Economics Dictionary for IGCSE, GCE A-Level, AP, and IB Diploma 

This is a brief set of key Economic terms that may be useful for Hong Kong students, who are learning Economics for IGCSE, GCE A-Level, AP, of IB Diploma. If there are any terms that you would like to be added, please contact us.

Absolute advantage (HL) – can produce more goods or services with the same resources

Accelerator (HL) – Keynesian investment level depends on changes in national income

Accounting costs (HL) – explicit monetary production costs

Ad valorem tax – indirect tax expressed as a percentage of price (VAT)

Administrative obstacles or regulatory barriers – government regulations that cause imports to decrease to protect domestic industries

Aggregate demand – planned domestic spending on goods and services at various possible average price levels during a specified time period

Aggregate supply – planned output of goods and services at various possible price levels during a certain period of time

Aid – flow of capital to developing countries in the form of grants or low interest rate loans

Allocative efficiency – when marginal benefit is equal to marginal cost

Anti-dumping duties – tariff imposed on import price of good being dumped to reduce harm on domestic industry

Appreciation – the increase in value, strengthening of the currency, or increase in the exchange rate

Balance of Payments (BOP) – record of all transactions a nation makes, over a given period of time, with other nations, consisting of the Current Account and Capital Account

Barrier to entry – things that make it difficult for new firms to enter the market

Basic economic question –  what to make for whom

Bilateral aid – when the government of one country provides aid to the government of another country

Breakeven output – total revenue is equal to total costs of production

Budget deficit – when spending is more than revenues

Buffer stocks – buying surplus stock during a good harvest to stabilize the price

Business cycle – fluctuations in real GDP often referred to as peaks, recessions, depressions, troughs, recoveries, and booms.

Capital – means of production such as factories, machines, equipment, and tools

Capital account of Balance of Payments – foreign direct investments in and out of a country over a given period of time

Capital flight – financial capital quickly exiting a country

Cartels – formal collusion by oligopolies who behave like a monopoly, driving up price, often achieved by restricting output

Centrally planned (command) economy – the government sets prices and output of goods and services

Ceteris paribus – all other things remain constant

Circular flow of income model – shows how money, factors of production, goods, and services flow around the economy among households, firms, financial markets, overseas markets, and the government

Collusive oligopoly – firms agree (formally or tacitly) to fix price, reduce supply, or engage in non competitive behavior, which is illegal in the UK, USA, and Hong Kong

Commodities – primary raw material products that are not easily differentiated, like iron ore or wheat

Commodity agreements –  quotas or buffer stock systems to stabilize prices

Commodity concentration of exports – a few commodities make up a large percentage of export revenue, usually of a developing country

Common market – free trade and movement of factors of production among members

Comparative advantage – goods or services can be produced at a lower opportunity cost

Consumption externality – cost are imposed or benefits are enjoyed by third parties not directly involved in the consumption transaction

Contestable market – price efficient markets with low cost of entry or exit

Cost-push inflation – supply shocks caused by the increasing price of commodities, especially oil

Cross-price elasticity of demand – % change in quantity demanded of good X / % change in the price of good Y

Crowding-out – when expansionary fiscal spending causes increased interest rates, which leads to reduced private sector spending

Current account of the balance of payments – value of exports and imports of goods and services over a specific period of time

Customs unions – economic integration to abolish tariffs and trade barriers and strengthen position when negotiating with non-members

Cyclical unemployment – a decrease in employment caused by a contraction in the business cycle 

Deflationary gap – when actual aggregate demand is less than planned aggregate demand

Demand for money – the amount of money that people are willing to hold at each and every interest rate

Demand pull inflation – when aggregate demand is greater than aggregate supply and drives up prices

Depreciation of exchange rate –  the external value of the currency falls when measured against foreign currencies

Economic cycle – the economy in the long run will fluctuate and have expansions or peaks and contractions or troughs

Exchange rate – the price of currencies when measured against other currencies

Financial crowding out –  when government spending competes with private sector spending,  making things more expensive for the private sector

Fiscal policy –  government spending and taxation to influence economic growth

Forward exchange rate market –  when the price is set today to trade currencies in the future

Frictional unemployment – occurs naturally when people are between jobs

Game theory – describes the behaviour of oligopolies as they compete with one another

Gini Coefficient – measures income inequality

Gross Domestic Product (GDP) –  measures the final value of goods and services produced in an economy over a specific period of time

Human Development Index (HDI) –  a measure of economic development based on life expectancy, level of education, and real GDP per capita at purchasing power parity

Infant industry – A new industry that is still relatively small and has not benefited from economies of scale or any competitive advantage

Inflation –  an increase in the general price level caused by an increase in demand or an increase in the cost of supplies

Inflationary gap – when actual aggregate demand is above planned aggregate demand

Injection – an increase in investment, government spending, or exports which increases the circular flow of income

Interest rate –  the opportunity cost of borrowing or saving money

Involuntary unemployment – the number of people who are willing and able to work at a given wage, but are not able to find employment

J Curve – when a currency is depreciated, the balance of trade may become worse in the short run before it improves in the long run

Laffer Curve – shows the relationship between the tax rate imposed by the government  and the level of tax revenue collected

Less developed country – a nation with low level of income, life expectancy and literacy

Liquidity preference – the demand for money in terms of holding cash instead of long term assets and investments

Lorenz Curve – shows income inequality by graphing the proportion of income earned by a given proportion of the population in an economy

Marginal Efficiency of Capital (MEC) – the expected rate of return on investment projects

Marginal Productivity Theory – the demand for labour depends on the marginal revenue product

Marginal Propensity to Consume – the proportion spent on consumption out of each extra unit of income

Marginal Propensity to Import – the proportion spent out of each extra unit of income on Imports

Marshall Lerner Condition – the depreciation in exchange rate will improve the current account if the price elasticity of demand for imports plus the price elasticity of demand for exports is greater than 1

Menu costs – the cost of changing menus and price lists when inflation occurs
Monetary policy – a government policy usually implemented by a central bank to affect the control of money supply or interest rates to influence economic growth

Monopoly – theoretically, when there is only one seller in the market or legally in the UK, when one firm has 25% market share

Multiplier effect – an increase in aggregate demand leads to a greater increase in national income, one’s spending becomes another’s earnings

National debt – the total accumulated debt of the government

Net investment – gross investment minus depreciation

Paradox of Thrift – an economic theory that states the when individuals increase their savings rates during an economic downtown, they deepen and lengthen the downturn, making things worse for themselves

Phillips curve – shows the short-run and long-run inverse relationships between inflation and unemployment

Potential economic growth – when there is an increase in the capacity of the economy

Poverty Trap – when individuals are worse off if they work because they will lose unemployment benefits and need to pay increased taxes

Precautionary demand of money – to hold money in case of emergency

Progressive tax – when the average tax rate increases with income

Protectionism – when a government protects domestic firms against foreign competition
Purchasing Power Parity (PPP) – used to inflation rates and exchange rates by standardizing the units of measure across countries

Quantity theory of money – the total amount of money in the economy multiplied by the velocity of circulation is equal to the general price level multiplied by the quantity of transactions: MV = PT

Quota – the amount that a firm or country can produce or purchase or import or export

Recession – when an economy experiences negative growth during two consecutive fiscal quarters

Regressive tax – when the average rate of taxation decreases as income increases

Regulatory capture – when the government regulator acts in the best interest of the industry being regulated, instead of the public, which may also be considered as a conflict of interest

Speculative demand of money – to hold money instead of less liquid assets

Tariff – tax placed on imported products

Terms of trade – measures the value of imports and exports between two countries

Trade creation – when trade shifts from a high-cost producing nations to low-cost producing nations to enjoy comparative advantage

Trade diversion – when joining a Custom Union leads to a shift from trade from lower-cost nations to higher-cost nations because of the protectionists measures are implemented against non members

Transaction demand of money – money needed to finance day today transactions

Unemployment rate – the number of people who are currently looking for work, but are currently without a job, expressed as a percentage of the labour force

Velocity of circulation – the number of times that money, on average, is spent on goods and services over a given period of time

Vertical equity – when there is a redistribution of income or wealth from the rich to the poor

Voluntarily unemployment – when people who are looking for work are not willing to accept the given wage rate

Withdrawal – a leakage from the economy that reduces aggregate demand: imports, savings, and taxes

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