Ability to pay principle - The idea that taxes should be levied on a person according to how well

that person can shoulder the burden.

Absolute poverty - The inability of an individual or a family to afford a basic standard of goods and
services, where the standard is absolute and unchanging over time. Absolute poverty is defined in
relation to a nationally or internationally determined 'poverty line', which determines the minimum
income that can sustain a family in terms of its basic needs.
Actual output - The quantity of output actually produced by an economy.
Ad Valorem Taxes - Taxes calculated as a fixed percentage of the price of the good or service; the
amount of tax increases as the price of the good or service increases.
Administrative barriers - Trade protection measures taking the form of administrative procedures
that countries may use to prevent the free flow of imports into a country.
Aggregate demand - The total quantity of goods and services that all buyers in an economy
(Consumers, Firms, the Government, and Foreigners) want to buy over a particular time period, at
different possible price levels.
Aggregate demand curve - The curve that shows that relationship between total quantity of goods
and services that all buyers in an economy want to buy over a particular time period.
Aggregate supply - The total quantity of goods and services produced in an economy over a
particular time period, at different price levels.
Allocative efficiency - An allocation of resources that results in producing the combination and
quantity of goods and services mostly preferred by consumers. Marginal Cost = Marginal Benefit
Anti-dumping - An argument that justifies trade protection policies: if a country's trading partner is
suspected of practicising dumping, than the country should have the right to impose trade protection
measures (tariffs or quotas) to limit quantities of the dumped good.
Appreciation - Refers to an increase in the value of a currency in the context of a floating (flexible)
exchange rate system or managed exchange rate system.
Appropriate technology - Technologies that are well-suited to a country's particular economic,
geographical, ecological, and climate conditions.
Automatic stabilisers - Factors that automatically, without any actions by the government, work
toward stabilizing the economy by reducing the short term fluctuation of the business cycle. Two
important automatic stabilizers are PROGRESSIVE INCOME TAXES and UNEMPLOYMENT
BENEFITS.
Average tax rate - Total taxes paid divided by total income.
Balance of payments - A record of all transactions between the residents of a country and the
residents of all other countries. It shows all payments received from other countries (credits), and all
payments made to other countries (debits). It has CURRENT ACCOUNT, CAPITAL ACCOUNT,
FINANCIAL ACCOUNT, and ERRORS&OMISSIONS.
Balanced Budget - Refers to a situation where the government's tax revenues equals the government

expenditures.
Benefit principle - The idea that people should pay taxes based on the benefits they receive from
government services.
Bilateral trade agreement - Any trade agreement involving two trading partners.
Budget deficit - It is a situation where the government's tax revenues are less than the government
expenditures over a specific period of time.
Budget surplus - It is a situation where the government tax revenues are greater than government
expenditures over a specific period of time.
Business cycle - Fluctuations in the growth of real GDP, consisting of alternating periods of
expansions and contractions.
Cap and Trade Scheme - A scheme in which a government authority sets a limit or 'cap' on the
amount of pollutants that can be legally emitted by a firm, set by an amount of pollution permits
(tradeable permits) distributed to firms.
Capital account (BALANCE OF PAYMENTS) - Refers to the inflows minus the outflows of funds
for capital transfers (including debt forgiveness and non-life insurance claims) and the purchase or
use of non-produced natural resources (such as mineral rights, forestry rights, fishing rights, and
airspace).
Carbon tax - A tax per unit of carbon emissions of fossil fuels.
Central Bank - A financial institution that is responsible for regulating the country's financial system
and commercial banks, and carrying out monetary policies.
Ceteris Paribus - "other things being equal"
Circular flow of income model - A model showing the flow of resources from consumers to firms,
and the flow of products from firms to consumers, as well as money flows consisting of consumers'
income arising from the sale of their resources and firms' revenues arising from the sale of their
products. Basically, it illustrates the equivalence of expenditure flows, value of output flows, and
income flows.
Clean technology - Technology that is not polluting, associated with environmental sustainability.
Examples: Solar power, wind power, hydropower, and recycling.
Closed economy - An economy that has no international trade. THIS DOES NOT REALLY EXIST
IN THE REAL WORLD.
Coase theorem - The proposition that if private parties can bargain without cost over the allocation
of resources, they can solve the problem of externalities on their own.
Commercial bank - A financial institution whose main functions are to hold deposits for their
customers, to make loans to their customers, to transfer funds by check from one bank to another,
and to buy government bonds.
Common access resources - Resources that are not owned by anyone, do not have a price, and are

available for anyone to use without payments. Examples: Lakes, rivers, and fishes in open seas.
These resources are a threat to sustainability.
Common good - Goods that are rivalrous and non-excludable
Common market - A type of trading bloc in which countries that have formed a customs union
proceed further to eliminate any remaining tariffs in trade between them. Example: European
Economic Community.
Competition - A situation that occurs when there are many buyers and sellers acting independently,
so that no one has the ability to influence the price at which the product is sold in the market.
Competitive market - A market composed of many buyers and sellers acting independently, none of
whom has any market power.
Competitive supply - A situation where two goods compete for the same resources. Example: A
farmer can produce wheat or corn, but producing ore of one means producing less of the other.
Complement goods - Two or more goods that tend to be used together. If two goods are
complements, an increase in the price of one will lead to a decrease in the demand of the other.
Composite indicator - A summary measure of more than one indicator. For example: Human
Development Indicator includes income, education and health indicators.
Concessional loans - Loans that are offered as part of FOREIGN AID, made on concessional terms.
They are offered at interest rates that are lower than commercial rates, with longer repayment
periods.
Conditional assistance - Refers to development assistance provided by bilateral or multilateral
development organizations, which is extended to countries on condition that they satisfy certain
requirements, usually requiring that the country adopts particular policies.
Consumer Price Index - A measure of the cost of living for the typical household. It compares the
value of a basket of goods and services in one year with the value of the same basket in a base year.
Consumer surplus - Refers to the difference between the highest prices consumers are willing to pay
for a good and the price actually paid.
Consumption - Spending by households (consumers) on goods and services (excludes spending on
housing).
Contractionary fiscal policy - A fiscal policy that is usually pursued during an inflationary period. It
involves decreasing government spending or increasing taxes. Possibly both methods.
Contractionary monetary policy - A monetary policy usually pursued in an inflationary period. It
involves increasing the interest rate (to lower investment and consumption spending).
Core rate of inflation - A rate of inflation based on consumer price index that excludes goods with
highly volatile (unstable) prices. This is most notable in food and energy prices.
Corporate indebtedness - The degree to which corporations have debts.

Corrective tax - A tax designed to induce private decision makers to take account of the social costs
that arise from a negative externality.
Cost-push inflation - A type of inflation caused by a fall in AGGREGATE SUPPLY, resulting from
an increase in COSTS OF PRODUCTION.
Costs of production - The total opportunity costs incurred by firms in order to acquire resources for
use in production.
Cross-price elasticity of demand (XED) - A measure of the responsiveness of the demand for one
good to a change in the price of another good.
Crowding-out - A situation where increasing government spending causes a higher rate of interest,
reducing private investment spending. Thus, reversing expansionary fiscal policy (BTW: it's fiscal
policy because it's increasing government spending).
Current account (BALANCE OF PAYMENTS) - This includes the balance of trade (exports minus
imports of goods), the balance of services (exports of services minus imports of services), inflows
minus outflows of income and current transfers.
Customs union - A type of trading bloc, consisting of a group of countries that fulfill the
requirements of a free trade area and adopts a common policy towards all non-member. (It's higher
than a FREE TRADE AREA, but lower than a COMMON MARKET)
Cyclical unemployment (demand-deficient unemployment) - A type of unemployment that occurs
during the downturns of the business cycle, when the economy is in a recessionary gap.
Deciles - Divisions of a population into ten equal groups with respect to the distribution of a
variable, such as income. So, basically 10% of the population with the lowest income.
Deflation - A continuing decrease in the general price level
Demand - Indicates the various quantities of good that consumers are willing and able to buy at
different possible prices during a particular time period.
Demand curve - A curve showing the relationship between the quantities of a good consumers are
willing and able to buy during a particular time period and their respectable prices.
Demand-pull inflation - A type of inflation caused by an increase in AGGREGATE DEMAND.
Demand-side policies - Policies that attempt to change aggregate demand in order to achieve goals
of price stability, full employment, and economic growth, and minimize the severity of the business
cycle.
Demerit goods - Goods that are considered to be undesirable for consumers and are over-provided
by the [Link] for over-provision may be that the good has negative externalities. Example:
cigarettes.
Depreciation - A decrease in the value of currency in the context of a floating (or flexible) exchange
rate system or managed exchange rate system.
Deregulation - Policies involving the elimination or reduction of government regulation of private

sector activities, based on the argument that government regulation stifles the competition and
increases inefficiency.
Devaluation - A decrease in the value of the currency in the context of a fixed exchange rate system.
Development aid - Foreign aid intended to help economically less developed countries; may involve
project aid, program aid, technical assistance, or debt relief.
Direct taxes - Taxes paid directly to the government tax authorities by the taxpayer, including
personal income taxes, corporate income taxes, and wealth taxes.
Disinflation - Refers to a fall in the rate of inflation; it involves a positive rate of inflation.
Disposable income - The income of consumers that is left over after the payment of income taxes.
Diversification - Refers to change involving greater variety, and is used to refer to increasing the
variety of goods and services produced and/or exported by a country.
Dual economy - Arises when there are two different and opposing sets of circumstances that exist
simultaneously, often found in economically less developed countries. For example: Higher class
living with lower class.
Dumping - The practice of selling a good in international markets at a price that is below the cost of
producing the good.
Economic efficiency - A condition that arises when allocative efficiency is achieved.
Economic growth - Increases in total real output produced by an economy over time.
Economic intergration - Refers to economic interdependence between countries.
Economically less developed countries - Common characteristics: Low levels of GDP per capita,
high levels of poverty, large agricultural sectors, and large urban informal sectors.
Economically more developed countries - Common characteristics: High levels of GDP per capita,
relatively low levels of poverty, small agricultural sectors, and large industrial and services sectors.
Economics - The study of choices leading to the best possible use of scarce resources in order to
best satisfy the unlimited human needs and wants.
Elasticity - A measure of responsiveness or sensitivity of a variable to changes in any of the
variable's determinants.
Empowerment - Creation of conditions for equality of opportunities. It involves increasing the
political, social, and economic power of individuals or groups of individuals.
Entrepreneurship (FACTOR OF PRODUCTION) - It involves a special human skill that includes
the ability to innovate by developing new ways of doing things, to take business risks and to seek
new opportunities for opening and running businesses.
Equilibrium - A state of balance such that there is no tendency to change.

Equity - The condition of being fair or just.

Errors and omissions (BALANCE OF PAYMENTS) - An item that is included to account for
possible omissions and errors in items that have been included or excluded in order to ensure that
the balance of payments balances.
Excess demand (Shortage) - Occurs when the quantity of good demanded is greater than the
quantity supplied.
Excess supply (Surplus) - Occurs when the quantity of a good demanded is smaller than the
quantity supplied.
Exchange rate - The rate at which one currency can be exchanged for another, or the number of
units of foreign currency that corresponds to the domestic currency.
Excise taxes - Taxes imposed on spending on particular goods or services.
Expansionary fiscal policy - Refers to fiscal policies usually pursued in a recession, involving an
increase in government spending or a decrease in taxes.
Expansionary monetary policy - Refers to monetary policy usually pursued in a recession, involving
a decrease in interest rates, intended to increase investment and consumption spending.
Expenditure approach - A method used to measure the value of aggregate output of an economy,
which adds up all spending on final good sand services produced within a country within a given
time period.
Expenditure flow - It is the flow of spending from households to firms to buy the goods and
services produced by the firms. The expenditure flow is equal to the income flow and the value of
output flow.
Export promotion - Refers to a growth and trade strategy where a country attempts to achieve
economic growth by expanding its exports. As a trade and strategy, it looks outward towards foreign
markets and is based on stronger links between domestic and global economies.
Externality - Occurs when the actions of consumers or producers give rise to positive or negative
side-effects on other people who are not part of these actions, and whose interests are not taken into
consideration.
Factors of production - All resources or inputs used to produce goods and services. LAND,
LABOR, CAPITAL, AND ENTREPRENEURSHIP.
Financial account (BALANCE OF PAYMENTS) - Refers to the inflows minus outflows of funds
due to foreign direct investment, portfolio investment, and changes in reserve assets.
Fiscal policy - Manipulations by the government of its own expenditures and taxes in order to
influence the level of aggregate demand.
Fixed exchange rate - Refers to an exchange rate that is fixed by the central bank of the country, and
is not permitted to change in response to changes in currency supply and demand. Maintaining the
value of a currency at its fixed rate requires constant intervention by the central bank.

Foreign aid - Consists of concessional financial flows from the developed world to economically
less developed countries, and includes CONCESSIONAL LOANS, and GRANTS.
Foreign debt - Refers to external debt, meaning the total amount of debt (private and public)
incurred by borrowing from foreign creditors. The global problem of debt involves large volumes of
public debt.
Foreign direct investment - Refers to investments by firms based in one country (the home country)
in productive activities in another country (the host country).
Free rider problem - Occurs when people can enjoy the use of a good without paying for it and
arises from non-excludability: people cannot be excluded from using the good, because it is not
possible to charge a price. It is often associated with public goods, which are a type of market
failure: due to the free rider problem, private firms fail to produce these goods.
Free trade - The absence of government intervention of any kind in international trade, so that trade
takes place without any restrictions between individuals or firms in different countries.
Free trade area - A type of trading bloc, consisting of a group of countries that agree to eliminate
trade barriers between themselves. Example: North American Free Trade Agreement.
Freely floating exchange rates - An exchange rate determined entirely by market forces (the forces
of supply and demand.)
Frictional unemployment - A type of unemployment that occurs when workers are between jobs,
workers make leave their job because they have been fired, or because their employers went out of
business, or because they are in search of a better job, or they may be waiting to begin a new job.
Full employment - Refers to maximum use of all resources in the economy to produce the
maximum quantity of goods and services that the economy is capable of producing, implying zero
unemployment.
GDP per capita - Gross domestic product divided by the number of people in the population.
Gini coefficient - A summary measure of the information contained in the Lorenz Curve of an
economy. The closer the Gini coefficient is to 1, the greater the income inequality. The closer the
Gini coefficient is to 0, the greater the income equality.
GNI per capita - Gross national income divided by the number of people in the population.
Government budget - A type of plan of a country's tax revenues and government expenditures over
a period of time.
Government intervention - The practice of government to intervene in markets, preventing the free
functioning of the market, usually for the purpose of achieving particular economic or social
objectives.
Grant - A type of foreign aid consisting of funds that are in effect gifts (they do not have to be paid).
Green GDP - Gross domestic product which has been adjusted to take account environmental
destruction and/or health consequences of environmental problems.

Gross domestic product (GDP) - A measure of the value of aggregate output of the economy. It is
the market value of all final good sand services produced within a country during a given time
period.
Gross national income (GNI) - A measure of total income received by the residents of the country,
equal to the value of all final goods and services produced by the factors of production supplied by
the country's residents. GNI = GDP + (income from abroad - income sent abroad).
Hidden unemployment - Unemployment that is not accounted in official unemployment statistics
because of such factors as the exclusion of discouraged workers, the practice of considering part
time workers as full-time workers, and others.
Household indebtedness - The degree to which households have debt.
Human capital - The skills, abilities, and knowledge acquired by people, as well as good levels of
health, all of which make them more productive.
Human development index (HDI) - A composite indicator of development which includes indicators
that measure three dimensions of development: income per capita, levels of health and educational
attainment.
Humanitarian aid - Foreign aid extended in regions where there are emergencies caused by violent
conflicts or natural disasters such as floods, earthquakes and tsunamis, intended to save lives,
ensure access to basic necessities and provide assistance with reconstruction.
Import substitution - Refers to a growth and trade strategy where a country begins to manufacture
simple consumer goods oriented towards the domestic market in order to promote its domestic
industry.
Incentive-related policies (a type of supply-side policy) - Policies involving reduction of varies
types of taxes, in the expectation that the tax cuts will change the incentives faced by tax payers.
For example, tax cuts may encourage the desire to work and cuts in business taxes may encourage
investment.
Income (Part of CURRENT ACCOUNT) - Refers to inflows of wages, rents, interest and profit
earned abroad minus the same income factors that are sent abroad.
Income approach - A method used to measure the value of aggregate output of an economy, which
adds up all income earned by factors of production in the course of producing all goods and services
within a country in a given time period.
Income elasticity of demand (YED) - A measure of the responsiveness of demand to changes in
income.
Income flow - Refers to the flow of income of households that are received by selling their factors
of production to firms.
Indebtedness - Refers to the level of debt, or the amount of money owed to creditors.
Indirect taxes - Taxes levied on spending to buy goods and services, called indirect because
payments of some or all of the taxes by the consumer is paid to the government authorities by the
firms.

Industrial policies - Government policies designed to support the growth of the industrial sector of
an economy. It may include support for infant industries through tax cuts, grants, low interest loans,
and etc, as well as investment in human capital, research and development, or infrastructure
development.
Infant industry - A new domestic industry that has not had time to establish itself and achieve
efficiencies in production, and therefore may be unable to compete with more mature competitor
firms from abroad. This is used as a strong argument for trade protection policies in developing
countries.
Inferior good - A good the demand for which varies negatively with income. As income increases,
the demand for the good decreases.
Inflation - A continuous increase in the general price level.
Inflation targeting - A type of monetary policy carried out by some central banks that focuses on
achieving a particular inflation target, rather than focusing on the goals of low and stable rate of
inflation and low unemployment. Common inflation targets are between 1.5% and 2.5%.
Inflationary gap - A situation where real GDP is greater than potential GDP, and unemployment is
lower than the natural rate of unemployment.
Infrastructure - Numerous types of physical capital resulting from investments, making major
contributions to economic growth and development by lowering costs of production and increasing
productivity. Examples: roads, airports, and dams.
Injections (part of the CIRCULAR FLOW OF INCOME MODEL) - Refers to the entry into income
flow of funds corresponding to investment, government spending or exports.
Interest - A payment, per unit of time, for the use of borrowed money (borrowers pay interest,
lenders receive interest.)
Interest rate - Interest expressed as a percentage.
International Monetary Fund (IMF) - An international financial institution composed of 185
member countries, whose purpose is to make short-term loans to governments on commercial terms
in order to stabilize exchange rates, alleviate balance of payments difficulties, and help countries
meet their foreign debt obligations.
Interventionist Policy - Any policy based on government intervention in the market.
Interventionist supply-side policy - Any policy based on government intervention in the market
intended to affect the supply-side of the economy, usually to shift the LRAS curve to the right,
increase potential output and achieve long term economic growth.
Investment - Includes spending by firms or the government on capital goods (buildings, machinery,
equipment), and all new spending on new construction (housing and other buildings).
Joint supply - Refers to the production of two or more goods that are derived from a single product,
so that it is not possible to produce more of one without producing more of the other. Example:
Butter and Skimmed milk are both produced from whole milk, producing more of one means to

produce more of the other.

Keynesian aggregate supply curve - An aggregate supply curve that has a flat horizontal section,
and upward sloping section and a vertical section.
Labor (FACTOR OF PRODUCTION) - The physical and mental effort that people contribute to the
production of goods and services.
Labor market flexibility - May be achieved by reducing or eliminating interference with market
forces. Example: Reducing or eliminating minimum wages and labor union activities, or reducing
job security.
Labor market reforms - Reforms intended to make labor markets more competitive and flexible, to
make wages respond to the forces of supply and demand, to lower labor costs and increase
employment by lowering the natural rate of unemployment. Example: Abolishing or reducing
minimum wages, reducing job security, and reducing unemployment benefits.
Labor market rigidities - Factors preventing the forces of supply and demand from operating in the
labor market, and therefore preventing labor market flexibility. Example: Minimum wages,
legislation, and job security.
Land (FACTOR OF PRODUCTION) - All natural resources: land and agricultural land, including
minerals, oil reserves, underground water, forests, rivers, and lakes.
Law of Demand - A law stating that there is a negative causal relationship between the price of a
good and quantity of the good demanded, over a particular time.
Law of Supply - A law stating that there is a positive causal relationship between the price of a good
and quantity of the good supplied, over a particular time.
Leakages (CIRCULAR FLOW OF INCOME) - Refers to withdrawals from the income flow of
funds corresponding to savings, taxes, or imports.
Lorenz Curve - A curve illustrating the degree of equality of income distribution in an economy. It
plots the cumulative percentage of income received by cumulative shares of the population.
Lump-sum tax - A tax that is the same amount for every person.
Luxuries - Goods that are not necessary or essential; They have an elastic PED and elastic YED.
Macroeconomic objectives - 1) Full employment. 2) Low rate of inflation. 3) Economic growth. 4)
An equitable distribution of income. 5) Avoidance of balance of payments problems.
Managed exchange rates - Exchange rates that are mostly free to float to their market price levels
over long periods of time; however, central banks periodically intervene in order to stabilize them
over the short term.
Marginal benefit - The extra or additional benefit received from consuming one more unit of a
good.
Marginal cost - The extra or additional cost of producing one more unit of output.

Marginal external cost - Change in total cost incurred by households or firms, associated with a
unit-change in the consumption or output of other households or businesses.
Marginal private benefits - The extra benefit received by consumers when they consume one more
unit of a good.
Marginal private costs - The extra costs to producers of producing one more unit of a good.
Marginal social benefits - The extra benefits to society of consuming one more unit of a good.
Marginal social costs - The extra costs to society of producing one more unit of good.
Marginal tax rate - The extra taxes paid on an additional dollar of income.
Market - Any kind of arrangement where buyers and sellers of a particular good, service, or
resource are linked together to carry out an exchange.
Market demand - Refers to the sum of all individual consumer demands for a good or service.
Market failure - Occurs when the market fails to allocate resources efficiently, or to provide the
quantity and combination of goods and services mostly wanted by society. There is either an
underallocation or an overallocation.
Market supply - Refers to the sum of all individual firm supplies of a good or service.
Market-based supply-side policy - Any policy based on promoting well-functioning, competitive
markets in order to influence the supply-side of the economy, usually to shift the LRAS curve to the
right, increase potential output and achieve long term economic growth. It includes labor market
reforms, competition policies and incentive-related policies.
Market-oriented policy - A policy in which government intervention is limited, economic decisions
are made mainly by the private decision-makers and the market has significant freedom to
determine resource allocation.
Maximum price (Price ceiling) - A legal price set by the government, which is below the market
equilibrium price.
Merit goods - Goods that are held to be desirable for consumers, but which are underprovided by
the market. Reasons for underprovision: Good may have positive externalities, or consumer
ignorance about the benefits of the good.
Micro-credit - A program to provide credit (loans) in small amounts to people who do not have
access to credit.
Microeconomics - The branch of economics that examines the behavior of individual consumer and
firm.
Millennium Development Goals - Eight development goals adopted by the Millennium Declaration
of 2000, consisting of 18 targets to be achieved by the year 2015. It includes 1) eradicating extreme
poverty and hunger, 2) achieving universal primary education, 3) reducing child mortality, 4) and
promoting gender equality.

Minimum price (price floor) - A legal price set by the government which is above the market
equilibrium price to fall to its equilibrium level determined by a free market.
Minimum wage (price floor) - A minimum price of wage set by governments in the labor market, in
order to ensure that low-skilled workers can earn a wage high enough to secure them with access to
basic goods and services.
Monetary policy (Type of demand-side policy) - Policy carried out by central bank, aiming to
change interest rates in order to influence aggregate demand.
Monetary union - A high form of economic integration, involving the adoption by a group of
countries of a single currency. Example: European Union.
Money - Anything that is acceptable as payment for goods and services.
Multilateral development assistance - Lending to developing countries for the purpose of assisting
their development on non-concessional terms by multilateral organizations. Example: World Bank
and International Monetary Fund.
Multilateral trade agreement - A trade agreement to lower trade barriers between many countries.
Multinational corporation - A firm involving in foreign direct investment.
National income - The total income of an economy, often used interchangeable with the value of
aggregate output.
Natural capital - Refers to an expanded meaning of the factor of production land, including
everything that is included in land plus additional natural resources occurring naturally in the
environment such as air, biodiversity, soil quality, the ozone layer, and the global climate.
Necessities - Goods that are necessary of essential. They have inelastic PED and inelastic YED.
Negative externality (also known as spillover costs) - A type of externality where the side-effects on
third parties are negative or harmful.
Negative externality of consumption - A negative externality caused by consumption activities,
leading to a situation where MSB<MPB.
Negative externality of production - A negative externality caused by production activities, leading
to a situation where MSC >MPC.
Net exports - Refers to the value of exports minus the value of imports.
Nominal GDP - Gross domestic product measured in terms of current (nominal) prices.
Nominal value - Value that is measured in prices that prevail at the time of measurement, and does
not account for changes in the price level.
Non-excludable - A characteristics of some goods where it is not possible to exclude someone from
using a good, because it is not possible to charge a price. It is one of the characteristics of public
goods.

Non-governmental organizations (NGOs) - Non-profit organizations that provide a very wide range
of services and humanitarian functions. Activities are 1) Emergency assistance, 2) Promotion of
sustainable development, 3) Protection of child health, 4) Health, 5) Provision of technical
assistance.
Non-price determinants of demand - The variables that can influence demand: Income, Preferences,
Prices of related goods (Substitution and Complementary), and Demographic changes.
Non-price determinants of supply - The variables that can influence supply: Costs of factor of
production, Price of related goods (Joint Supply and Competitive Supply), Technology, Producer
expectations, Taxes, The number of firms, Supply shocks and Subsidies.
Non-price rationing - The apportioning or distributing of goods among interested users/buyers
through means other than price, often necessary when there are price ceilings (maximum prices);
may include waiting in line (queues) and underground markets; to be contrasted with 'price
rationing', which involves distributing goods among users by means of market-determined prices.
Non-produced, non-financial assets - A part of the capital account of the balance of payments,
which includes a variety of items such as mineral rights, forestry rights, fishing rights and airspace.
Non-rivalrous - A characteristic of some goods where the consumption of the good by one person
does not reduce consumption by someone else; it is one of the two characteristics of public goods.
Normal good - a good the demand for which varies positively (or directly) with income; this means
that as income increases, demand for the good increases.
Normative economics - The body of economics based on normative statements, which involve
beliefs, or value judgements about what ought to be. Normative statements cannot be true or false;
they can only be assessed relative to beliefs and value judgements. Normative economics forms the
basis of economic policies.
Official Development Assistance (ODA) - The most important part of foreign aid, referring to
foreign aid that is offered by countries or by international organizations composed of a number of
countries (it does not include aid offered by non-governmental organizations).
Open economy - An economy that has international trade: (imports and exports) usually appears in
connection with economic theories and models as virtually all economies in the real world are open
economies (though to varying degrees).
Opportunity cost - The value of the next best alternative that must be given up or sacrificed in order
to obtain something else.
Output approach - A method used to measure the value of aggregate output of an economy, which
calculates the value of all final goods and services produced in the country within a given time
period. According to the circular flow model, it is equivalent to measurement by the expenditure
approach and the income approach.
Overallocation of resources - Occurs when too many resources are allocated to the production of a
good relative to what is socially most desirable, resulting in its overproduction.
Overvalued currency - A currency whose value is higher than its free-market value; may occur if the
exchange rate is fixed (or pegged), or in a managed exchange rate system, but not in a freely

floating exchange rater system.

per capita - Per person, or per head. For example, GDP per capita is total GDP divided by the
number of people in the population.
Perfectly elastic demand - Refers to a price elasticity of demand value of infinity, and arises in the
case of a horizontal demand curve.
Perfectly elastic supply - Refers to a price elasticity of supply value of infinity, and arises in the
case of a horizontal supply curve.
Perfectly inelastic demand - Refers to a price elasticity of supply value of zero, and arises in the
case of a vertical demand curve.
Perfectly inelastic supply - Refers to a price elasticity of supply value of zero, and arises in the case
of a vertical supply curve.
Personal income taxes - Taxes paid by households or individuals in households on all forms of
income, including wages, rental income, interest income, and dividends (income from ownership of
shares in a company); is the most important source of government tax revenues in many countries
(especially economically more developed countries).
Physical capital - One of the factors of production, which is itself produced (it doesn't occur
naturally), used to produce goods and services; includes machinery, tools, factories, buildings, road
systems, airports, telephone supply lines, etc. Also referred to as 'capital', or 'capital good' or
'investment good'.
Portfolio investment - Financial investment, including investment in stocks and bonds. Appears as
an item in the financial account of the balance of payments.
Positive causal relationship - A relationship between two variables in which an increase in the value
of one causes an increase in the value of the other, i.e. the two variables change in the same
direction; also know as a direct relationship.
Positive externality (also known as Spillover Benefits) - A type of externality where the side-effects
on third parties are positive or beneficial.
Positive externality of consumption - A positive externality caused by consumption activities,
leading to a situation where MSB>MPC.
Positive externality of production - A positive externality caused by production activities, leading to
a situation where MSC > MPC.
Potential output - The level of output that can be produced when there is "full employment".
Poverty - The inability of an individual or family to afford an adequate standard of goods and
services. It may be relative or absolute.
Poverty cycle - Arises when low incomes result in low savings, permitting low investments (in
physical, human, and natural capital), and therefore, low productivity leading to low incomes.
Preferential trade agreement - An agreement between two or more countries to lower trade barriers

between them on particular products, resulting in an easier access to the markets of other members
for selected products, compared with the access of countries that are not members.
Price as incentives - The ability of prices, and changes in prices, to convey information to
consumers and producers that motivates them to respond by offering them incentives to behave in
their best-self-interest.
Price control - Setting of minimum or maximum prices by governments so that prices are unable to
adjust to their equilibrium level determined by demand and supply.
Price elastic demand - Relatively high responsiveness of demand to changes in price. PED > 1
Price elastic supply - Relatively high responsiveness of supply to changes in price. PES > 1
Price inelastic demand - Relatively low responsiveness of demand to changes in price. PED < 1
Price inelastic supply - Relatively low responsiveness of supply to changes in price. PES < 1
Price support - Minimum prices (price floors) set by governments for agricultural product.
Prices as signals - The ability of prices, and changes in prices, to communicate information to
consumers and producers, on the basis of which they make economic decisions.
Primary commodity - Any product that is produced in the primary sector, which includes
agriculture, forestry, fishing, and the extractive industries.
Primary products - All products produced in the primary sector of an economy.
Primary sector - A part of an economy that is dominated by agriculture, including fishing and
forestry.
Private good - A good that is both rivalrous and excludable.
Privatisation - A transfer of ownership of the public sector (the government) to the private sector
(the private owners).
Producer Price Index - Consists of several indices of prices received by the producers of goods at
various stages in the production process.
Producer surplus - Refers to the difference between the price received by firms for selling their
goods and the lowest price firms are willing to receive to produce the good.
Production possibilities curve - All possible combination of the maximum amounts of two goods
that can be produced by an economy, given fixed and unchanging resources and technology.
Productive efficiency - Occurs when firms produce at the lowest possible cost.
Productivity - Refers to the quantity of output produced for each hour of work of the working
population.
Profit - A payment per unit of time to owner of entrepreneurship.

Program aid - Foreign aid involving financial support to sectors, such as education, health care,
agriculture, urban development, financial sector (credit, banking, insurance), and the environment.
Progressive taxation - As income increases, the fraction of income paid as taxes increases.
Project aid - Foreign aid involving support for specific projects, such as building schools, clinics,
hospitals, irrigation systems, or other agricultural infrastructure.
Property rights - The ability of an individual to own and exercise control over scarce resources.
Proportional taxation - Taxation where as income increases, the fraction of income paid as taxes
remain constant.
Public debt - Refers to the government's accumulation of budget deficits minus budget surpluses.
Public good - A good that is non-rivalrous and non-excludable.
Purchasing power parity exchange rate - Special exchange rates between currencies that makes the
buying power of each currency equal to the buying power of the US $1, and therefore, equaling
each other.
Quintiles - Division of population into five equal groups with respect to the distribution of a
variable, such as income. Example: The lowest income quintile refers to the 20% of the population
with the lowest income.
Quota - A type of trade protection that involves setting a legal limit to the quantity of a good that
can be imported over a particular time period.
Real GDP - Gross domestic product measured in constant prices.
Reallocation of resources - Refers to reassigning resources to particular uses, so that the allocation
of resources changes and becomes a new allocation.
Recession - An economic contraction, where there is falling real GDP and increasing
unemployment of resources, lasting six months or more.
Recessionary gap - A situation where real GDP is less than potential GDP, and unemployment is
greater than the natural rate of unemployment.
Redistribution of income - Refers to changing the distribution of income, giving rise to a new
distribution.
Regional trade agreement - A trade agreement between several countries that are located within a
geographical region. Example: NAFTA.
Regressive taxation - Taxation where as income increases, the fraction of income paid as taxes
decreases.
Regulation - The policies involving government regulation of a private sector's activities, based on
the argument that governments can help/improve the economy's performance.
Relative poverty - The inability of an individual or family to afford an adequate standard of goods

and services, where the adequate standard is relative and changes over time.
Rent - A payment, per unit of time, to owners of land resources who supply their land to the
production process.
Reserve assets - Refers to foreign currency reserves that the central bank maintains and can buy or
sell to influence the value of the country's currency exchange rate.
Resource allocation - Assigning available resources, or factors of production, to specific uses
chosen among many possible and competing alternatives. It involves answering "What to produce"
and "How to produce".
Resources - Factors of production, used by firms as inputs in the production process.
Revaluation (of a currency) - Refers to an increase in the value of the currency in the context of a
fixed exchange rate system.
Rivalrous - A characteristic of a good according to which its consumption by one person reduces its
availability for another person.
Scarcity - The condition in which available resources are limited.
Seasonal unemployment - A type of unemployment that occurs when the demand for labor in
certain industries changes on a seasonal basis because of variations in needs.
Social optimum - Refers to a situation that is best from the social point of view, determined by the
achievement of allocative efficiency.
Social safety net - A system of government transfers of cash or goods to vulnerable groups,
undertaken to ensure that these groups do not fall below a socially acceptable minimum standard of
living.
Social surplus - The sum of consumer and producer surplus.
Spare capacity - Refers to physical capital that firms have available but do not use; arises in
recessions.
Specific tax - A tax calculated as an absolute amount per unit of the good or service sold.
Speculation - Buying and selling of something in hope of making profit.
Structural unemployment - A type of unemployment that occurs as a result of technological changes
and changing patterns of demand, as well as geographical changes, and labor market rigidities.
Subsidy - An amount of money paid by the government to firms for reasons: to protect infant
industries, to support producers' income, or as a form of protection against imports.
Substitute goods - Two or more goods that satisfy a similar need, so that one good can be used
instead of the other. If two goods are substitutes, an increase in the price of one leads to an increase
in the demand for the other.
Supply - Indicates the various quantities of a good that firms (or a firm) are willing and able to

produce and sell at different possible prices during a particular time period.
Supply of money - The amount of money in circulation, determined by the central bank of a
country.
Supply shock - Events that have a sudden and strong impact on short-run aggregate supply.
Example: A war that destroys physical capital or unfavorable weather on a factor of production.
Supply-side policies - A variety of policies that focus on aggregate supply. There are market-based
policies and interventionist policies.
Tariffs - Taxes on imported goods.
Taxation - The action of the taxing authorities levying a tax.
Tied aid - The practice whereby donors make the recipients of foreign aid spend a portion of the
borrowed funds on the purchase of goods and services from the donor country.
Total revenue - The amount of money received by firms when they sell a good or service. TR = P x
Q.
Tradable permits - Permits that can be issued to firms by a government or international body, and
that can be traded (bought and sold) in a market, the objective being to limit the total amount of
pollutants emitted by the firms.
Trade liberalization - The policy of liberalizing international trade by eliminating trade protection
and barriers to trade.
Trade protection - Government intervention in international trade through imposition of trade
restrictions to prevent the free entry of imports into a country and protect the domestic economy
from foreign competition.
Trading bloc - A group of countries that have agreed to reduce tariff and other barriers to trade for
the purpose of encouraging the development of free or freer trade and cooperation between them.
Transaction cost - The costs that parties incur in the process of agreeing to and following through on
a bargain.
Transfer payments - Payments made by the government to individuals specifically for the purpose
of redistributing income.
Underallocation of resources - Occurs when too few resources are allocated to the production of a
good relative to what is socially most desirable.
Underemployment - The number of underemployed people, defined as all people above a particular
job who have part-time jobs.
Underground market - Refers to a market that arises whenever a buying/selling of a transaction is
unrecorded.
Undervalued currency - A currency whose value is lower than its free-market value.

Unemployment - The number of unemployed people, defined as all people above a particular age
who are not working and not actively searching for work.
Unemployment rate - The measure of the amount of unemployment in an economy.
Unit elastic demand - Refers to a price elasticity of demand value of one.
Unit elastic supply - Refers to a price elasticity of supply value of one.
Urban informal sector - That part of an urban economy that lies outside the formal economy,
consisting of economic activities that are unregistered and legally unregulated.
Value added tax - A type of consumption tax that is placed on a product whenever value is added at
the stage of production and at final sale.
Value of output flow - Refers to the value of output that is sold by firms and purchased by
consumers.
Wage - A payment, per unit of time, to those who provide labor.
Welfare - Refers to the well-being of population.
Welfare loss - Refers to a loss of a portion of social surplus that arises when MSB doesn't equal
MSC.
World Bank - A development assistance organization, composed of 185 member countries which
are its joint owners, that extends long-term credit to developing country governments for the
purpose of promoting economic development and structural changes. It consists of two
organizations: The International Bank for Reconstruction and Development and the International
Development Association.
World Trade Organization - An international organization that provides the institutional and legal
framework for the trading system that exists between member nations worldwide, responsible for
liberalizing trade, operating a system of trade rules and providing a forum for trade negotiations
between governments, and for settling trade disputes.