sustained increase in the general price level accompanied by a decline in money's purchasing power.

Inflation Rate: The percentage change in a price index over a specified period.

Consumer Price Index (CPI): An index measuring changes in the price of a representative basket of goods and services purchased by an average consumer.

Weighted Price Index: A price index that assigns different weights to goods and services according to their importance in consumers' expenditure.

Demand-Pull Inflation: Inflation resulting from an increase in aggregate demand.

Cost-Push Inflation: Inflation caused by rising production costs that shift SRAS to the left.

Deflation: A persistent decline in the general price level.

Disinflation: A decrease in the rate of inflation.

Fiscal Policy

Fiscal Policy: A demand-side policy involving changes in government expenditure and/or direct taxation to influence economic objectives such as inflation and unemployment.

Budget Deficit: A situation where planned government expenditure exceeds planned government revenue.

Government Debt: The government's total outstanding borrowing from domestic and foreign creditors.

Automatic Stabilizers: Features of fiscal policy, such as taxation and unemployment benefits, that automatically reduce fluctuations in economic activity.

Crowding Out: A situation where government borrowing contributes to higher interest rates and reduces private investment or consumption.

Average Tax Rate: The proportion of total income paid in tax.

Marginal Tax Rate: The proportion of additional income paid in tax.

Proportional Tax: A tax system in which the same tax rate applies as income increases.

Monetary Policy

Monetary Policy: A demand-side policy involving changes in interest rates or the money supply to influence inflation and unemployment.

Central Bank: The institution responsible for an economy's monetary policy and often described as the government's bank.

Interest Rate: The price of borrowing money or obtaining credit.

Money Supply: The total value of monetary assets available in an economy at a particular time.

Expansionary Monetary Policy: Monetary policy intended to increase aggregate demand and economic activity.

Contractionary Monetary Policy: Monetary policy intended to reduce aggregate demand and economic activity.

Open Market Operations: Central-bank purchases or sales of government securities used to influence the amount of money circulating in the economy.

Minimum Reserve Requirements: Rules specifying the minimum reserves commercial banks must hold against their lending.

Quantitative Easing: An expansionary monetary policy in which a central bank purchases government bonds or other financial assets to increase the money supply and stimulate economic activity.

Credit Creation: The process through which commercial-bank lending expands deposits and the overall money supply.

Nominal Interest Rate: An interest rate that has not been adjusted for inflation.

Real Interest Rate: An interest rate adjusted for inflation.

Supply-Side Policies

Supply-Side Policies: Government policies intended to increase an economy's productive capacity and shift LRAS to the right.

Deregulation: A supply-side policy involving the reduction or removal of government regulations affecting firms.

Privatisation: A supply-side policy involving the transfer of publicly owned assets to the private sector.

Labour Market Flexibility: The ability and speed with which labour markets adjust to changes in economic conditions and production.

The Global Economy

The global economy section considers international trade, exchange rates, economic integration, development, poverty, and sustainability. These concepts help explain how countries interact economically and why economic outcomes can differ significantly between countries.

International Trade

International Trade: The exchange of goods and services between countries.

Exports: Goods and services produced in one country and purchased by people or organizations in another.

Imports: Goods and services produced abroad and purchased by consumers in the domestic economy.

Export Revenue: The value of income producers receive from exports.

Import Expenditure: The value of spending on imported goods and services.

Free Trade: International trade occurring without barriers such as tariffs, quotas, or subsidies.

Absolute Advantage: The ability of one country to produce more output than another using the same quantity of resources.

Comparative Advantage: The ability of a country to produce a good at a lower opportunity cost than another country.

Trade Liberalisation: The process of reducing barriers to international trade.

Trade Protection: Government policies designed to restrict imports and/or promote exports through trade barriers.

Tariff: A tax imposed on imports to protect domestic producers and/or generate government revenue.

Quota: A trade barrier establishing a limit on the quantity or value of imports entering a country.

International Subsidy: Government financial assistance provided per unit of output to support domestic producers against foreign competition.

Dumping: Selling a product in a foreign market at a price below its unit cost of production.

Infant Industry: A newly developing industry that may be protected from international competition until it becomes sufficiently established to compete internationally.

Primary Commodities: Raw materials produced by the primary sector.

Primary Sector: The sector involving the extraction or harvesting of natural resources and food.

Economic Integration

Preferential Trade Agreement: An agreement providing selected trading partners with preferential access, such as reduced tariffs on certain products.

Free Trade Agreement: An agreement in which participating countries trade freely with each other while maintaining their own trade policies toward non-members.

Customs Union: An agreement combining free trade between member countries with common external trade barriers.

Common Market: A customs union that also permits free movement of goods, services, capital, and labour.

Monetary Union: An arrangement in which multiple countries use the same currency and share a common central bank.

Exchange Rates

Exchange Rate: The value of one currency expressed in terms of another currency.

Floating Exchange Rate: An exchange-rate system where currency values are determined by demand and supply in foreign exchange markets.

Fixed Exchange Rate: A system where a currency's value is pegged to another currency, a group of currencies, or another reference such as gold.

Managed Exchange Rate: An exchange rate that generally floats but is occasionally influenced by monetary authorities.

Appreciation: An increase in a currency's value under a floating exchange-rate system.

Depreciation: A decrease in a currency's value under a floating exchange-rate system.

Revaluation: An official increase in the value of a currency under a fixed exchange-rate system.

Devaluation: An official decrease in the value of a currency under a fixed exchange-rate system.

Purchasing Power Parity (PPP): The theory that exchange rates are in equilibrium when currencies have equivalent purchasing power in their respective countries.

Balance of Payments

Balance of Payments: A record of transactions between the residents of one country and residents of other countries over a specified period.

Current Account: The section of the balance of payments recording trade in goods and services, net investment income, and current transfers.

Current Account Deficit: A situation where receipts from exports and income flows are less than expenditure on imports and outgoing income flows.

Current Account Surplus: A situation where receipts from exports and income flows exceed expenditure on imports and outgoing income flows.

Balance of Trade in Goods: Export revenue from physical goods minus expenditure on imported physical goods.

Balance of Trade in Services: Revenue from exported services minus expenditure on imported services.

Financial Account: A measure of changes in foreign ownership of domestic financial assets.

Capital Account: An account recording certain international asset and capital transfers.

Capital Transfers: International monetary movements associated with activities such as migrant transfers and transfers involving fixed assets.

Current Transfers: Transfers of goods, services, income, or financial resources for which nothing is received in return.

Reserve Assets: Foreign currencies and precious metals held by central banks, including reserves used to influence exchange rates.

Capital Flight: The movement of money and other assets out of a country in search of greater security elsewhere.

Portfolio Investment: Purchasing financial assets such as shares and bonds to obtain financial returns.

Foreign Direct Investment (FDI): Long-term investment by a multinational corporation in a foreign economy involving a significant ownership interest.

Marshall-Lerner Condition: The condition stating that currency depreciation or devaluation improves the current account when the combined elasticities of demand for exports and imports exceed one.

J-Curve: The idea that currency depreciation may initially worsen the current account before improving it over the longer term.

Economic Development

Economic Development: A broad improvement in living standards involving factors such as lower poverty, better health and education, and greater economic freedom and choice.

Standard of Living: The level of wealth, comfort, material goods, and necessities available to people.

Poverty: A lack or scarcity of sufficient material possessions or income.

Absolute Poverty: Poverty measured according to the income required to satisfy basic survival needs.

Relative Poverty: Poverty measured in comparison with the typical income or living standards within a society.

Poverty Trap/Cycle: A self-reinforcing sequence in which low income contributes to low saving, low investment, low growth, and continued low income.

Human Development Index (HDI): A composite development indicator combining measures of health, education, and standard of living.

Multidimensional Poverty Index (MPI): A measure of acute poverty that considers simultaneous deprivations in health, education, and living standards.

Human Opportunity Index (HOI): An index examining how circumstances outside an individual's control can influence access to basic opportunities.

Gini Coefficient: An index measuring the degree of income inequality within an economy.

Lorenz Curve: A curve showing the cumulative distribution of income across a population.

Happiness Index: An index designed to measure the overall happiness and well-being of a population.

Happy Planet Index: An index examining how effectively countries use environmental resources to achieve long and satisfying lives.

OECD Better Life Index: An index comparing well-being between countries using indicators of material living conditions and quality of life.

Infrastructure: Large-scale capital, often provided by governments, that enables economic activity to occur.

Informal Market: Economic activity that is neither taxed nor officially monitored and is generally excluded from national income statistics.

Microfinance: The provision of small loans to low-income entrepreneurs who lack access to traditional banking services.

Remittances: Money transferred by foreign workers to individuals, commonly family members, in their home countries.

Social Safety Net: Government or institutional welfare programs designed to protect vulnerable households from falling into poverty.

Universal Basic Income: A regular cash payment provided to individuals without a means test or work requirement.

Foreign Aid

Foreign Aid: The international transfer of money, goods, or services intended to benefit another country and its population.

Development Aid: Aid involving measures such as grants, concessional long-term loans, project aid, and programme aid.

Humanitarian Aid: Short-term assistance intended to relieve suffering, including food, medical, and emergency aid.

Official Foreign Aid: Aid provided to a country by another government or multilateral institution.

Debt Relief: The cancellation of debt owed by an economically less developed country to support its development objectives.

World Bank: An international organization that provides financial assistance and advice to developing countries and works to reduce poverty and support investment.

International Monetary Fund (IMF): An international organization concerned with monetary cooperation, financial stability, international trade, and economic stability.

World Trade Organization (WTO): An international organization that establishes rules for global trade, facilitates trade negotiations, and helps resolve disputes between member countries.

Development Strategies

Import Substitution: A development strategy that promotes domestic production of goods that would otherwise be imported.

Export Promotion: A development strategy emphasizing international trade and increasing exports as a source of economic growth.

Appropriate Technology: Technology suited to the particular economic, social, and environmental circumstances of its users.

Fairtrade: A certification system intended to provide producers in developing economies with fairer prices and approved production conditions.

Public-Private Partnerships: Contractual arrangements between public-sector organizations and private-sector firms.

Social Enterprise: An enterprise primarily pursuing social objectives while operating commercially and using its profits mainly to support those objectives.

Sustainability

Sustainability: Meeting present needs without reducing future generations' ability to meet their own needs.

Sustainable Development: Development that satisfies current needs without compromising the ability of future generations to satisfy theirs.

Circular Economy: An economic model that moves beyond the traditional take-make-dispose system by reducing waste, keeping materials in use, and regenerating natural systems.

UN Sustainable Development Goals (SDGs): Seventeen global goals established by the United Nations addressing issues including poverty, inequality, and climate change.

Corporate Social Responsibility (CSR): An approach in which firms seek to operate responsibly and ethically toward society and the environment.

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