IB Economics SL All Definitions

property rights (?)

"basket" of legal rights that allow people to own and benefit from private property - the right to OWN assets (ex. land or buildings) - the right to establish the USE of our assets (ex. adding to the building) - the right to BENEFIT from our assets (ex. renting out our land) - the right to SELL our assets - the right to EXCLUDE others from using or taking over our assets **if you can't guarantee your ownership of property, there is no incentive to improve that property b/c it would be lost

Lorenz curve

- shows the % of households vs % of income - line of absolute equality @ 45 degrees - the farther away the curve is from the line of absolute equality, the more inequality there is

human development index (HDI)

1) long and healthy life - life expectancy at birth 2) improved education - adult literacy rate, school enrollment 3) decent standard of living (ability to meet basic needs) - GDP per capita between 0 and 1 > 0.800: high 0.500-0.799: medium <0.500: low problems: does not cover all aspects of development, masks inequalities b/w different groups

common characteristics of developing countries

1) low standards of living, characterized by low incomes, inequality, poor health, & inadequate education 2) low levels of productivity (output per person) - caused by low education standards, low levels of health, lack of investment in physical capital, lack of access to technology 3) high rates of population growth & dependency burdens 4) high and rising levels of unemployment & underemployment (unemployment rates b/w 9-16%, discouraged workers, part-time workers, true rate of unemployment is >40%) 5) substantial dependence on agricultural production & primary product exports 6) prevalence of imperfect markets & limited information (lack a banking system, developed legal system, adequate infrastructure esp transport routes, accurate information systems) 7) dominance, dependence, & vulnerability in international relations

Capital Account

1. Capital transfers 2. Non-financial assets

Financial Account

1. Foreign Direct Investment 2. Portfolio and other investments 3. Reserve assets (official reserves)

The current account

1. Goods and services 2. Income 3. Transfers

World Trade Organization (WTO)

153 member countries, it is an international institution which aims at promoting free trade by persuading countries to abolish import tariffs and other barriers

millennium development goals (MDGs)

1: eradicate extreme poverty and hunger 2: achieve universal primary education 3: promote gender equality and empower women 4: reduce child mortality 5: improve maternal health 6: combat HIV/AIDS, malaria and other diseases 7: ensure environmental sustainability 8: develop a global partnership for development

Deflation

A decrease in the general price level of goods and services in a economy over a period of time.

Disinflation

A decrease in the rate of inflation

Quota

A limit placed on the quantities of a product that can be imported

Foreign Exchange Market

A market in which currencies are exchanged for other currencies

The Balance of Payments

A record of all transaction of a country with the rest of the world over a period of time, usually a year

Tariff

A tariff is defined as a tax imposed on imports aimed at restricting their flow into the country and protecting domestic producers

Gini index

A/(A+B) - ratio of the area between the line of equality and the Lorenz curve to the total area under the line of equality - 0: absolute equality - 1: absolute inequality (1 person owns all the income) - the higher the Gini index, the more unequal the distribution of income

Gross National Product (GNI)

Comprises of GDP together with net property income from abroad

Fixed Exchange Rate

Currency value set or maintained by the government or central bank

Externalities

Economic by-products caused by the production or consumption of a good that affects an uninvolved third party

Current Account =

Financial + Capital Account

Customs Union

Free trade area members agree to adopt a common external tariff

Inferior Goods

Goods for which demand goes down when income is higher and for which demand goes up when income is lower. Negative YED value

Normal Goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower. Positive YED value

Merit goods

Goods that are held to be socially desirable, but which are under-provided by the market.

Demerit goods

Goods that are held to be socially undesirable, but which are over-provided by the market.

Non-excludable

Goods that are impossible or prohibitively expensive to prevent non-payers from consuming

Public goods

Goods that are non-excludable and non-rivalrous in nature of consumption

Non rivalrous

Goods that may be consumed by one consumer without preventing simultaneous consumption by others

Floating (flexible) exchange rate

If the currency is valued based on market forces alone, without government aid

The Law of Demand

Inverse relationship between price and quantity demanded

Scarcity

Limited quantities of resources to meet unlimited wants

Cross Elasticity of Demand (XED)

Measures the responsiveness of the quantity demanded of a good (X) to changes in price of another good (Y), ceteris paribus.

Income Elasticity of Demand (YED)

Measures the responsiveness of the quantity demanded of a good to changes in income level ceteris paribus.

Price Elasticity of Demand (PED)

Measures the responsiveness of the quantity demanded of a good to changes in its own price, ceteris paribus.

Price Elasticity of Supply

Measures the responsiveness of the quantity supplied of a good to changes in its own price, ceteris paribus.

Free Trade Area

Members eliminate or agree o phase out trade barriers between them but each member country maintains its own external tariff to outside members

Common Market

Members of a customs union additionally agree to permit the free flow of factors of production

Monetary Union

Members of an economic union agree to adopt a common currency and establish a common central bank (Eurozone)

Free Trade

No protection on goods from other nations (international trade) such as taxes, quotas, etc.

Market equilibrium

Occurs at the price where the quantity supplied by producers is equal to the quantity demanded by consumers.

Market Failure

Occurs when the free market fails to allocate resources efficiently in a way that societal welfare is maximised

Devaluation

Official changes in the price of the currency in the fixed exchange rate system -- DECREASE

Revaluation

Official changes in the price of the currency in the fixed exchange rate system -- INCREASE

Supply Side Policies

Policies to increase factors of production to expand productive capacity of an economy.

The Law of Supply

Positive relationship between price and quantity demanded

Inflation

Sustained increase in the general level of prices of a given basket of goods over a period of time (two quarters)

Indirect Taxes

Taxes on spending paid by suppliers, not directly by consumers.

Direct Taxes

Taxes paid directly to the government tax authorities by the taxpayer.

Purchasing Power Parity (PPP)

The amount of money needed in one country to purchase the same goods and services in another country

Opportunity cost

The cost of making a decision where the next best alternative is forgone

Regional Trading blocks

The idea is: you have a group of countries who among themselves have free trade, but countries from the outside are blocked out

Depreciation

The price (value) of a currency in a floating exchange rate system decreases

Appreciation

The price (value) of a currency in a floating exchange rate system increases

Demand

The quantity of a good or service that consumers are willing and able to buy at various prices over a given period of time, ceteris paribus.

Supply

The quantity of a good or service that producers are willing and able to sell at various prices over a given period of time, ceteris paribus.

Aggregate Demand (AD)

The total level of expenditure on domestically produced goods and services in a country at each general price level, for a given period of time.

Gross Domestic Products (GDP)

The total market value of all final goods and services produced in a country for a given time period

Exchange rate

The value of one currency expressed in the terms of another currency

Aggregate Supply (AS)

Total output of goods and services that domestic firms would like to produce and sell at each general price level.

Fiscal policy

Use of government expenditure and taxation to influence economic activity

Monetary Policy

Use of money supply, interest rates and exchange rates by the central bank to influence economic activity

Deflationary gap

When planned output is greater than the planned expenditures

Preferential Trade Agreement

Where a country agrees to give preferential access, e.g. reduced tariffs, to certain products from one or more trading partners.

Market

Where buyers and sellers meet to exchange goods and services

Unemployment

Where people in the labour force are willing and able to work but are unable to find employment

protectionism

any economic policy that is aimed at supporting domestic producers at the expense of foreign producers ex. tariffs, subsidies, quotas, non-tariff barriers

(foreign) aid

def: any assistance that is given to a country that would not have been provided through normal market forces

economic development

improvement in WELFARE - increasing FREEDOMS - reducing poverty - public provision of education, health care, maintenance of law & order - civil liberties, civic participation

economic growth

increase in the real output of an economy over time

development poverty cycle

low incomes --> low levels of education & health --> low levels of human capital --> low productivity

growth poverty cycle

low incomes --> low levels of saving --> low levels of investment --> low economic growth

relative poverty vs absolute poverty

relative poverty: comparative; if a person does not reach some specified level of income absolute poverty: measured in terms of the basic necessities for survival, the amount that a person NEEDS to have in order to live (basic clothing, food, & shelter) *World Bank uses an abs poverty line of US$1 per day

gender-related development index (GDI)

the HDI adjusted for inequality between men & women

infrastructure

the essential facilities & services such as roads, airports, sewage treatment, water systems, railways, telecommunications and other utilities that are necessary for economic activity categories: transport, public utilities, public services, communication services

underemployment

workers are overqualified for their jobs or work fewer hours than they would prefer