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CAIE IGCSE
ECONOMICS (0455)
DEFINITIONS
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CAIE IGCSE ECONOMICS

21. Net investment- gross investment minus depreciation

1. Definitions 22. Negative net investment- a reduction in the number of
capital goods caused by some obsolete and worn-out
capital goods not being replaced
1.1. The basic economic problem 23. Opportunity cost - the next best alternative forgone
while making an economic decision
1. Wants- desires for goods and services 24. Production possibility curve- a curve that shows the
2. Resources- factors used to produce goods and services maximum output of two types of products and
3. The economic problem - unlimited wants exceeding combination of those products that can be produced
finite resources with existing resources and technology
4. Scarcity- a situation where there is not enough to satisfy
everyone's wants
5. Economic good - a product which requires resources to 1.2. The Allocation of Resources
produce it and therefore has an opportunity cost
6. Free good- a product which does not require any 1. Microeconomics- the study of the behaviour and
resources to make it and so does not have an decisions of households and firms and the performance
opportunity cost of individual markets.
7. Capital/Capital goods- human-made goods used in 2. Macroeconomics- the study of the whole economy
production 3. Market- an arrangement which brings buyers into
8. Consumer goods- goods and services purchased by contact with sellers
households for their own satisfaction 4. Economic agents- those people who undertake
9. Entrepreneur- a person who bears the risks and makes economic activities and make economic decisions
the key decisions in a business 5. Economic systems- the institutions, organisations and
10. Occupationally mobile - capable of changing use mechanisms that influence economic behaviour and
determine how resources are allocated
6. Planned economic system- an economic system where
11. Geographically mobile - capable of moving from one the government makes the crucial decisions, land and
location to another location capital are state-owned and directives allocate
12. Mobility of labour- the ability of labour to change where resources
it works or in which occupation 7. Mixed economic system- an economy in which both the
13. Mobility of capital-the ability to change where capital is private and public sectors play an important role
used or in which occupation 8. Market economic system- an economic system where
14. Mobility of enterprise- the ability to change where consumers determine what is produced, resources are
enterprise is used or in which occupation allocated by the price mechanism and land and capital
15. Labour force- people in work and those actively seeking are privately owned
work 9. Price mechanism- the way the decisions made by
16. Productivity- the output per factor of production in an households and firms interact to decide the allocation
hour of resources
17. Output- goods and services produced by the factors of 10. Capital-intensive- the use of a high proportion of capital
production relative to labour
18. Investment-spending on capital goods
19. Gross investment- total spending on capital goods
20. Depreciation (capital consumption) - the value of capital
goods that have worn out or become obsolete

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CAIE IGCSE ECONOMICS

11. Labour-intensive- the use of a high proportion of labour 31. Contraction in supply- a fall in the quantity supplied
relative to capital caused by a fall in the product's price.
12. Market equilibrium- a situation where demand and 32. Changes in supply- changes in supply conditions causing
supply are equal at the current price shifts in the supply curve
13. Market disequilibrium- a situation where demand and 33. Increase in supply- a rise in supply at any given price,
supply are not equal at the current price causing the supply curve to shift to the right
14. Demand- the willingness and ability to buy a product 34. Decrease in supply- a fall in supply at any given price,
15. Market demand - total demand for a product causing the supply curve to shift to the left
16. Aggregation - the addition of individual components to 35. Unit cost- the average cost of production. It is found by
arrive at a total amount dividing the total cost by the output
17. Extension in demand- a rise in the quantity demanded 36. Improvements in technology- advances in the quality of
caused by a fall in the product's price. capital goods and methods of production
18. Contraction in demand- a fall in the quantity demanded 37. Direct taxes- taxes on the income and wealth of
caused by a rise in the product's price. individuals and firms
19. Changes in demand- shifts in the demand curve 38. Indirect taxes- taxes on goods and services
20. increase in demand- a rise in demand at any given price, 39. Tax- a payment to the government
causing the demand curve to shift to the right 40. Subsidy- a payment by the government to encourage
the production or consumption of a product
21. Decrease in demand - a fall in demand at any given
price, causing the demand curve to shift to the left 41. Equilibrium price- the price where demand and supply
22. Normal goods- a product whose demand increases are equal
when income increases and decreases when income 42. Disequilibrium - a situation where demand and supply
falls are not equal
23. Inferior goods- a product whose demand decreases 43. Excess supply- the amount by which supply is greater
when income increases and increases when income falls than demand
24. Substitute- a product that can be used in place of 44. Excess demand- the amount by which demand is
another greater than supply
25. Complement- a product that is used together with 45. Price elasticity of demand (PED) - a measure of the
another product responsiveness of the quantity demanded to a change
26. Ageing population- an increase in the average age of the in price
population 46. Elastic demand - when the quantity demanded changes
27. Birth rate- the number of live births per thousand of the by a greater percentage than the change in price
population in a year 47. Inelastic demand - when the quantity demanded
28. Supply- the willingness and ability to sell a product changes by a smaller percentage than the change in
29. Market supply- total supply of a product price
30. Extension in supply- a rise in the quantity supplied 48. Perfectly elastic demand- when a change in price causes
caused by a rise in the product's price. a complete change in the quantity demanded
49. Perfectly inelastic demand - when a change in price has
no effect on the quantity demanded
50. Unit elasticity of demand - when a change in price
causes an equal change in the quantity demanded,
leaving total revenue unchanged.

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CAIE IGCSE ECONOMICS

51. Price elasticity of supply (PES) - a measure of the 71. External benefits- benefits enjoyed by those who are
responsiveness of the quantity supplied to a change in not involved in the consumption and production
price activities of others directly
52. Elastic supply- when the quantity supplied changes by a 72. External costs- costs imposed on those who are not
greater percentage than the change in price involved in the consumption and production activities of
53. Inelastic supply - when the quantity supplied changes by others directly
a smaller percentage than the change in price 73. Socially optimum output- the level of output where
54. Perfectly elastic supply - when a change in price causes social cost equals social benefit, and society's welfare is
a complete change in the quantity supplied maximised
55. Perfectly inelastic supply- when a change in price has no 74. Merit goods- products the government considers
effect on the quantity supplied consumers do not fully appreciate how beneficial they
56. Unit elasticity of supply- when a change in price causes are and will be under-consumed if left to market forces.
an equal change in the quantity supplied Such goods generate positive externalities.
57. Public sector- the part of the economy controlled by the 75. Demerit goods- products the government considers
government consumers do not fully appreciate how harmful they are
58. State-owned enterprises (SOEs) - organisations owned and will be over-consumed if left to market forces. Such
by the government which sell products goods generate negative externalities.
59. Privatisation - the sale of public assets to the private 76. Public good - a non-rival and non-excludable product
sector hence needs to be financed by taxation.
60. Price mechanism- the system by which the market 77. Private goods- a product which is both rival and
forces of demand and supply determine prices excludable
78. Monopoly- a single seller
79. Price fixing- when two or more firms agree to sell a
61. Market failure- market forces resulting in an inefficient product at the same price
allocation of resources 80. Mixed economic system- an economy in which both the
62. Free rider - someone who consumes a good or service
private and public sectors play an essential role
without paying for it
63. Allocative efficiency- when resources are allocated to
produce the right products in the right quantities 81. Rationing- a limit on the amount that can be consumed
64. Productively efficient- when products are produced at 82. Lottery- the drawing of tickets to decide who will get the
the lowest possible cost and make full use of resources products
65. Dynamic efficiency - efficiency occurring over time as a 83. Nationalisation- moving the ownership and control of
result of investment and innovation an industry from the private sector to the government
66. Third parties- those not directly involved in producing or 84. Public corporation- a business organisation owned by
consuming a product the government which is designed to act in the public
67. Social benefits- the total benefits to a society of an interest
economic activity
68. Social costs- the total costs to a society of an economic 1.3. Microeconomic Decision Makers
activity
69. Private benefits- benefits received by those directly
consuming or producing a product
70. Private costs - costs made by those directly consuming
or producing a product

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CAIE IGCSE ECONOMICS

1. Money- an item which is generally acceptable as a 11. Average propensity to save (APS)- the proportion of
means of payment household disposable income that is saved
2. Commercial banks- banks which aim to make a profit by 12. Mortgage- a loan to help buy a house
providing a range of banking services to households and 13. Earnings- the total pay received by a worker
firms 14. Wage rate- a payment which an employer contracts to
3. Central bank- a government-owned bank which pay a worker. It is the basic wage a worker receives per
provides banking services to the government and unit of time or unit of output.
commercial banks and operates monetary policy 15. National minimum wage (NMW) - a minimum rate of
4. Liquidity - being able to turn an asset into cash quickly wage for an hour's work, fixed by the government for
without a loss the whole economy.
5. Disposable income- income left after income tax has 16. Elasticity of demand for labour- a measure of the
been deducted and state benefits received responsiveness of demand for labour to a change in the
6. Wealth- a stock of assets, including money held in bank wage rate
accounts, shares in companies, government bonds, cars 17. Elasticity of supply of labour- a measure of the
and property responsiveness of the supply of labour to a change in
7. Rate of interest- a charge for borrowing money and a the wage rate
payment for lending money 18. Specialisation - the concentration on particular products
8. Average propensity to consume (APC) - the proportion or tasks
of household disposable income which is spent 19. Division of labour- workers specialising in particular
9. Consumption- expenditure by households on consumer tasks
goods and income 20. Trade union- an association which represents the
10. Savings ratio- the proportion of household disposable interests of a group of workers
income that is saved
21. Collective bargaining- representatives of workers
negotiating with employers' associations
22. Industrial action- when workers disrupt production to
put pressure on employers to agree to their demands
23. Industry- a group of firms producing the same product
24. Primary sector- covers industries which extract natural
resources
25. Secondary sector- covers manufacturing and
construction industries
26. Tertiary sector- covers industries which provide services
27. Quaternary sector- covers knowledge-based service
industries
28. internal growth- an increase in the size of a firm
resulting from it enlarging existing plants or opening
new ones
29. External growth- an increase in the size of a firm
resulting from it merging or taking over another firm
30. Horizontal merger- the merger of firms producing the
same product and at the same stage of production

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CAIE IGCSE ECONOMICS

31. Vertical merger- the merger of firms producing the 51. Competitive market- a market with a number of firms
same product but at a different stage of production that compete with each other
32. Vertical merger backwards- a merger with a firm at an 52. Monopoly- a market with a single supplier
earlier stage of the supply chain 53. Barrier to entry- anything that makes it difficult for a
33. Vertical merger forwards- a merger with a firm at a later firm to start producing the product
stage of the supply chain 54. Barrier to exit- anything that makes it difficult for a firm
34. Conglomerate merger- a merger between firms to stop producing the product
producing different products 55. Scale of production- the size of production units and the
35. Internal economies of scale - lower long-run average methods of production used
costs resulting from a firm growing in size
36. External economies of scale - lower long-run average 1.4. Government and the macroeconomy
costs resulting from an industry growing in size
37. Internal diseconomies of scale - higher long-run average 1. Local government- a government organisation with the
costs arising from a firm growing too large authority to administer a range of policies within an
38. External diseconomies of scale - higher long-run area of the country
average costs arising from an industry growing too large 2. Natural monopoly- an industry where a single firm can
39. Total cost- the total amount that has to be spent on the produce at a lower average cost than two or more firms
factors of production used to produce a product because of the existence of significant economies of
40. Average total cost - total cost divided by output scale
3. Strategic industries- industries are important for the
41. Fixed costs- costs which do not change with output in economic development and safety of the country
the short run 4. National champions- industries that are, or have the
42. Average fixed cost- total fixed cost divided by output potential to be, world leaders
43. Variable cost- costs that change with output 5. Trade blocs- a regional group of countries that remove
44. Average variable cost- total variable cost divided by trade restrictions between them
output 6. Free international trade- the exchange of goods and
45. Price- the amount of money that has to be given to services between countries without restriction
obtain a product 7. Economic growth- an increase in the output of an
46. Total revenue- the total amount of money received from economy in the long run, an increase in the economy's
selling a product productive potential
47. Average revenue- the total revenue divided by the 8. Actual economic growth- an increase in the output of an
quantity sold economy
48. Profit satisficing - sacrificing some profit to achieve 9. Potential economic growth- an increase in an economy's
some goals productive capacity
49. Profit maximisation - making as much profit as possible 10. Aggregate demand - the total demand for a country's
50. Market structure- the conditions which exist in a product at a given price level. It consists of consumer
market, including the number of firms expenditure, investment, government spending and net
exports (exports-imports)

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CAIE IGCSE ECONOMICS

11. Aggregate supply- the total amount of goods and 31. Flat taxes- taxes with a single rate
services that domestic firms are willing to supply at a 32. Fiscal policy- decisions on government spending and
given price level taxation designed to influence aggregate demand
12. Full employment- the lowest level of unemployment 33. Expansionary fiscal policy- rises in government
possible expenditure and/or cuts in taxation designed to
13. Economically active- being a member of the labour force increase aggregate demand
14. Unemployment rate- the percentage of the labour force 34. Contractionary fiscal policy - cuts in government
who are willing and able to work but are without jobs expenditure and/or rises in taxation designed to reduce
15. Price stability- the price level in the economy not aggregate demand
changing significantly over time 35. Monetary policy- decisions on the money supply, the
16. Inflation rate- the percentage rise in the price level of rate of interest and the exchange rate taken to influence
goods and services over time aggregate demand
17. Balance of payments- the record of a country's 36. Foreign exchange rate- the price of one currency in
economic transactions with other countries terms of anther currency or currencies
18. Budget- the relationship between government revenue 37. Expansionary monetary policy- increases in the money
and government spending supply and/or the reduction in the rate of interest
19. Budget deficit- government spending is higher than designed to increase aggregate demand
government revenue 38. Contractionary monetary policy- cuts in the money
20. Budget surplus- government revenue is higher than supply or growth of money supply and/or rises in the
government spending rate of interest designed to reduce aggregate demand
39. Supply-side policy- measures designed to increase
aggregate supply
21. National debt- the total amount the goverment has
40. Deregulation- the removal of rules and regulations
borrowed over time
22. Multiplier effect- the final impact on aggregate demand
being greater than initial change
23. Direct taxes- taxes on income and wealth
24. Indirect taxes- taxes on expenditure
25. Progressive tax- one which takes a larger percentage of
the income or wealth of the rich
26. Proportional tax- one which takes the same percentage
of income or wealth of all taxpayers
27. Regressive tax- one which takes a larger percentage of
the income or wealth of the poor
28. Automatic stabilisers- forms of government expenditure
and taxations that reduce fluctuations in economic
activity, without any change in government policy
29. Inflation- the rise in the price level of goods and services
over time
30. Informal economy- that part of the economy that is not
regulated, protected or taxed by the government

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CAIE IGCSE ECONOMICS

41. Gross domestic product (GDP)- the total output of a 51. Unemployment - being without a job while willing and
country able to work
42. Circular flow of income- the movement of expenditure, 52. Claimant count- a measure of unemployment which
income and output around the economy counts as unemployed these in receipt of
43. Value added- the difference between the sales revenue unemployment benefits
received and the cost of raw materials used. 53. Labour force survey (ILO) Measure - a measure of
44. Transfer payments- transfers of income from one group unemployment which counts as unemployed people
to another not in return for providing a good or service who identify as such in a survey
45. Nominal GDP- GDP at current market prices and so, not 54. Frictional unemployment- temporary unemployment
adjusted for inflation arising from workers being in between jobs
46. Real GDP- GDP at constant prices and so, adjusted for 55. Structural unemployment - unemployment caused by
inflation long-term changes in the pattern of demand and
47. Subsistence agriculture - the output agricultural goods methods of production
for farmers' personal use 56. Cyclical unemployment - unemployment caused by a
48. Recession - a reduction in real GDP over a period of six lack of aggregate demand
months or more 57. Search unemployment - unemployment arising from
49. Sustainable economic growth- economic growth that workers who have lost their jobs, looking for a job they
does not endanger the country's ability to grow in the are willing to accept
future 58. Casual unemployment- unemployment arising from
50. Employment- being involved in a productive activity for workers regularly being between periods of
which a payment is received employment
59. Seasonal unemployment- unemployment caused by a
fall in demand at particular times of the year
60. Regional unemployment- unemployment caused by a
decline in job opportunities in a particular area of the
country

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CAIE IGCSE ECONOMICS

61. Technological unemployment- unemployment caused 1. Purchasing power parity- an exchange rate based on
by workers being replaced by capital equipment the ratio of the price of a basket of a products in
62. Deflation- a sustained fall in the prices of goods and different countries
services 2. Human development index (HDI) - a measure of living
63. Disinflation- a fall in the rate of inflation standards which takes into account income, education
64. Cost-push inflation- rises in the price level caused by and life expectancy
higher costs of production 3. Absolute poverty- a condition where people's income is
65. Demand-pull inflation- rises in the price level caused by too low to enable them to meet their basic needs
excess demand 4. Relative poverty - a condition where people are poor in
66. Wage-price spiral- wage rises leading to higher prices, in comparison to others in the country. Their income is too
turn, lead to further wage claims and price rises low to enable them to enjoy the average standard of
67. Monetary inflation- rises in the price level caused by an living in their country
excessive growth of the money supply 5. Vicious circle of poverty - a situation where people
68. Hyperinflation- a very rapid and large rise in the price become trapped in poverty
level 6. Emigration- the act of leaving the country to live in
69. Index-linking- changing payments in line with changes in another country
the inflation rate 7. Birth rate- the number of births in a year per 1000
70. Menu costs- costs involved in having to change prices as population in a year
a result of inflation 8. Death rate- the number of deaths in a year per 1000
71. Shoe-leather costs- costs involved in moving money population in a year
around to gain higher interest rates 9. Infant mortality rate- the number of deaths per 1000
live births in a year
1.5. Economic development 10. Population pyramid- a diagram showing the age and
gender structure of a country's population
11. Optimum population- the size of population which
maximizes the country’s output per head
12. Economic development- an improvement in economic
welfare

1.6. International trade and globalisation

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CAIE IGCSE ECONOMICS

1. Globalisation- the process by which the world is 21. Primary income - income earned by people working in
becoming increasingly interconnected through trade different countries and investment income which comes
and other links into and goes out of the country
2. Quota- a limit placed on imports and exports 22. Secondary income - transfers between residents and
3. Embargo- a ban placed on imports and exports non-residents of money, goods or services, not in return
4. Exchange control- a limit on the amount of foreign for anything else
currency that can be obtained 23. Current account balance- a record of the income
5. Infant industries- new industries with relatively low received and the expenditure made by a country in its
output and high cost dealings with other countries
6. Declining industries- old industries which are going out
of business
7. Strategic industries- industries that are considered
important for the survival or development of the
country
8. Foreign exchange rate- the price of one currency in
terms of another currency or currencies
9. Fixed exchange rate - an exchange rate whose value is
set at a particular value in terms of another currency or
currencies
10. Devaluation- a fall in the value of a fixed exchange rate

11. Revaluation- a rise in the value of a fixed exchange rate

12. Floating exchange rate - an exchange rate which can
change frequently as it determined by market forces
13. Appreciation- a rise in the value of a floating exchange
rate
14. Depreciation- a fall in the value of a floating exchange
rate
15. Trade in goods- the value of exported goods and
imported goods
16. Trade in goods deficit- expenditure on imported goods
exceeding revenue from exported goods
17. Trade in goods surplus - revenue from exported goods
exceeding expenditure on imported goods
18. Trade in services- the value of exported services and
imported services
19. Trade in services deficit- expenditure on imported
services exceeding revenue from exported services
20. Trade in goods surplus - revenue from exported
services exceeding expenditure on imported services

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[Link]

CAIE IGCSE
ECONOMICS (0455)
DEFINITIONS

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