Foundation economics

Opportunity cost The next best alternative foregone when an economic decision is made.
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.
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).
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).
Labour The human factor of production. It is the physical and mental contribution of
the existing work force to production.
Entrepreneurship The factor of production involving organising and risk-taking.
Profit maximisation Profit maximisation is producing at the level of output where profits are
greatest: where marginal revenue equals marginal cost.
Total revenue The aggregate revenue gained by a firm from the sale of a particular quantity of
output (equal to price times quantity sold).
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.
Primary sector Extracts or harvests products directly from the earth in order to produce raw
materials or food.
Market A market is where buyers and sellers come together to carry out economic
transaction.
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.
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.
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.
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.

Microeconomics

Demand and supply

Demand The willingness and ability of consumers to purchase a quantity of a good or
service.
Quantity demanded The willingness and ability to purchase a quantity of a good or service at a
certain price over a given time period.
Market demand The horizontal sum of the individual demand curves for a product of all the
consumers in a market.
Law of demand As the price of a good falls, the quantity demanded will normally increase.
Complements Goods are used in combination with each other. For example, digital cameras and
memory cards.
Substitutes Goods which can be used in place of each other. For example, Adidas running
shoes and Nike running shoes.
Supply This is the willingness and ability of producers to produce a quantity of a good
or service.
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.
Market supply The horizontal sum of the individual supply curves for a product of all the
producers in a market.
Law of supply As the price of a good rises, the quantity supplied will normally rise.
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).
Utility A measure of the satisfaction derived from purchasing a good or service.
Marginal utility The extra utility derived from consuming one more unit of a good or service.
Equilibrium A state of rest, self-perpetuating in the absence of any outside disturbance.
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.
Consumer surplus The additional benefit / utility received by consumers by paying a price that is
lower than they are willing to pay
Producer surplus The additional benefit received by producers by receiving a price that is higher
 than the price they were willing to receive.
Social / community The combination of consumer surplus and producer surplus.
surplus
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.
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.
Price controls Prices imposed by an authority, set above or below the equilibrium market price.
Price ceiling A price imposed by an authority and set below the equilibrium price. Prices
(maximum price) cannot rise above this price.
Price floor (minimum A price imposed by an authority and set above the market price. Prices cannot
price) fall below this price.

Elasticities
Elasticity A measure of the responsiveness of something to a change in one of its
determinants.
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.
Price elasticity of A measure of the responsiveness of the quantity demanded of a good or service
demand (PED) when there is a change in its price.
Price elasticity of A measure of the responsiveness of the quantity supplied of a good or service
supply (PES) when there is a change in its price.
Income elasticity of A measure of the responsiveness of the demand for a good or service to a change
demand (YED) in income.
Engel curve A curve showing the relationship between income and quantity demanded.
Inferior goods A good where the demand for it decreases as income increases and more superior
goods are purchased.
Normal goods A good where the demand for it increases as income increases.

Government intervention
Average tax rate The proportion of a person’s income that is paid in tax, usually expressed as a
percentage.
Indirect taxes These are taxes on expenditure. They are added to the selling price of a good or
service.
Proportional tax A system of taxation in which tax is levied at a constant rate as income rises.
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.
Subsidies Subsidies are financial support paid by governments to firms.

Market failure
Market failure The failure of markets to produce at the point where community surplus
(consumer surplus + producer surplus) is maximised.
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 costs to make it. The socially
optimum level of output.
Allocative This occurs where the marginal social cost of producing good is not equal to the
inefficiency 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.
Socially optimum This occurs where the marginal social cost of producing a good is equal to the
output 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)
Welfare loss A loss of economic efficiency that can occur when equilibrium for a good or
service is not allocatively efficient.
Externalities External costs or benefits to a third party, when a good or service is produced
or consumed.
Marginal costs Marginal costs are the additional costs of producing one more unit of output.
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 social The extra benefit/utility to society of consuming an additional unit of output,
benefit (MSB) including both the private benefit and the external benefit.
Demerit goods Goods or services considered to be harmful to people that would be over-
provided by the market and so over-consumed.
Merit goods Goods or services considered to be beneficial for people that would be under-
provided by the market and so under-consumed.
Negative externalities They are the negative effects that are suffered by a third party when a good or
of consumption service is consumed.
Negative externalities They are the negative effects that are suffered by a third party when a good or
of production service is produced.
Positive externalities The beneficial effects that are enjoyed by a third party when a good or service is
of consumption consumed.
Positive externalities The beneficial effects that are enjoyed by a third party when a good or service is
of production produced.
Common access Common access resources are natural resources over which there is no
resources established private ownership—they are non-excludable, but rivalrous.
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.
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.
Non-excludable Non-excludability exists when it is impossible to prevent a person, or persons,
from consuming a good or service.
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.
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.
Carbon (emission) Taxes levied on the carbon contents of fuel.
taxes
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.
Sustainability Meeting the needs of the present generation without compromising the ability
of future generations to meet their own needs.
Sustainable The level of development needed to meet the needs of the present generation
development without compromising the ability of future generations to meet their own needs.
Macroeconomics

The level of overall economic activity

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.
Gross domestic The total money value of all final goods and services produced in an economy
product (GDP) in a given time period, usually one year.
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.
Nominal gross The total money value of all final goods and services produced in an economy
domestic product in a given time period, usually one year, at current values (not adjusted for
inflation).
National income The total value of the final output of all new goods and services produced in a
country in 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).
Circular flow of A simplified model of the economy that shows the flow of money through the
income economy.
Injections The investment, government expenditure and export revenues that add spending
to the circular flow of income.
Foreign sector The segment of the circular flow of income that includes exports and imports.

Aggregate demand and aggregate supply

Aggregate demand The total spending in an economy consisting of consumption, investment,
(AD) government expenditure and net exports.
Consumption (C) Spending by households on consumer goods and services over a period of time.
Investment (I) The addition of capital stock to the economy or expenditure by firms on capital.
Government spending Spending by governments on goods and services.
(G)
Net exports (X-M) Export revenues minus import expenditure.
Exports Goods and services produced in one country and purchased by consumers in
another country.
Export revenue Value of exports earned by producers.
Imports Goods and services purchased by consumers in one country that have been
 produced in another country
Import expenditure Value of spending on imports.
Aggregate supply The total amount of domestic goods and services supplied by businesses and the
(AS) government, including both consumer goods and capital goods.
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.
Long run aggregate Aggregate supply that is dependent upon the resources in the economy and that
supply (LRAS) can only be increased by improvements in the quantity and/or quality of factors
of production.
Monetarist / new An economic school of thought which argues that changes in the money supply
classical revolution 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.
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 / organisations.
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.
Full employment level The level of output that is produced by the economy when there is only natural
of output unemployment.

Unemployment and inflation

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.
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.
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.
Cost-push inflation Inflation that is caused by an increase in the costs of production in an economy.
Demand-pull inflation Inflation that is caused by increasing aggregate demand in an economy.
Price deflator A coefficient that removes the impact of inflation when measuring economic
statistics.
Deflation A persistent fall in the average level of prices in an economy.
Disinflation A fall in the rate of inflation.
Labour market This refers to the speed with which labour markets adapt to fluctuations and
flexibility changes in production, the economy, or society.
Unemployment The state of being eligible for work, actively looking for work, but without a job.
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.
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.
Cyclical (demand- Disequilibrium unemployment that exists when there is insufficient demand in
deficient) the economy and wages do not fall to compensate for this.
unemployment
Frictional Equilibrium unemployment that exists when people have left a job and are in
unemployment the process of searching for another job.
Seasonal Equilibrium unemployment that exists when people are out of work because their
unemployment usual job is out of season, for example, a ski instructor in the summer.
Unemployment Payments, usually made by the government, to people who are unemployed
benefits (and actively seeking employment).

Economic growth and equity

Standard of living The level of wealth, comfort, material goods, and necessity goods available to a
certain socioeconomic class in a country.
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.
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.
Poverty The scarcity or the lack of a certain amount of material possessions or money.
Absolute poverty Absolute poverty is measured in terms of basic need for survival. It is the amount
of income a person needs to have in order to stay alive.
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.
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.
Equity The concept or idea of fairness.

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.
Gini coefficient A coefficient (index) that measures the ratio of the area between a Lorenz curve
(index) 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.
Disposable income The remaining income available for an individual to spend or save, after taxation.
Universal basic A regular cash payment given to all on an individual basis, without means test
income or work requirement.
Efficiency Efficiency is a quantifiable concept, determined by the ratio of useful output to
total input.

Demand side and supply side policies

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.
Government The total outstanding borrowing of a government, made up of internal debt
(national) debt (owing to national creditors) and external debt (owing to foreign creditors).
Central bank The government’s bank. The institution that is responsible for an economy’s
monetary policy.
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.
Contractionary A monetary policy designed to decrease aggregate demand and thus the level of
monetary policy economic activity.
Interest rate The price of credit/borrowed money.
Real interest rates Interest rates that have been adjusted for inflation.
Nominal interest rates Interest rates that have not been adjusted for inflation.
Monetary policy A demand-side policy using changes in the money supply or interest rates to
achieve economic objectives relating to inflation and unemployment.
Expansionary A monetary policy designed to increase aggregate demand and thus the level
monetary policy of economic activity.
Fiscal policy A demand-side policy using changes in government spending and/or direct
taxation to achieve economic objectives relating to inflation and unemployment.
Price expectations The forecasts or views that consumers hold about future price movements that
play a role in determining consumer demand.
Supply-side policies Government policies designed to shift the long run aggregate supply curve to
the right, thus increasing potential output in the economy.
Privatisation A type of supply-side policy where the government sells public assets to the
private sector.
Deregulation A type of supply-side policy where the government reduces the number or type
of regulations governing the behaviour of firms.
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.
Infrastructure The large-scale capital usually provided by government that is necessary for
economic activity to take place.
Global economics

International trade
World Trade An international body that sets the rules for global trading and resolves disputes
Organisation (WTO) between its member countries. It also hosts negotiations concerning the reduction
of trade barriers between its member nations.
International trade Trade that involves the exchange of goods or services between two countries.
Absolute advantage This is where a country is able to produce more output than other countries using
the same input of factors of production.
Comparative This is where a country is able to produce a good at a lower opportunity cost of
advantage resources than another country.
Economies of scale Unit cost advantages that a business may experience as an outcome of
increasing its scale of operations.

Capital transfers A measure of net monetary movements gained or lost through actions such as the
transfer of good 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.
Tarriff A duty (tax) that is placed upon imports to protect domestic industries from
foreign competition and to raise revenue for the government.
Quota Import barriers that set limits on the quantity or value of imports that may be
imported into a country.
Dumping It is the selling of a good in another country at a price below its unit cost of
production.
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.

Exchange rate
Exchange rate The value of one currency expressed in term of another, for example, €1 = US
$1.5.
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.
Appreciation An increase in the value of one currency in terms of another currency in a
floating exchange rate system.
Depreciation A fall in the value of one currency in terms of another currency in a floating
exchange rate system.
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.
Revaluation An increase in the value of a currency in a fixed exchange rate system.
Devaluation A decrease in the value of a currency in a fixed exchange rate system.
Managed exchange An exchange rate that floats in the foreign exchange markets but is subject to
rate 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”.
Purchasing power A theory which states that exchange rates between currencies are in equilibrium
parity (PPP) when their purchasing power is the same in each of the two countries.

The balance of payments

Balance of payments It is 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 A measure of the revenue received from the exports of tangible (physical) goods
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.
External balance The value of exports of goods and services minus the value of imports of goods
and services.
Financial account A measure of the net change in foreign ownership of domestic financial assets.
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.
Remittances Remittances are the transfer of money by foreign workers to individuals, often
family members, in their home country.
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.
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.
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 transfer 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.
Current account This is where the revenue from the exports of goods and services and income
deficit flows is less than the expenditure on the import of goods and services and
income flows in a given year.
Current account This is where the revenue from the export of goods and services and income
surplus flows is greater than the expenditure on the import of goods and services and
income flows in a given year.
Official borrowing International borrowing by a government to help to cover a current account
deficit.

Economic integration
Free trade International trade that takes place without any barriers, such as tariffs, quotas,
or subsidies.
Trade protection Trade protection is an economic policy aiming to limit imports and/or encourage
exports by setting up trade barriers.
Trade liberalisation The process of reducing barriers to international trade.
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.
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.
Common market A customs union with common policies on product regulation, and free
movement of goods, services, capital, and labour.
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 the customs union.
Monetary union This is where two or more countries share the same currency and have a common
central bank.
Development economics
Economic growth The growth of the real value of output in an economy over time. Usually
measured as growth in real GDP.
Economic A broad concept involving improvement in standards of living, reduction in
development poverty, improved health and education along with increased freedom and
economic choice.
Economically least Those countries classified by the UN as being “low- income countries
developed countries confronting severe structural impediments to sustainable development. They are
(ELDC’s) highly vulnerable to economic and environmental shocks and have low levels of
human assets”.
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).

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.
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.
Official foreign aid Aid that is provided to a country by another government or multilateral
agency.
Non-government A non-government organization that exists to promote economic development
organisation (NGO) and/or humanitarian ideals and/or sustainable development.
International An organization working to foster global monetary cooperation, secure financial
Monetary Fund (IMF) stability, facilitate international trade, and reduce poverty.
Humanitarian aid Aid given to alleviate short-term suffering, consisting of food aid, medical aid,
and emergency relief aid.
Economic well-being A multi-dimensional concept relating to the level of prosperity and quality of
living standards in a country.
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.

Indexes
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.
The elements are well-being, life expectancy, inequality of outcomes, and
ecological footprint.
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$).
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.
OECD Better Life An index to compare well-being across countries, based on 11 topics that the
Index OECD has identified as essential, in the areas of material living conditions
and quality of life.