Economics for the IB Diploma

Important diagrams to remember

(a) Creating and eliminating a deflationary gap (b) Creating and eliminating an inflationary gap

LRAS LRAS
SRAS1 SRAS1

price level Pl1 a SRAS2 price level Pl3 c SRAS2
Pl2 b
Pl3 c Pl2 b
Pl1 a
AD1
AD1
AD2
0 YrecYp AD2
0 Yp Yinfl
real GDP
real GDP

Figure 9.8 Returning to long-run full employment equilibrium in the monetarist/new classical model

price level LRAS price level Keynesian AS
section III
SRAS1
Pl1 section II

AD1 section I
Pl2 SRAS2
0 Yp Ymax real GDP
AD2
Figure 9.11 The Keynesian aggregate supply curve
0 Yp
real GDP

Figure 9.9 Changes in long-run equilibrium in the monetarist/new
classical AD-AS model

(a) Recessionary (deflationary) gap (b) Inflationary gap (c) Full employment equilibrium
Keynesian AS Keynesian AS
Keynesian AS

price level
price level
price level

AD AD 0 AD
0 Ye Yp
0 Yp Ye Yp = Ye
real GDP real GDP real GDP

Figure 9.12 Three equilibrium states of the economy in the Keynesian model

© Cambridge University Press 2012 Economics for the IB Diploma 30

Important diagrams to remember

(a) The monetarist/new classical model (b) The Keynesian model

LRAS Keynesian AS
Pl1
price level price level
Pl2
AD3 AD1 AD2 AD3 AD4
0 Y1 Y2 Y3 Yp real GDP
Pl3 AD2
AD1

0 Yp real GDP

Figure 9.13 Effects of increases in aggregate demand on real GDP and the price level

(a) The monetarist/new classical model (b) The Keynesian model
AS1
LRAS1 LRAS2 AS2

price level price level

0 Yp1 Yp2 real GDP 0 Yp1 Yp2 real GDP

Figure 9.14 Increasing potential output, shifts in aggregate supply curves and long-term economic growth

(a) The monetarist/new classical model (b) The Keynesian model
LRAS1
LRAS2 AS1 AS2

price level SRAS1 SRAS2 price level

Pl1

AD1 AD2 AD1 AD2
0 Y1 Y2
0 Y1 Y2
real GDP
real GDP

Figure 9.15 Long-term economic growth: achieving potential (full employment) output in a growing economy

© Cambridge University Press 2012 Economics for the IB Diploma 31

Higher level topic Important diagrams to remember

autonomous induced Keynesian AS
spending spending Pl3
price level
$8 price level$24 Pl2
million million Pl1 AD3 AD4

$32 million AD3 AD1 AD2
AD1 AD2 Y3 0 Y1 Y2 Y3

0 Y1 Y2 real GDP
Figure 9.18 How the effect of the multiplier changes depending on the
real GDP
price level
Figure 9.17 Aggregate demand, real GDP and the multiplier in the
Keynesian model

© Cambridge University Press 2012 Economics for the IB Diploma 32

Important diagrams to remember

Chapter 10 Macroeconomic objectives I: Low unemployment, low and stable
rate of inflation

P P supply
S2
S S1 P labour surplus = of
P1
P2 P2
P1
D1
D
price unemployment labour
price
price of labour (wage) Wm

We

demand

D2 for

0 Q2 Q1 Q 0 Q2 Q1 Q labour

0 Qd Qe Qs Q

(a) Fall in demand for a product produced (b) Labour market rigidities lead to an quantity of labour
in a declining industry, or produced in increase in costs of production (supply
a local industry that relocates, causes shifts to the left), causing a fall in (c) Minimum wage legislation and labour union
a fall in Q produced; employers fire Q produced; employers hire fewer activities lead to higher than equilibrium wages
workers with inappropriate skills or workers and lower quantity of labour demanded
local workers no longer needed due to
relocation

Figure 10.1 Structural unemployment

(a) The monetarist/new classical model (b) The Keynesian model
LRAS Keynesian AS

SRAS Pl1
Pl1 Pl2
Pl2
AD1
AD1 AD2
0 Yrec Yp
AD2 real GDP
0 Yrec Yp

real GDP

Figure 10.2 Cyclical unemployment
price level
price level

(a) The monetarist/new classical model (b) The Keynesian model LRAS

AS SRAS2

LRAS

SRAS Pl2 SRAS1
Pl1
price level
price level AD1
price level
Pl2 Pl2 0 Yrec Yp
real GDP
Pl1 Pl1 AD2
AD2 Figure 10.5 Cost-push inflation

AD1 AD1 Economics for the IB Diploma 33
0 Yp Yinfl
0 Yp Yinfl
real GDP real GDP

Figure 10.4 Demand-pull inflation

© Cambridge University Press 2012

Important diagrams to remember

Higher level topic

(a) The shifting Phillips curve (b) The reasoning behind SRAS shifts in
terms of the AD-AS model

rate of inflation c price level SRAS3
Pl3 c SRAS2
b Pl2 b SRAS1
Pl1 a
a PC3
PC2 AD

PC1 0 Y3 Y2 Y1
0 unemployment rate real GDP

Figure 10.7 Stagflation: outward shifts of the short-run Phillips curve due to decreasing SRAS

(a) The shape of the LRPC and SRPC (b) The reasoning behind the two curves in
LRPC terms of the AD-AS model

rate of inflation 9% c LRASprice level

7% b SRPC2 SRAS2
5% a SRPC1 Pl3 c
Pl2 b SRAS1
0 3% 5%
unemployment rate AD2
Pl1 a

AD1
0 Yp Yinfl

real GDP

5% = natural rate
of unemployment

Figure 10.8 The short-run and long-run Phillips curves

© Cambridge University Press 2012 Economics for the IB Diploma 34

Important diagrams to remember

Chapter 11 Macroeconomic objectives II: Economic growth and equity in the
distribution of income

(a) Economic growth as an increase in actual output caused by 100
reductions in unemployment and productive inefficiency
cumulative percentage of income 80
Y
perfect
B income
A equality h

0X 60

(b) Economic growth as an increase in production possibilities 40 g d
caused by increases in resource quantities or improvements in Belarus
resource quality
f
Y 20 c

C eb
B a Bolivia
A
0 20 40 60 80 100
0 PPC1 PPC2 PPC3 X cumulative percentage of population

Figure 11.1 Using the production possibilities model to illustrate economic Figure 11.3 Lorenz curves: Belarus achieves greater income equality than
growth Bolivia

100

cumulative percentage of income 80 perfect income
equality

60 increased income
equality after
redistribution

40

20
before

redistribution

0 20 40 60 80 100
cumulative percentage of population

Figure 11.4 Lorenz curves and income redistribution

© Cambridge University Press 2012 Economics for the IB Diploma 35

Important diagrams to remember

Chapter 12 Demand-side and supply-side policies

(a) The monetarist/new classical modelprice level (a) The monetarist/new classical modelprice level
LRAS
LRAS SRAS

SRAS Pl1
Pl2 Pl2
Pl1
AD2AD1
AD2
0 Yp Yinfl real GDP
AD1
0 Yrec Yp real GDP potential output

(b) The Keynesian model

(b) The Keynesian model AS

Keynesian AS price level

Pl2price level Pl1
Pl1 Pl2

AD2 AD2AD1
AD1
0 Yrec Yp real GDP 0 Yp Yinfl real GDP

Figure 12.1 Effects of expansionary policy: eliminating a recessionary potential output
(deflationary) gap
Figure 12.2 Effects of contractionary policy: eliminating an
inflationary gap

(a) Partial crowding out (b) Complete crowding out

price level due to G SRAS price level SRAS

due to G

due to I AD2 due to I AD2

AD3 AD1
AD1 0 Y1 Y2
0 Y1 Y3 Y2
real GDP real GDP

Figure 12.3 Crowding out of private investment Economics for the IB Diploma 36

© Cambridge University Press 2012

(a) Equilibrium rate of interest Important diagrams to remember
Sm
(b) Changes in the supply of money cause
i changes in the equilibrium rate of interest
Dm Sm3 Sm1 Sm2

0 Qe i3
quantity of money i1
i2
Figure 12.4 The money market and determination of the rate of interest
rate of interest Dm
rate of interest 0 Q3 Q1 Q2

quantity of money

© Cambridge University Press 2012 Economics for the IB Diploma 37

Chapter 13 International trade Important diagrams to remember

(a) Country A: absolute (b) Country A: comparative country A’s PPC
advantage in good Y; advantage in good Y; country B’s PPC
Country B: absolute Country B: comparative 0 good X
advantage in good X advantage in good X
good Y Figure 13.5 Identical opportunity costs:
good Y no gains from trade

good Y
country A country A
country B country B

0 good X 0 good X

Figure 13.3 Absolute and comparative advantage

Production possibilities when each Opportunity cost of cotton Opportunity cost of microchips
country produces only cotton or

only microchips

(1) (2) (3) (4)
Cotton Microchips
10 units of microchips = 1 20 units of cotton = 2
Cottonia 20 or 10 20 units of cotton 2 10 units of microchips

Microchippia 25 or 50 50 units of microchips = 2 25 units of cotton = 1
25 units of cotton 50 units of microchips 2

Table 13.2 Comparative advantage

25 (a) Cottonia exports 10 units of cotton andcotton
20 imports 10 units of microchips
cotton 15 Microchippia’s PPC
10 25
20 A production
5 Cottonia’s 15
PPC 10 B consumption

0 10 20 30 40 50 60 5
microchips
0 10 20 30 40 50
Figure 13.2 Comparative advantage microchips

(b) Microchippia exports 10 units ofcotton
microchips and imports 10 units of cotton

25
20
15
10 D consumption

5
C production

0 10 20 30 40 50
microchips

© Cambridge University Press 2012 Figure 13.4 The gains from specialisation and trade based on comparative
advantage: both countries consume outside their PPC

Economics for the IB Diploma 38

Important diagrams to remember

(a) Effects on imports (a) Effects on imports Sd = domestic supply
P
P

Sd = quota quota Sdq = domestic supply
revenue
domestic plus quota
supply Pq

Pw Pd government revenue Pw world price =
world supply curve
+t world price + tariff

Pw tariff

0 Q1 Q2 world price = 0 Q1 Q2 Dd = domestic demand
world supply curve
Q3 Q4 Q
Dd = domestic demand
Q3 Q4 Q

imports with tariff imports with quota

imports without tariff imports without quota

(b) Welfare effects Sd = (b) Welfare effects Sd = domestic supply
P
domestic supply P

Pw + t a b welfare loss = d + f a quota Sdq = domestic supply
Pq c
world price + tariff Pw g plus quota

c de f tariff b welfare loss = d + e + f
Pw g de ef
world price = world price =
world supply curve world supply curve
Dd = domestic demand
0 Q1 Q2 Q3 Dd = domestic demand
Q4 Q
Q3 Q4 Q
imports with tariff 0 Q1 Q2

imports without tariff imports with quota

imports without quota

Figure 13.7 Effects of a tariff Figure 13.9 Effects of a quota

(a) Production subsidy: quantity of imports falls
P Sd = domestic supply

Sds = domestic
Ps subsidy supply minus subsidy

Pw world price =
world supply curve

Dd = domestic demand

0 Q1 Q3 Q2 Q

imports after subsidy
imports before subsidy

Figure 13.11 Production subsidies

© Cambridge University Press 2012 Economics for the IB Diploma 39

Important diagrams to remember

Chapter 14 Exchange rates and the balance of payments

(a) The market for US dollars (a) Demand for $ increases: $ appreciates

per $ = price of $ in terms of excess supply of $ S of $ per $ = price of $ in terms of S of $

0.80 (dollars) 0.90 C
0.67
0.50 equilibrium 0.67 A B
exchange rate D2 for $
0
excess demand for $ D for $ D1 for $
0 Q of $ (dollars)
(dollars)
(b) Supply of € increases: € depreciates
Q of $ (dollars)

(b) The market for euros

$ per = price of in terms of $ excess supply of S of S1 of $ per = price of in terms of $
D S2 of
(euros) 1.50 E
1.11 F
2.00 equilibrium
1.50 exchange rate D for
1.25 0 Q of (euros)
excess demand for D for
0 Figure 14.2 Exchange rate changes in a freely floating exchange rate system
(euros)

Q of (euros)

Figure 14.1 Exchange rate determination in a freely floating exchange
rate system

(a) Shifting the currency demand curve (b) Shifting the currency supply curve

$ per bople = price of boples in terms of $ S of boples $ per bople = price of boples in terms of $ S2 S1 of boples
2. central bank buys excess 2. imports are reduced,
therefore the supply
boples, increasing demand of boples falls
BA for boples BA
2.00 C 2.00
1.50 1. fall in demand for Bopland's 0 1. fall in demand for Bopland's
exports reduces demand exports reduces demand
0 for boples for bople

D2 for boples D1 for boples D2 for boples D1 for boples
Q of boples
Q of boples

Figure 14.3 Fixed exchange rates: maintaining the value of the bople at 1 bople = $2.00

© Cambridge University Press 2012 Economics for the IB Diploma 40

Important diagrams to remember

(a) With a trade deficit, country consumes outside its PPCgood A
C
good A
PPC
0 good B
(b) With a trade surplus, country consumes inside its PPC

D
PPC

0 good B
Figure 14.6 Using a PPC to illustrate a trade deficit and a trade surplus

© Cambridge University Press 2012 Economics for the IB Diploma 41

Important diagrams to remember

Chapter 15 Economic integration and the terms of trade

Higher level topic

(a) Changes in global demand: terms of trade and (b) Changes in global supply: effects of terms of trade changes on
balance of trade change in same direction the balance of trade depend on PEDs for exports and imports

global price of internationally S S3 S1
traded good global supply
P2 global supply
global price of internationallyof wheatP3
traded good
P1 P1 S2

P3 D2 P2 global demand
global demand
D
D1 for wheat 0 Q3 Q1 Q2
D3
quantity of internationally
0 Q3 Q1 Q2 traded good

quantity of internationally
traded good

Figure 15.1 Changes in global demand or supply: terms of trade impacts on the balance of trade

P S1 S2

P1
P2

D2
D1
0Q

Figure 15.2 Long-term declines in primary product prices due to low
growth in demand (due to low YEDs) and high growth in supply
(due to technological advances)

© Cambridge University Press 2012 Economics for the IB Diploma 42

Important diagrams to remember

Chapter 16 Understanding economic developmentindustrial goods

A→B: no economic growth with some development
B→C: economic growth with no development
B→D or E: economic growth with development

C
AD

E
B
PPC1 PPC2
0 merit goods

Figure 16.1 Economic growth and economic development

low low low
income savings investment

low physical low low natural
capital human capital
capital

low growth low productivity
in income of labour
and land
Figure 16.2 The poverty cycle (poverty trap)

© Cambridge University Press 2012 Economics for the IB Diploma 43

World Bank country classification

The World Bank classifies countries into four groups Lower middle income economies
according to income levels (based on 2008 GNI per
capita):

• Economically less developed countries:

ο low income, with GNI per capita of US$975 or less

ο lower middle income, with GNI per capita of
$976–$3855

ο upper middle income, with GNI per capita of
$3856–$11 905.

• Economically more developed countries:

ο high income, with GNI per capita of $11 906 or
more.

Table 16 World Bank country groups by 2008 GNI per capita
Low income economies

Afghanistan Ethiopia Madagascar Sierra Leone Albania Guatemala Marshall Sudan
Bangladesh Somalia Islands
Benin Gambia, The Malawi Tajikistan Micronesia, Swaziland
Burkina Faso Tanzania Fed. Sts
Burundi Ghana Mali Togo Angola Guyana Morocco Syrian Arab
Cambodia Uganda Republic
Central Guinea Mauritania Uzbekistan Nicaragua Thailand
African Rep. Nigeria Timor-Leste
Chad Guinea-Bissau Mongolia Vietnam Armenia Honduras Pakistan Tonga

Comoros Haiti Mozambique Yemen, Rep. Bhutan India
Congo, Dem. Zambia Bolivia Indonesia
Rep. Kenya Myanmar Cameroon Iran, Islamic
Eritrea Zimbabwe Rep.
Korea, Dem. Nepal Cape Verde Palau Tunisia
Rep. China Iraq
Kyrgyz Rep. Niger Jordan Papua New Turkmenistan
Lao PDR Rwanda

Guinea

Liberia Senegal Congo, Rep. Kazakhstan Paraguay Ukraine

Côte d’Ivoire Kiribati Philippines Vanuatu

Djibouti Kosovo Samoa West Bank
and Gaza

Ecuador Lesotho São Tomé and

Principe

Egypt, Arab Macedonia, Solomon
Rep. FYR
Islands
El Salvador Maldives
Sri Lanka

(continued over)

© Cambridge University Press 2012 Economics for the IB Diploma 1

World Bank country classification

Upper middle income economies High income economies

Algeria Costa Rica Lithuania Romania Andorra Denmark Israel Puerto Rico
American Cuba Malaysia Russian Antigua and Equitorial Italy Qatar
Samoa Federation Barbuda Guinea
Argentina Dominica Mamibia Serbia Aruba Estonia Japan San Marino
Azerbaijan Dominican Mauritius Seychelles Australia Estonia Korea, Rep. Saudi Arabia
Republic Austria Faroe Islands Kuwait Singapore
Belarus Fiji Mayotte South Africa Bahamas, The Finland Liechtenstein Slovak
Belize Gabon Mexico St Kitts and Republic
Nevis Bahrain France Luxembourg Slovenia
Bosnia and Georgia Moldova St Lucia Barbados French Macao, China Spain
Herzegovina Grenada Polynesia
Montenegro St Vincent and Belgium Germany Malta Sweden
Botswana Grenadines Bermuda Greece Monaco Switzerland
Northern Suriname Brunei Greenland Netherlands Taiwan, China
Brazil Jamaica Mariana Canada Guam Netherlands Trinidad and
Islands Turkey Antilles Tobago
Bulgaria Latvia Panama Uruguay Cayman Hong Kong, New United Arab
Chile Lebanon Peru Venezuela, RB Islands China Caledonia Emirates
Colombia Libya Poland Channel Hungary New Zealand United
Islands Kingdom
Croatia Iceland Norway United States
Cyprus Ireland Oman Virgin Islands
(US)
Czech Isle of Man Portugal
Republic

Source: The World Bank, World Development Report, 2010.

© Cambridge University Press 2012 Economics for the IB Diploma 2

The Nobel Prize in Economics

The Nobel Prize in Economics is the most important 2005
award in the area of economics. It is awarded each
year to a person or persons who have been singled Robert J. Aumann and Thomas C. Schelling, ‘for
out for ‘specific discoveries or breakthroughs in the having enhanced our understanding of conflict and
field of Economics’. The prize is a medal, a diploma, cooperation through game-theory analysis’.
and an amount of money that changes over time,
currently being approximately US$1 million. The 2004
Nobel Prize in Economics is not one of the original
five prizes selected by Alfred Nobel in his will in 1895 Finn E. Kydland and Edward C. Prescott, ‘for their
(these were in Literature, Peace, Physics, Chemistry contributions to dynamic macroeconomics: the time
and Physiology or Medicine). The actual name of consistency of economic policy and the driving forces
the prize is The Sveriges Riksbank Prize in Economic behind business cycles’.
Sciences in Memory of Alfred Nobel, established by
the Bank of Sweden in 1968 on the occasion of its 2003
300th anniversary. As with the five original subjects, it
is awarded each year by the Royal Swedish Academy Robert F. Engle III, ‘for methods of analyzing economic
of Sciences. time series with time-varying volatility (ARCH)’; and
Clive W.J. Granger, ‘for methods of analyzing economic
Winners of the Nobel Prize in time series with common trends (cointegration)’.
Economics
2002
2010
Daniel Kahneman, ‘for having integrated insights
Peter A. Hammond, Dale T. Mortensen and from psychological research into economic science,
Christopher A. Pissarides, ‘for their analysis of markets specially concerning human judgment and decision-
with search frictions’. making under uncertainty’; and Vernon L. Smith, ‘for
having established laboratory experiments as a tool in
2009 empirical economic analysis, especially in the study of
alternative market mechanisms’.
Elinor Ostrom, ‘for her analysis of economic
governance, especially the commons’; and Oliver E. 2001
Williamson, ‘for his analysis of economic governance,
especially the boundaries of the firm’. George A. Akerlof, A. Michael Spence, and Joseph E.
Stiglitz, ‘for their analyses of markets with asymmetric
2008 information’.

Paul Krugman, ‘for his analysis of trade patterns and 2000
location of economic activity’.
James J. Heckman, ‘for his development of theory
2007 and methods for analyzing selective samples’; and
Daniel McFadden, ‘for his development of theory and
Leonid Hurwicz, Eric S. Maskin and Roger B. Myerson, methods for analyzing discrete choice’.
‘for having laid the foundations of mechanism design
theory’. 1999

2006 Robert A. Mundell, ‘for his analysis of monetary and
fiscal policy under different exchange-rate regimes and
Edmund S. Phelps, ‘for his analysis of intertemporal his analysis of optimum currency areas’.
tradeoffs in macroeconomic policy’.
1998

Amartya Sen, ‘for analyzing the causes of famine and
other welfare economics issues’.

© Cambridge University Press 2012 Economics for the IB Diploma 1

1997 The Nobel Prize in Economics

Robert C. Merton and Myron S. Scholes, ‘for 1987
developing a pioneering formula for the valuation of
stock options’. Robert M. Solow, ‘for his contributions to the theory
of economic growth’.
1996
1986
James A. Mirrlees and William Vickrey, ‘for their
fundamental contributions to the economic theory of James M. Buchanan, Jr, ‘for his development of the
incentives under asymmetric information’. contractual and constitutional bases for the theory of
economic and political decision-making’.
1995
1985
Robert E. Lucas, ‘for having developed and
applied the hypothesis of rational expectations, Franco Modigliani, ‘for his pioneering analyses of
and thereby having transformed macroeconomic saving and of financial markets’.
analysis and deepened our understanding of
economic policy’. 1984

1994 Sir Richard Stone, ‘for having made fundamental
contributions to the development of systems of
John C. Harsanyi, John F. Nash and Reinhard Selten, national accounts and hence greatly improved the
‘for their pioneering analysis of equilibria in the thory basis for empirical economic analysis’.
of non-cooperative games’.
1983
1993
Gerard Debreu, ‘for having incorporated new
Robert W. Fogel and Douglass C. North, ‘for having analytical methods into economic theory and for
renewed research in economic history by applying his rigorous reformulation of the theory of general
economic theory and quantitative methods in order to equilibrium’.
explain economic and institutional change’.
1982
1992
George J. Stigler, ‘for his seminal studies of industrial
Gary S. Becker, ‘for having extended the domain of structures, functioning of markets and causes and
microeconomic analysis to a wide range of human effects of public regulation’.
behavior and interaction, including non-market
behavior’. 1981

1991 James Tobin, ‘for his analysis of financial markets and
their relations to expenditure decisions, employment,
Ronald H. Coase, ‘for his discovery and clarification production and prices’.
of the significance of transaction costs and property
rights for the institutional structure and functioning 1980
of the economy’.
Lawrence L. Klein, ‘for the creation of econometric
1990 models and the application to the analysis of
economic fluctuations and economic policies’.
Harry M. Markowitz, Merton M. Miller and William
F. Sharpe, ‘for their pioneering work in the theory of 1979
financial economics’.
Theodore W. Schultz and Sir Arthur Lewis, ‘for their
1989 pioneering research into economic development
research with particular consideration of the problems
Trygve Haavelmo, ‘for his clarification of probability of developing countries’.
theory foundations of econometrics and his analysis of
simultaneous economic structures’. 1978

1988 Herbert A. Simon, ‘for his pioneering research into
the decision-making process within economic
Maurice Allais, ‘for his pioneering contributions to organizations’.
the theory of markets and efficient utilization of
resources’. 1977

Bertil Ohlin and James E. Meade, ‘for their
pathbreaking contribution to the theory of

© Cambridge University Press 2012 Economics for the IB Diploma 2

international trade and international capital The Nobel Prize in Economics
movements’.
1972
1976
Sir John R. Hicks and Kenneth J. Arrow, ‘for their
Milton Friedman, ‘for his achievements in the fields pioneering contributions to general economic
of consumption analysis, monetary history and equilibrium theory and welfare theory’.
theory and for his demonstration of the complexity of
stabilization policy’. 1971

1975 Simon Kuznets, ‘for his empirically founded
interpretation of economic growth which has led to
Leonid Vitaliyevich Kantorovich and Tjalling C. new and deepened insight into the economic and
Koopmans, ‘for their contributions to the theory of social structure and process of development’.
optimum allocation of resources’.
1970
1974
Paul A. Samuelson, ‘for the scientific work through
Gunnar Myrdal and Friedrich August Von Hayek, which he has developed static and dynamic economic
‘for their pioneering work in the theory of money theory and actively contributed to raising the level of
and economic fluctuations and for their penetrating analysis in economic science’.
analysis of the interdependence of economic, social
and institutional phenomena’. 1969

1973 Ragnar Frisch and Jan Tinbergen, ‘for having
developed and applied dynamic models for the
Wassily Leontief, ‘for the development of the input- analysis of economic problems’.
output method and for its application to important
economic problems’. Source: Nobelprize.org.

© Cambridge University Press 2012 Economics for the IB Diploma 3

Glossary

abnormal profit Refers to positive time period (aggregate demand), measured average costs Costs per unit of output,
economic profit, arising when total on the horizontal axis, plotted against the or the cost of each unit of output on
revenue is greater than total economic price level, measured on the vertical axis. average. They are calculated by dividing
costs (implicit plus explicit costs); is total cost by the number of units of output
also known as ‘supernormal profit’. See aggregate supply The total quantity produced.
economic profit. of goods and services produced in an
economy over a particular time period, at average fixed costs Fixed cost per unit
absolute advantage Refers to the ability different price levels, ceteris paribus. of output, or the fixed cost of each unit of
of a country to produce a good using fewer output on average. They are calculated by
resources than another country, or, what aid See foreign aid. dividing fixed cost by the number of units
is the same thing, the ability of a certain of output produced.
amount of resources in a country to allocation of resources See resource
produce more than the same resources can allocation. average product The total quantity
produce in another country. of output of a firm per unit of variable
allocative efficiency An allocation of input (such as labour); shows how much
absolute poverty The inability of an resources that results in producing the output each unit of the variable input
individual or a family to afford a basic combination and quantity of goods and (for example, each worker) produces on
standard of goods and services, where services mostly preferred by consumers. It average.
this standard is absolute and unchanging is achieved when the economy allocates
over time. Absolute poverty is defined in its resources so that no one can become average revenue Revenue per unit of
relation to a nationally or internationally better off in terms of increasing their output sold, calculated by dividing total
determined ‘poverty line’, which benefit from consumption without revenue by the number of units of output
determines the minimum income that can someone else becoming worse off. The produced.
sustain a family in terms of its basic needs. condition for allocative efficiency is given
by P = MC (price is equal to marginal cost). average tax rate Tax paid divided by
actual output The quantity of output total income, expressed as a percentage
actually produced by an economy. In the anti-dumping An argument that (i.e. tax paid divided by total income
context of the production possibilities justifies trade protection policies: if a multiplied by 100).
model, it may be contrasted with country’s trading partner is suspected of
production possibilities: actual output practising dumping, then the country average total costs Total cost per unit
occurs somewhere inside an economy’s should have the right to impose trade of output, or the total cost of each unit of
production possibilities curve (PPC) protection measures (tariffs or quotas) to output on average. They are calculated by
because of the presence of unemployed limit quantities of the dumped good; see dividing total costs by the number of units
resources and productive inefficiency. dumping. of output; they are also equal to the sum of
In the context of the AD-AS model, it average fixed costs and average variable costs.
may be contrasted with potential output, appreciation (of a currency) Refers
given by the position of an economy’s to an increase in the value of a currency average variable costs Variable cost
long-run aggregate supply (LRAS) curve: in the context of a floating (or flexible) per unit of output, or the variable cost of
actual output may be higher or lower than exchange rate system or managed each unit of output on average. They are
potential output (if there is an inflationary exchange rate system (compare with calculated by dividing variable cost by the
or deflationary gap) or it may be equal revaluation, which refers to an increase in number of units of output.
to potential output (if the economy is in currency value in the context of a fixed
long-run equilibrium). exchange rate system). balance of payments A record (usually
for a year) of all transactions between the
ad valorem taxes Taxes calculated as a appropriate technology Technologies residents of a country and the residents of
fixed percentage of the price of the good that are well-suited to a country’s all other countries, showing all payments
or service; the amount of tax increases as particular economic, geographical, received from other countries (credits),
the price of the good or service increases. ecological and climate conditions. Often and all payments made to other countries
used in connection with labour-abundant (debits). In the course of a year, the sum of
administrative barriers Trade developing countries that require labour- all the credits must be equal to the sum of
protection measures taking the form of intensive (as opposed to capita- intensive) all the debits.
administrative procedures that countries technologies.
may use to prevent the free flow of balance of trade in goods Part of the
imports into a country; these may include asymmetric information A type of balance of payments, it is the value of
customs procedures involving inspections market failure where buyers and sellers exports of goods minus the value of
and valuation, controls on packaging, and do not have equal access to information, imports of goods over a specific period of
others. Often considered to be a kind of usually resulting in an underallocation of time (usually a year).
‘hidden’ trade protection as they don’t resources to the production of goods and
involve obvious trade protection measures services, as parties to a transaction with balance of trade in services Part of
such as tariffs and quotas. less access to information try to protect the balance of payments, it is the value
themselves against the consequences of of exports of services minus the value of
aggregate demand The total quantity the information asymmetry. imports of services over a specific period of
of goods and services that all buyers time (usually a year)
in an economy (consumers, firms, the automatic stabilisers Factors that
government and foreigners) want to buy automatically, without any action by balance on capital account The sum
over a particular time period, at different government authorities, work toward of inflows minus outflows of funds in
possible price levels, ceteris paribus. stabilising the economy by reducing the the capital account of the balance of
short term fluctuations of the business payments. See capital account.
aggregate demand curve The curve cycle. Two important automatic stabilisers
that shows the relationship between total are progressive income taxes and balance on current account The sum
quantity of goods and services that all buyers unemployment benefits. of inflows minus outflows of funds in
in an economy want to buy over a particular the current account of the balance of
payments. See current account.
540 Glossary

balance on financial account The sum capital One of the factors of production, circular flow of income model A
of inflows of funds minus outflows in which itself has been produced (it does model showing the flow of resources from
the financial account of the balance of not occur naturally), also known as consumers (households) to firms, and the
payments. See financial account. ‘physical capital’, including machinery, flow of products from firms to consumers,
tools, equipment, buildings, etc. Physical as well as money flows consisting of
balanced budget Referring usually to the capital is also referred to as a ‘capital consumers’ income arising from the sale
government’s budget, it is the situation good’ or ‘investment good’. Other types of their resources and firms’ revenues
where government tax revenues are equal of capital include ‘human capital’, or the arising from the sale of their products. It
to government expenditures over a specific skills, abilities, knowledge and levels of illustrates the equivalence of expenditure
period of time (usually a year). good health acquired by people; ‘natural flows, value of output flows, and income
capital’, or everything that traditionally flows.
barriers to entry Anything that can has been included in the factor of
prevent a firm from entering an industry production ‘land’; and ‘financial capital’, clean technology Technology that is not
and beginning production, as a result or purchases of financial instruments such polluting, associated with environmental
limiting the degree of competition in the as stocks and bonds. sustainability; includes solar power, wind
industry. power, hydropower, recycling, and many
capital account In the balance of more.
bilateral trade agreement Any trade payments, refers to the inflows minus
agreement (or agreement to lower outflows of funds for (i) capital transfers’ closed economy An economy that has
international trade barriers) involving (including such things as debt forgiveness no international trade (no imports and
two trading partners, usually two and non-life insurance claims), and (ii) the exports); usually appears in connection
countries. It may also involve a trade purchase or use of non-produced natural with economic theories and models as
agreement between one country and resources (such as mineral rights, forestry virtually no economy in the real world is
another group of countries when this rights, fishing rights and airspace); it is a a closed economy. To be contrasted with
groups acts as a single unit (such as the relatively unimportant part of the balance open economy.
European Union). May be contrasted with of payments.
regional trade agreement and multilateral collusion An agreement among firms to
trade agreement. capital account balance See balance on fix prices, or divide the market between
capital account. them, so as to limit competition and
break-even point The point of maximise profit; usually involves firms in
production of a firm where its total capital expenditures With reference to oligopoly.
revenue is exactly equal to its total costs government expenditures, these include
(economic costs), and it is therefore public investments, or the production of collusive oligopoly Refers to the type
earning normal profit, or zero economic physical capital, such as building roads, of oligopoly where firms agree to restrict
(supernormal) profit airports, harbours, school buildings, output or fix the price, in order to limit
hospitals, etc. competition, increase monopoly power
break-even price A price at which and increase profits. See also cartel.
the firm breaks even, meaning that its capital liberalisation Refers to the
total revenues are just equal to its total free movement of financial capital in commercial bank A financial institution
costs (economic costs); at the break-even and out of a country, occurring through (which may be private or public) whose
price the firm is earning zero economic the elimination by the government main functions are to hold deposits for
(supernormal) profit, but it is earning of exchange controls (government their customers (consumers and firms), to
normal profit. restrictions on the quantity of foreign make loans to their customers, to transfer
exchange that can be bought by domestic funds by cheque (check) from one bank to
budget deficit Referring usually to the residents of a country). another, and to buy government bonds.
government’s budget, it is the situation
where government tax revenues are less capital transfers A part of the capital common access resources Resources
than government expenditures over a account of the balance of payments, that are not owned by anyone, do not
specific period of time (usually a year). they include inflows minus outflows for have a price, and are available for anyone
such things as debt forgiveness, non-life to use without payment (for example,
budget surplus Referring usually to the insurance claims, and investment. See lakes, rivers, fish in the open seas, open
government’s budget, it is the situation capital account. grazing land, the ozone layer and many
where government tax revenues are greater more); their depletion or degradation leads
than government expenditures over a carbon tax A tax per unit of carbon to environmental unsustainability.
specific period of time (usually a year). emissions of fossil fuels, considered by
many countries as a policy to deal with common market A type of trading bloc
business confidence A measure of the the problem of climate change. in which countries that have formed a
degree of optimism among firms in an customs union proceed further to eliminate
economy about the future performance cartel A formal agreement between firms any remaining tariffs in trade between
of firms and the economy; it is measured in an industry to undertake concerted them; they continue to have a common
on the basis of surveys of business actions to limit competition; is formed in external policy (as in a customs union), and
managers. Is an important determinant of connection with collusive oligopoly. It may in addition agree to eliminate all restrictions
the investment component of aggregate involve fixing the quantity to be produced on movements of any factors of production
demand. by each firm, or fixing the price at which within them; factors affected are mainly
output can be sold, and other actions. labour and capital, which are free to cross
business cycle Fluctuations in the The objective is to increase the monopoly all borders and move, travel and find
growth of real output, or real GDP, power of the firms in the cartel. Cartels are employment freely within all member
consisting of alternating periods of illegal in many countries. countries. The best-known common market
expansion (increasing real output) and is the European Economic Community
contraction (decreasing real output); also central bank A financial institution (EEC, the precursor of the present European
known as trade cycles. that is responsible for regulating Union).
the country’s financial system and
cap and trade scheme A scheme in commercial banks, and carrying out community surplus See social surplus.
which a government authority (of a single monetary policy.
country or a group of countries) sets a comparative advantage Arises when
limit or ‘cap’ on the amount of pollutants ceteris paribus A Latin expression that a country has a lower relative cost, or
that can be legally emitted by a firm, means ‘other things being equal’. Another opportunity cost, in the production of
set by an amount of pollution permits way of saying this is that all other things a good than another country. Forms the
(known as tradable permits) distributed are assumed to be constant or unchanging. basis of the theory of comparative advantage.
to firms; firms that want to pollute more It is used in economics theories and
than their permits allow can buy more models to isolate changes in only those competitive market A market
permits in a market, while firms that want variables that are being studied. composed of many buyers and sellers
to pollute less can sell their excess permits. acting independently, none of whom has

Glossary 541

any ability to influence the price of the consumer surplus Refers to the difference investment spending, thus reversing the
product (i.e. no market power). between the highest prices consumers are impacts of the government’s expansionary
willing to pay for a good and the price fiscal policy.
competitive supply In the case of two actually paid. In a diagram, it is shown
goods, refers to production of one or the by the area under the demand curve and current account In the balance of
other by a firm; in other words the two above the price paid by consumers. payments, this includes the balance of
goods compete with each other for the trade (recording exports minus imports
same resources (for example, if a farmer consumption Spending by households of goods) plus the balance on services
can produce wheat or corn, producing (consumers) on goods and services (recording exports of services minus imports
more of one means producing less of the (excludes spending on housing). of services), plus inflows minus outflows
other). of income and current transfers. The most
contractionary fiscal policy Refers to important part of the current account in
competition Occurs when there fiscal policy usually pursued in an inflation, most countries is the balance of trade.
are many buyers and sellers acting involving a decrease in government
independently, so that no one has the spending or an increase in taxes (or both). current account balance See balance on
ability to influence the price at which the May be contrasted with expansionary fiscal current account.
product is sold in the market. policy. See also fiscal policy.
current account deficit Occurs when
complements (complementary contractionary monetary policy Refers the current account balance has a negative
goods) Two or more goods that tend to monetary policy usually pursued in an value, meaning that debits are larger than
to be used together. If two goods are inflation, involving an increase in interest credits (there is an excess of debits).
complements, an increase in the price of rates, intended to lower investment and
one will lead to a decrease in the demand consumption spending; also known as current account surplus Occurs when
of the other. ‘tight monetary policy’. May be contrasted the current account balance has a positive
with expansionery monetary policy. See also value, meaning that credits are larger than
composite indicator A summary monetary policy. debits (there is an excess of credits).
measure of more than one indicator, often
used to measure economic development; core rate of inflation A rate of inflation current expenditures In the government
for example the Human Development Index based on a consumer price index that budget, refers to government spending
(HDI), that measures income, education excludes goods with highly volatile on day-to-day items that are recurring
and health indicators. (unstable) prices, notably food and energy (i.e. repeat themselves) and items that
prices. are used up or ‘consumed’ as a good or
concentration ratio A measure of service is provided. Include wages and
how much an industry’s production corporate indebtedness The degree salaries (for all government employees);
is concentrated among the industry’s to which corporations have debts (see spending for supplies and equipment for
largest firms; it measures the percentage indebtedness). the day-to-day operation of government
of output produced by the largest firms activities (for example, school supplies
in an industry, and is used to provide an corporate social responsibility The and medical supplies for public schools
indication of the degree of competition or practice of some corporations to avoid and public health care services); provision
degree of monopoly power in an industry. socially undesirable activities, such as of subsidies; and interest payments on
The higher the ratio, the greater the degree polluting activities, employing children, government loans.
of monopoly power. or employing workers under unhealthy
conditions; as well as undertaking socially current transfers An item in the current
concessional loan Loans that are desirable activities, such as support for account of the balance of payments, refers
offered as part of foreign aid, made on human rights and donations to charities. to inflows and outflows of funds for items
concessional terms, i.e. that they are including gifts, foreign aid, and pensions.
offered at interest rates that are lower than cost-push inflation A type of inflation
commercial rates, with longer repayment caused by a fall in aggregate supply, in customs union A type of trading bloc,
periods. turn resulting from increases in costs of consisting of a group of countries that
production (for example, wages or prices fulfil the requirements of a free trade area
conditional assistance Refers to of other inputs), shown in the AD-AS (elimination of trade barriers between
development assistance provided by model as leftward shifts of the AS curve. members) and in addition adopt a
bilateral or multilateral development common policy towards all non-member
organisations, which is extended to costs of production The total countries; members of a customs union
countries on condition that they satisfy opportunity costs incurred by firms in also act as a group in all trade negotiations
certain requirements, usually requiring order to acquire resources for use in and agreements with non-members. It
that they adopt particular policies. production; include explicit costs (for achieves a higher degree of economic
purchased resources) and implicit costs integration than a free trade area, but
constant returns to scale Refers to (for self-owned resources). lower than a common market.
the situation where the output of a firm
changes in the same proportion as all credit items In the balance of payments, cyclical unemployment A type of
its inputs; given a percentage increase refer to payments received from other unemployment that occurs during the
in all inputs, output increases by the countries, entering the balance of downturns of the business cycle, when
same percentage. May be contrasted with payments accounts with a plus sign; they the economy is in a recessionary gap; the
increasing returns to scale and decreasing represent an inflow of foreign exchange downturn is seen as arising from declining
returns to scale. into a country. or low aggregate demand, and therefore
is also known as ‘demand-deficient’
consumer confidence A measure of the cross-price elasticity of demand (XED) unemployment.
degree of optimism of consumers about A measure of the responsiveness of the
their future income and the future of demand for one good to a change in the debit items In the balance of payments,
the economy; it is measured on the basis price of another good; measured by the refer to payments made to other countries,
of surveys consumers. Is an important percentage change in the quantity of one entering the balance of payments accounts
determinant of the consumption good demanded divided by the percentage with a minus sign; they represent an
component of aggregate demand. change in the price of another good. If outflow of foreign exchange from a
XED > 0 the two goods are substitutes; if country.
consumer price index A measure of the XED < 0, the two goods are complements.
cost of living for the typical household; deciles Division of a population into
it compares the value of a basket of crowding-out Refers to the possible ten equal groups with respect to the
goods and services in one year with the impacts on real GDP of increased distribution of a variable, such as income;
value of the same basket in a base year. government spending (expansionary fiscal for example, the lowest income decile
Inflation (and deflation) are measured as policy) financed by borrowing; if increased refers to 10% of the population with the
a percentage change in the value of the government borrowing results in a higher lowest income.
basket from one year to another. rate of interest, this could reduce private

542 Glossary

decreasing returns to scale Refers to system (to be compared with devaluation, dual economy Arises when there
the situation where the output of a firm which is a decrease in currency value in are two different and opposing sets of
changes less than in proportion to a a fixed exchange rate system). (Note that circumstances that exist simultaneously,
change in all its inputs; given a percentage depreciation also refers to capital goods often found in economically less
increase in all inputs, output increases by that become worn out and are discarded.) developed countries, such as for example,
a smaller percentage. May be contrasted wealthy, highly educated groups co-
with constant returns to scale and increasing deregulation Policies involving the existing with poor, illiterate groups, a
returns to scale. elimination or reduction of government formal and informal urban sector, and a
regulation of private sector activities, low-productivity agricultural sector and a
deficit In general, this is the deficiency based on the argument that government high-productivity urban industrial sector.
of something compared with something regulation stifles competition and
else. (i) In the balance of payments, a increases inefficiency. dumping The practice of selling a good
‘deficit’ in an account occurs when the in international markets at a price that
credits (inflows of money from abroad) deterioration in the terms of trade A is below the cost of producing it (usually
are smaller than the debits (outflows of decrease in the value of the terms of trade by providing export subsidies); while it
money to other countries); for example, a index. See terms of trade. is illegal according to international trade
deficit in the balance of trade means that rules, many countries practise it anyway.
the value of exports (credits) is smaller determinants of aggregate Forms the basis of the anti-dumping
than the value of imports (debits). (ii) demand Factors that cause shifts of the argument in favour of trade protection.
In the case of the government budget, a aggregate demand curve; include factors See also anti-dumping.
‘deficit’ occurs when government revenues that influence consumption spending
are smaller than government expenditures. (C), investment spending (I), government easy monetary policy See expansionary
spending (G) and net exports (Xn). monetary policy.
deflation A continuing (or sustained)
decrease in the general price level. determinants of demand See non-price economic costs The sum of explicit costs
determinants of demand. and implicit costs, or the total opportunity
deflationary gap See recessionary gap. costs incurred by a firm for its use of
determinants of supply See non-price resources, whether purchased or self-owned.
demand Indicates the various quantities determinants of supply. When economists refer to ‘costs’ they are
of a good that consumers (or a consumer) actually referring to ‘economic costs’.
are willing and able to buy at different devaluation (of a currency) Refers to a
possible prices during a particular time decrease in the value of a currency in the economic development Broad-based rises
period, ceteris paribus (all other things context of a fixed exchange rate system (to in the standard of living and well-being of
being equal). be compared with depreciation, which is a a population, particularly in economically
decrease in currency value in the context less developed countries. It involves
demand-deficient unemployment See of a floating (or flexible) or managed increasing income levels and reducing
cyclical unemployment. exchange rate system). poverty, reducing income inequalities and
unemployment, and increasing provision of
demand curve A curve showing the development aid Foreign aid intended and access to basic goods and services such
relationship between the quantities of to help economically less development as food and shelter, sanitation, education
a good consumers (or a consumer) are countries; may involve project aid, and health care services.
willing and able to buy during a particular programme aid, technical assistance or debt
time period, and their respective prices, relief. economic efficiency A condition
ceteris paribus (all other things being equal). that arises when allocative efficiency is
direct investment In the balance of achieved. See allocative efficiency.
demand management Policies that payments, refers to inflows or outflows
focus on the demand side of the economy, of funds for the purpose of foreign direct economic growth Increases in total real
attempting to influence aggregate demand investment. See foreign direct investment. output produced by an economy (real
to achieve the goals of price stability, full GDP) over time; may also refer to increases
employment and economic growth. direct taxes Taxes paid directly to in real output (real GDP) per capita (or per
the government tax authorities by the person).
demand-pull inflation A type of taxpayer, including personal income taxes,
inflation caused by an increase in corporate income taxes and wealth taxes. economic integration Refers to
aggregate demand, shown in the AD-AS economic interdependence between
model as a rightward shift in the AD curve. diseconomies of scale Increases in the countries, usually achieved by agreement
average costs of production that occur as a between countries to reduce or eliminate
demand-side policies Policies that firm increases its output by varying all its trade and other barriers between them.
attempt to change aggregate demand inputs (i.e. in the long run). Diseconomies There are various degrees of integration,
(shift the aggregate demand curve in the of scale are responsible for the upward- depending on the type of agreement and
AD-AS model) in order to achieve the sloping part of the long-run average total the degree to which barriers between
goals of price stability, full employment cost curve: as a firm increases its size, costs countries are removed; see trading bloc, free
and economic growth, and minimise per unit of output increase. trade area, customs union, common market,
the severity of the business cycle. In the monetary union.
event of an inflationary or recessionary disinflation Refers to a fall in the rate
(deflationary) gap, they try to bring of inflation; it involves a positive rate of economic profit Is a firm’s total revenue
aggregate demand to the full employment inflation and should be contrasted with minus total economic costs (explicit plus
level of real GDP, or potential GDP. They deflation. implicit). If economic profit is positive, the
can also impact on economic growth by firm is earning supernormal (abnormal)
contributing to increases in potential GDP. disposable income The income of profit; if it is zero, the firm is earning
Consists of fiscal and monetary policies. consumers that is left over after the normal profit; if it is negative, the firm is
To be contrasted with supply-side policies. payment of income taxes. making a loss.

demerit goods Goods that are considered distribution of income Concerned with economically less developed countries
to be undesirable for consumers and are how much of an economy’s total income According to the World Bank’s classification
overprovided by the market. Reasons different individuals or different groups system, includes countries that have a
for overprovision may be that the goods in the population receive, and involves per capital GNI below a particular level
have negative externalities, or consumer answering the ‘for whom’ basic economic (which changes from year to year); some
ignorance about the harmful effects. question. common characteristics include low levels
of GDP per capita, high levels of poverty,
depreciation (of a currency) Refers to a diversification Generally refers to change large agricultural sectors and large urban
decrease in the value of a currency in the involving greater variety, and is used to informal sectors (though it is dangerous to
context of a floating (or flexible) exchange refer to increasing the variety of goods and generalise about these characteristics).
rate system or managed exchange rate services produced and/or exported by a
country; it is the opposite of specialisation. Glossary 543

economically more developed equality (though this is only one possible expenditure-switching policies Policies
countries According to the World Bank’s interpretation of equity). that involve switching consumption
classification system, includes countries away from imported goods and towards
that have a per capital GNI above a errors and omissions In the balance domestically produced goods, in order to
particular level (which changes from year of payments, refers to an item that is correct a current account deficit; include
to year); they generally have relatively included to account for possible omissions trade protection policies and depreciation.
high levels of GDP per capita, relatively and errors in items that have been
low levels of poverty, small agricultural included or excluded, in order to ensure explicit costs Costs of production that
sectors, and large industrial and services that the balance of payments balances, i.e. involve a money payment by a firm to
sectors (though it is dangerous to that the sum of credits and debits is equal an outsider in order to acquire a factor of
generalise about these characteristics). to zero. production that is not owned by the firm.
Is a type of opportunity cost; should be
economics The study of choices leading excess demand In the context of contrasted with implicit costs.
to the best possible use of scarce resources demand and supply, occurs when the
in order to best satisfy unlimited human quantity of a good demanded is greater export promotion Refers to a growth
needs and wants. than the quantity supplied, leading to a and trade strategy where a country
shortage of the good; see shortage. attempts to achieve economic growth by
economies of scale Decreases in the expanding its exports. As a trade strategy,
average costs of production that occur as excess supply In the context of demand it looks outward towards foreign markets
a firm increases its output by varying all and supply, occurs when the quantity of a and is based on stronger links between
its inputs (i.e. in the long run). Economies good demanded is smaller than the quantity the domestic and global economies. To be
of scale explain the downward-sloping supplied, leading to a surplus; see surplus. contrasted with import substitution.
portion of the long-run average total cost
curve: as a firm increases its size, the costs exchange rate The rate at which one externality Occurs when the actions
per unit of output fall. currency can be exchanged for another, or of consumers or producers give rise to
the number of units of foreign currency positive or negative side-effects on other
elasticity In general, this is a measure that correspond to the domestic currency; people who are not part of these actions,
of the responsiveness or sensitivity of a can be thought of as the ‘price’ of a and whose interests are not taken into
variable to changes in any of the variable’s currency, which is expressed in terms of consideration. Positive externalities give
determinants. See specific elasticities: price another currency. rise to positive side-effects; negative
elasticity of demand, cross-price elasticity of externalities to negative side-effects.
demand, income elasticity of demand, price excise taxes Taxes imposed on spending
elasticity of supply. on particular goods or services (for factor endowments The factors of
example, gasoline/petrol); are a type of production that a country is ‘endowed
empowerment Creation of conditions for indirect tax. See indirect taxes. with’, or possesses. Differing factor
equality of opportunities; involves increasing endowments among countries suggests that
the political, social, and economic power of excludable A characteristic of goods different countries are better suited to the
individuals or groups of individuals. according to which it is possible to exclude production of certain kinds of goods and
people from using the good by charging services than others, or, to put it differently,
entrepreneurship One of the factors a price for it; if someone is unwilling or they are more efficient in the production of
of production, involving a special unable to pay the price they will be excluded some things rather than others. Differing
human skill that includes the ability to from using it. Most goods are excludable. It factor endowments form the basis of the
innovate by developing new ways of doing is one of the two characteristics of ‘private theory of comparative advantage. (Also known
things, to take business risks and to seek goods’. See also rivalrous. as ‘resource endowments’.)
new opportunities for opening and running
a business. Entrepreneurship organises the expansionary fiscal policy Refers to factors of production All resources,
other three factors of production (land, fiscal policy usually pursued in a recession, or inputs (land, labour, capital,
labour and capital) and takes on the risks of involving an increase in government entrepreneurship) used to produce goods
success or failure of a business. spending or a decrease in taxes (or both). and services.
May be contrasted with contractionary
equilibrium A state of balance such that fiscal policy. See also fiscal policy. financial account In the balance of
there is no tendency to change. See also payments, refers to inflows minus outflows
market equilibrium and equilibrium level of expansionary monetary policy Refers of funds due to foreign direct investment,
output (or of real GDP). to monetary policy usually pursued in a portfolio investment and changes in
recession, involving a decrease in interest reserve assets.
equilibrium level of output The level rates, intended to increase investment and
of output (real GDP) where the aggregate consumption spending; also known as financial account balance See balance
demand curve intersects the aggregate supply ‘easy monetary policy’. May be contrasted on financial account.
curve (also known as the ‘equilibrium level with contractionery monetary policy. See also
of income’). Note the distinction between monetary policy. fiscal policy Manipulations by the
short-run equilibrium level of output and long- government of its own expenditures and
run equilibrium level of output. expenditure approach A method used to taxes in order to influence the level of
measure the value of aggregate output of an aggregate demand; it is a type of demand-
equilibrium level of real GDP See economy, which adds up all spending on side policy or demand management.
equilibrium level of output. final goods and services produced within
a country within a given time period. As fixed costs Costs that arise from the
equilibrium price The price determined suggested by the circular flow model, it is use of fixed inputs, which do not change
in a market when quantity demanded is equivalent to measurement by the income as output increases or decreases (hence
equal to quantity supplied, and there is no approach and the output approach. they are ‘fixed’). Fixed costs arise only in
tendency for the price to change; it is the the short run, or the period of time when
price that prevails when there is market expenditure flow In the simple circular there is at least one fixed input. Examples
equilibrium. flow of income model, it is the flow of include rental payments, property taxes
spending from households to firms to buy and insurance premiums.
equilibrium quantity The quantity that the goods and services produced by the
is bought and sold when a market is in firms; the expenditure flow is equal to the fixed exchange rate Refers to an
equilibrium, i.e. when quantity demanded income flow and the value of output flow. exchange rate that is fixed by the central
is equal to quantity supplied. bank of a country, and is not permitted to
expenditure-reducing policies Policies change in response to changes in currency
equity The condition of being fair or that involve reducing expenditures in the supply and demand. Maintaining the
just; should be contrasted with the term domestic economy so as to bring about value of a currency at its fixed rate requires
‘equality’. Often used in connection a decrease in imports in order to correct constant intervention by the central bank
with income distribution, in which case a current account deficit; they include or government.
it is usually interpreted to mean income contractionary fiscal and monetary policies.

544 Glossary

fixed exchange rate system An freely floating exchange rate An GNI per capita Gross national income
exchange rate system where exchange exchange rate determined entirely by divided by the number of people in the
rates are fixed by the central bank of each market forces, or the forces of supply population; is an indicator of the amount
country. See fixed exchange rate. and demand. There is no government of income in an economy per person in
intervention in the foreign exchange the population.
flexible labour market See labour market market to influence the value of
flexibility. the exchange rate. Also known as governance Refers to the way of
‘floating exchange rate’ or ‘flexible governing, and the exercise of power
floating exchange rate See freely floating exchange rate’. in the management of an economy’s
exchange rate. economic and social resources, in order
freely floating exchange rate system An to achieve particular objectives such as
floating exchange rate system See freely exchange rate system where exchange economic growth and development.
floating exchange rate system. rates are determined entirely by market
forces; see freely floating exchange rate. government budget A type of plan of
foreign aid Consists of concessional a country’s tax revenues and government
financial flows from the developed world frictional unemployment A type of expenditures over a period of time (usually
to economically less developed countries, unemployment that occurs when workers a year).
and includes concessional loans and grants. are between jobs; workers may leave
See also concessional loan and official their job because they have been fired, government debt See public debt.
development assistance. To be contrasted or because their employer went out of
with multilateral development assistance. business, or because they are in search of a government intervention The practice
better job, or they may be waiting to begin of government to intervene (interfere) in
foreign debt Refers to external debt, a new job; tends to be short term. markets, preventing the free functioning
meaning the total amount of debt (public of the market, usually for the purpose of
and private) incurred by borrowing from full employment (i) In the context achieving particular economic or social
foreign creditors (i.e. lenders). The global of the production possibilities model, objectives.
problem of debt involves large volumes of refers to maximum use of all resources in
public (i.e. government) debt. the economy to produce the maximum government spending Spending
quantity of goods and services that undertaken by the government, as part
foreign direct investment (FDI) Refers the economy is capable of producing of its fiscal policy or as part of an effort
to investment by firms based in one (production possibilities), implying zero to meet particular economic and social
country (the home country) in productive unemployment. (ii) In the context of the objectives (such as provision of subsidies,
activities in another country (the host AD–AS model, refers to the natural rate of provision of public goods, etc.).
country). Firms that undertake FDI are unemployment, or unemployment that
called multinational corporations. prevails when the economy is producing grant A type of foreign aid consisting of
potential output, or real GDP, determined funds that are in effect gifts (they do not
foreign exchange Refers to foreign by the position of the LRAS curve (when have to be repaid).
national currencies, i.e. for any country, it the economy is in long equilibrium). See
refers to currencies other than its own. also natural rate of unemployment). Note green GDP Gross domestic product
that in this context, ‘full employment’ (GDP) which has been adjusted to take
formal collusion An agreement between refers to employment of labour resources. into account environmental destruction
firms (usually in oligopoly) to limit and/or health consequences of
output or fix prices, in order to restrict full employment level of output (real environmental problems.
competition; is likely to involve the GDP) The level of output (or real GDP)
formation of a cartel. Also known as ‘open at which unemployment is equal to the gross domestic product (GDP) A
collusion’. natural rate of unemployment; the level measure of the value of aggregate output
of output (real GDP) where there is no of an economy, it is the market value
free entry and exit The condition in deflationary or recessionary gap. Also of all final goods and services produced
which firms face no barriers to entering or known as potential output (potential GDP). within a country during a given time
exiting an industry, characteristic of the period (usually a year); it is a commonly
market structures of perfect competition and game theory A mathematical technique used measure of the value of aggregate
monopolistic competition. analyzing the behaviour of decision- output; to be contrasted with gross national
makers who are dependent on each other, income (GNI).
free rider problem Occurs when and who use strategic behaviour as they
people can enjoy the use of a good try to anticipate the behaviour of their gross national income (GNI) A measure
without paying for it, and arises from rivals. Has become an important tool in of the total income received by the
non-excludability: people cannot be microeconomics, often used to analyse residents of a country, equal to the value
excluded from using the good, because it the behaviour of oligopolistic firms; is of all final goods and services produced
is not possible to charge a price. Is often based heavily on the work of American by the factors of production supplied by
associated with public goods, which are mathematician and economist John Nash. the country’s residents regardless of where
a type of market failure: due to the free the factors are located; GNI = GDP plus
rider problem, private firms fail to produce GDP See gross domestic product. income from abroad minus income sent
these goods. abroad. Formerly known as gross national
GDP deflator See price deflator. product (GNP); may be contrasted with
free trade The absence of government gross domestic product (GDP).
intervention of any kind in international GDP per capita Gross domestic product
trade, so that trade takes place without divided by the number of people in the gross national product (GNP) See gross
any restrictions (or barriers) between population; is an indicator of the amount national income.
individuals or firms in different countries. of domestic output per person in the
population. growth See economic growth.
free trade area A type of trading bloc,
consisting of a group of countries that Gini coefficient A summary measure of growth maximisation A possible goal
agree to eliminate trade barriers between the information contained in the Lorenz of firms, that differs from the goal of
themselves; it is the most common type curve of an economy, defined as the area profit maximisation assumed by standard
of integration area, and involves a lower between the diagonal and the Lorenz microeconomic theory, involving the
degree of economic integration than a curve, divided by the entire area under achievement of the highest possible
customs union or common market. Each the diagonal. The Gini coefficient has a growth, for various reasons such as
member country retains the right to value between 0 and 1; the larger the Gini achieving economies of scale, diversifying,
pursue its own trade policy towards non- coefficient, and the closer it is to 1, the achieving market power, or others.
member countries. An example of a free greater is the income inequality.
trade area is NAFTA (North American Free hidden unemployment Unemployment
Trade Agreement). GNI See gross national income. that is not counted in official

Glossary 545

unemployment statistics because of such abroad minus the same income factors abroad. The presence of infant industries
factors as the exclusion of ‘discouraged that are sent abroad. is considered to be one of the strongest
workers’, the practice of considering part- arguments in favour of trade protection
time workers as full-time workers, and income approach A method used to policies in developing countries.
others. measure the value of aggregate output of an
economy, which adds up all income earned inferior good A good the demand for
homogeneous product A product by the factors of production in the course which varies negatively (or indirectly)
that is completely standardised and not of producing all goods and services within a with income; this means that as income
differentiated; is characteristic of products country in a given time period. As suggested increases, the demand for the good
in perfect competition. by the circular flow model, it is equivalent decreases.
to measurement by the expenditure approach
household indebtedness The degree and the output approach. inflation A continuing (or sustained)
to which households have debts (see increase in the general price level.
indebtedness). income distribution See distribution of
income. inflation targeting A type of monetary
human capital The skills, abilities and policy carried out by some central banks
knowledge acquired by people, as well as income elastic demand Relatively high that focuses on achieving a particular
good levels of health, all of which make responsiveness of demand to changes inflation target, rather than focusing
them more productive; considered to be in income; YED (income elasticity of on the goals of low and stable rate
a kind of ‘capital’ because it provides a demand) > 1. See income elasticity of demand. of inflation and low unemployment;
stream of future benefits by increasing the common inflation targets are between
amount of output that can be produced in income elasticity of demand A measure 1.5% and 2.5%.
the future. of the responsiveness of demand to
changes in income; measured by the inflationary gap A situation where real
Human Development Index (HDI) A percentage change in quantity demanded GDP is greater than potential GDP, and
composite indicator of development divided by the percentage change in price. unemployment is lower than the natural
which includes indicators that measure rate of unemployment; it arises when the
three dimensions of development: income income flow In the simple circular flow AD curve intersects the SRAS curve at a
per capita, levels of health and educational of income model, refers to the flow of higher level of real GDP than potential
attainment; is considered to be a better income of households that they receive GDP.
indicator of development than single by selling their factors of production
indicators such as GNI per capita. (resources) to firms; the income flow is informal collusion See tacit collusion.
equal to the expenditure flow and the value
humanitarian aid Foreign aid extended of output flow. infrastructure Numerous types
in regions where there are emergencies of physical capital resulting from
caused by violent conflicts or natural income inelastic demand Relatively investments, making major contributions
disasters such as floods, earthquakes and low responsiveness of demand to changes to economic growth and development
tsunamis, intended to save lives, ensure in income; YED (income elasticity of by lowering costs of production and
access to basic necessities such as food, demand) < 1. See income elasticity of increasing productivity; include power,
water, shelter and health care, and provide demand. telecommunications, piped water supplies,
assistance with reconstruction. sanitation, roads, major dam and canal
income redistribution See redistribution works for irrigation and drainage, urban
implicit costs Costs of production of income. transport, ports and airports.
involving sacrificed income arising from
the use of self-owned resources by a firm; increasing returns to scale Refers to injections In the circular flow of income
is a type of opportunity cost; should be the situation where the output of a firm model, refer to the entry into income flow
contrasted with explicit costs. changes more than in proportion to a of funds corresponding to investment,
change in all its inputs; given a percentage government spending or exports.
import quota see quota. increase in all inputs, output increases by
a larger percentage. May be contrasted integration See economic integration.
import substitution Also known as with constant returns to scale and decreasing
import-substituting industrialisation, returns to scale. interest (i) A payment, per unit of time,
refers to a growth and trade strategy where for the use of borrowed money (borrowers
a country begins to manufacture simple indebtedness Refers to the level of debt, pay interest, lenders receive interest). (ii)
consumer goods oriented towards the or the amount of money owed to creditors A payment, per unit of time, to owners of
domestic market (such as shoes, textiles, (lenders); may be on a household, firm, or capital resources.
beverages, electrical appliances) in order country level.
to promote its domestic industry; it interest rate Interest expressed as a
presupposes the imposition of protective indirect taxes Taxes levied on spending percentage; in the case of borrowed
measures (tariffs, quotas, etc.) that will to buy goods and services, called indirect money, it is interest as a percentage of the
prevent the entry of imports that compete because, whereas payment of some amount borrowed. Changes in interest
with domestic producers. To be contrasted or all of the tax by the consumer is rates form the basis of monetary policy.
with export promotion. involved, they are paid to the government
authorities by the suppliers (firms), that is, International Monetary Fund (IMF) An
improvement in the terms of trade An indirectly. international financial institution
increase in the value of the terms of trade composed of 185 member countries,
index. See terms of trade. industrial policies Government whose purpose is to make short-term
policies designed to support the growth loans to governments on commercial
incentive-related policies Policies of the industrial sector of an economy; terms (i.e. non-concessional) in order to
involving reduction of various types of may include support for small and stabilise exchange rates, alleviate balance
taxes (such as income taxes and business medium-sized firms or support for ‘infant of payments difficulties and help countries
taxes), in the expectation that the tax cuts industries’ through tax cuts, grants, meet their foreign debt obligations.
will change the incentives faced by tax- low interest loans and other measures,
payers; for example, cuts in income taxes as well as investment in human interventionist policy Any policy
may encourage the desire to work; cuts in capital, research and development, or based on government intervention
business taxes may encourage investment. infrastructure development in support of in the market; to be contrasted with
Are a type of supply-side policy. industry. market-oriented policy. See also government
intervention.
incidence of taxes See tax incidence. infant industry A new domestic industry
that has not had time to establish itself interventionist supply-side policy Any
income In the current account of the and achieve efficiencies in production, policy based on government intervention
balance of payments, refers to inflows of and may therefore be unable to compete in the market intended to affect the
wages, rents, interest and profits earned with more ‘mature’ competitor firms from supply-side of the economy, usually to
shift the LRAS curve to the right, increase
546 Glossary

potential output and achieve long term abolishing or reducing minimum wages, long-run average total cost curve A
economic growth; see industrial policy as an reducing job security and reducing curve that shows the lowest possible
example. May be contrasted with market- unemployment benefits. Are a type of average cost that can be attained by a firm
based supply side policy. supply-side policy. for any level of output when all of the
firm’s inputs are variable.
investment Includes spending by firms labour market rigidities Factors
or the government on capital goods (i.e. preventing the forces of supply and long-run equilibrium level of
buildings, machinery, equipment, etc.) demand from operating in the labour output The level of output (real GDP)
and all spending on new construction market, and therefore preventing labour that results when the economy is in long
(housing and other buildings). market flexibility; include minimum wage run equilibrium, occurring when the
legislation, job security, etc. See labour aggregate demand and short-run aggregate
J-curve effect A curve that plots market reforms. supply curves intersect at a point on the
the balance of trade (exports minus long run aggregate supply curve; occurs
imports) on the vertical axis and time land A factor of production which where the vertical LRAS curve intersects the
on the horizontal axis, showing that a includes all natural resources: land and horizontal axis, known as potential output.
country with a devaluing/depreciating agricultural land, as well as everything
currency may see a worsening in its trade that is under or above the land, such as long-run Phillips curve See Phillips
balance (an increase in a trade deficit) minerals, oil reserves, underground water, curve.
in the period immediately following the forests, rivers and lakes. Natural resources
devaluation or depreciation, while in a are also called ‘gifts of nature’ or ‘natural long term growth trend In the business
later period the trade deficit will begin capital’. cycle diagram, refers to the line that
to shrink provided the Marshall–Lerner runs through the business cycle curve,
condition holds (see Marshall–Lerner law of demand A law stating that there representing average growth over long
condition). is a negative causal relationship between periods of time; shows how output grows
the price of a good and quantity of the over time when cyclical fluctuations are
joint supply Refers to production of good demanded, over a particular time ironed out. The output represented by
two or more goods that are derived from a period, ceteris paribus: as the price of the the long-term growth trend is known as
single product, so that it is not possible to good increases, the quantity of the good potential output.
produce more of one without producing demanded falls (and vice versa).
more of the other (for example, butter and Lorenz curve A curve illustrating the
skimmed milk are both produced from law of diminishing returns A law degree of equality (or inequality) of
whole milk, and producing more of one that states that as more and more units income distribution in an economy. It
means producing more of the other as of a variable input (such as labour) are plots the cumulative percentage of income
well). added to one or more fixed inputs (such received by cumulative shares of the
as land), the marginal product of the population. Perfect income equality would
Keynesian aggregate supply curve An variable input at first increases, but there be represented by a straight line. The
aggregate supply curve that has a flat comes a point when the marginal product closer the Lorenz curve is to the straight
(horizontal) section, and upward sloping of the variable input begins to decrease. line, the greater the equality in income
section and a vertical section. This relationship presupposes that the distribution.
fixed input(s) remain fixed, and that the
Keynesian multiplier The ratio technology of production is also fixed loss Refers to the difference between
of real GDP divided by a change in (unchanging). economic costs and total revenue of a firm
any of the components of aggregate when economic costs are greater than
spending (consumption C, investment I, law of supply A law stating that there revenues; it is negative economic profit.
government spending G, or net exports is a positive causal relationship between See economic profit.
X − M); alternatively it is 1/(1-MPC), the price of a good and quantity of the
where MPC is the marginal propensity to good supplied, over a particular time luxuries Goods that are not necessary
consume. The value of this ratio is usually period, ceteris paribus: as the price of the or essential; they have a price elastic
greater than one because of a multiplied good increases, the quantity of the good demand (PED>1) and income elastic demand
effect of an initial change in a component supplied also increases (and vice versa). (YED>1). To be contrasted with necessities.
of aggregate spending on the final value of
real output. leakages In the circular flow of income macroeconomic objectives Objectives
model, refer to the withdrawal from the of policy makers in the macroeconomy;
kinked demand curve A model income flow of funds corresponding to include full employment, low rate of
developed to explain price inflexibility of savings, taxes or imports; also known as inflation, economic growth, an equitable
oligopolistic firms that do not collude (do ‘withdrawals’. distribution of income and external
not agree to collaborate in order to limit balance (balance of trade and avoidance of
competition between them). long run (i) In microeconomics, it is a balance of payments problems).
time period in which all inputs can be
labour A factor of production, which changed; there are no fixed inputs. macroeconomics The branch of
includes the physical and mental effort (ii) In macroeconomics, it is the period of economics that examines the economy
that people contribute to the production time when prices of resources (especially as a whole by use of aggregates, which
of goods and services. wages) change along with changes in the are wholes or collections of many
price level. individual units, such as the sum of
labour market flexibility Refers to consumer behaviours and the sum of
the operation of market forces (supply long-run aggregate supply (LRAS) firm behaviours, total income and output
and demand) in the labour market; curve A curve showing the relationship of the entire economy as well as total
to be contrasted with labour market between real GDP produced and the price employment and the general price level.
rigidities. May be achieved by reducing level when wages (and other resource
or eliminating interference with prices) change to reflect changes in the managed exchange rates Exchange rates
market forces (for example, reducing or price level, ceteris paribus. The LRAS curve that are for the most part free to float to
eliminating minimum wages and labour is vertical at the full employment level their market levels (i.e. their equilibrium
union activities, reducing job security, of GDP, or potential GDP, indicating that levels) over long periods of time; however,
etc.); see labour market reforms. in the long run the economy produces central banks periodically intervene in
potential GDP, which is independent of order to stabilise them over the short term.
labour market reforms Reforms the price level.
intended to make labour markets more managed exchange rate system The
competitive and flexible, to make long run average total costs The lowest exchange rate system in use since 1973,
wages respond to the forces of supply possible average costs that can be attained also known as the ‘managed float’; see
and demand, to lower labour costs and by a firm for any level of output when all managed exchange rates.
increase employment by lowering the the firm’s inputs are variable, i.e. in the
natural rate of unemployment; include long run. managed float See managed exchange
rates.

Glossary 547

marginal benefit The extra or additional where too much or too little of goods microeconomics The branch of
benefit received from consuming one or services are produced and consumed economics that examines the behaviour
more unit of a good. from the point of view of what is socially of individual decision-making units,
most desirable. consumers and firms; is concerned with
marginal cost The extra or additional consumer and firm behaviour and how
cost of producing one more unit of output. market power Refers to the control that their interactions in markets determine
a seller may have over the price of the prices in goods markets and resource
marginal private benefits (MPB) The product it sells; the greater the market markets.
extra benefit received by consumers power, the greater is the seller’s control
when they consume one more unit of a over price. Also known as ‘monopoly Millennium Development Goals
good. power’. (MDGs) Eight development goals
adopted by the Millennium Declaration
marginal private costs (MPC) The extra market structure The characteristics of of 2000, consisting of 18 targets to be
costs to producers of producing one more a market organisation that determine the achieved by the year 2015; among the
unit of a good. behaviour of firms within an industry. eight goals, four include eradicating
extreme poverty and hunger, achieving
marginal product The extra or market supply Refers to the sum of universal primary education, reducing
additional output that results from one all individual firm supplies of a good or child mortality, promoting gender
additional unit of a variable input (such service. equality.
as labour).
market-based supply-side policy Any minimum price A legal price set by the
marginal propensity to consume policy based on promoting well- government which is above the market
(MPC) The fraction of additional income functioning, competitive markets in equilibrium price; this does not allow
spent on domestically produced goods order to influence the supply-side the price to fall to its equilibrium level
and services. Determines the size of the of the economy, usually to shift the determined by a free market; also known
Keynesian multiplier; the larger the MPC, LRAS curve to the right, increase as a price floor.
the larger the multiplier. potential output and achieve long
term economic growth; include labour minimum wage A minimum price of
marginal propensity to import market reforms, competition policies labour (the ‘wage’) set by governments
(MPI) The fraction of additional income and incentive-related policies. May be in the labour market, in order to ensure
spent on imports. The larger the MPI, the contrasted with interventionist supply side that low-skilled workers can earn a wage
smaller the Keynesian multiplier. policy. high enough to secure them with access
to basic goods and services. It is a type of
marginal propensity to save (MPS) The market-oriented policy A policy price floor.
fraction of additional income that is in which government intervention is
saved. The larger the MPS, the smaller the limited, economic decisions are made monetarist/new classical
Keynesian multiplier. mainly by the private decision-makers model Actually includes two different
(firms and consumers) and the market models of the macroeconomy (the
marginal propensity to tax (MPT) The has significant freedom to determine monetarist and the new classical); both
fraction of additional income that is paid resource allocation; to be contrasted with are based on the following principles:
as taxes. The larger the MPT, the smaller interventionist policy. the importance of the price mechanism
the Keynesian multiplier. in coordinating economic activities,
Marshall–Lerner condition A condition the concept of competitive market
marginal revenue The additional stating when depreciation or devaluation equilibrium, and thinking about the
revenue arising from the sale of an of a country’s currency will lead to an economy as a harmonious system
additional unit of output. improvement in that country’s balance that automatically tends toward full
of trade: the sum of the price elasticities employment.
marginal social benefits (MSB) The of demand for imports and exports must
extra benefits to society of consuming one be greater than 1 for the trade balance monetary policy Policy carried out
more unit of a good; are equal to marginal to improve (for a trade deficit to become by the central bank, aiming to change
private benefits (MPB) when there are no smaller). This usually holds over the interest rates in order to influence
consumption externalities. longer term, but not in the shorter term aggregate demand; it is a type of demand-
(see J-curve). side policy, or demand management.
marginal social costs (MSC) The extra
costs to society of producing one more maximum price A legal price set by the monetary union A high form of
unit of a good; are equal to marginal government, which is below the market economic integration, involving the
private costs (MPC) when there are no equilibrium price; this does not allow adoption by a group of countries of a
production externalities. the price to rise to its equilibrium level single currency, such as some of the
determined by a free market; also known countries of the European Union (‘euro
marginal tax rate The tax rate paid on as a price ceiling. zone’ countries) that have adopted the
additional income; refers to the tax rate euro. Monetary integration in addition
that applies to the highest tax bracket of merit goods Goods that are held to involves the adoption of a common
an individual’s personal income. be desirable for consumers, but which monetary policy carried out by a single
are underprovided by the market. central bank, which is necessitated by the
market Any kind of arrangement where Reasons for underprovision may be that use of a single currency.
buyers and sellers of a particular good, the good has positive externalities, or
service or resource are linked together to consumers with low incomes cannot money Anything that is acceptable as
carry out an exchange. afford it (and so do not demand it), or payment for goods and services; more
consumer ignorance about the benefits of precisely, money consists of currency
market demand Refers to the sum of all the good. (coins and paper money) and checking
individual consumer demands for a good accounts.
or service. micro-credit A programme to provide
credit (loans) in small amounts to people monopolistic competition One of
market equilibrium Occurs where who do not ordinarily have access to the four market structures, with the
quantity demanded is equal to quantity credit. ‘Micro’ is the Greek word for following characteristics: a large number
supplied, and there is no tendency for the ‘small’, and refers to the small amounts of of firms; substantial control over market
price or quantity to change. the loans, the very small size of businesses price; product differentiation; no
or activities that are financed by the barriers to entry. Examples include the
market failure Occurs when the loans (very small businesses are known shoe, clothing, detergent, computer,
market fails to allocate resources as ‘micro-enterprises’) and the short publishing, furniture and restaurant
efficiently, or to provide the quantity repayment periods involved. industries.
and combination of goods and services
mostly wanted by society. Market
failure results in allocative inefficiency,

548 Glossary

monopoly One of the four market natural rate of unemployment activities, including emergency assistance,
structures, with the following Unemployment that occurs when the promotion of sustainable development,
characteristics: a single or dominant economy is producing at its potential poverty alleviation, protection of child
large firm in the industry; significant or full employment level of output health, provision of technical assistance,
control over price; produces and sells a (real GDP), and is equal to the sum and many more.
unique product with no close substitutes; of structural, frictional plus seasonal
high barriers to entry into the industry. unemployment. non-price competition Occurs when
Examples include telephone, water and firms compete with each other on the
electricity companies in areas where they necessities Goods that are necessary or basis of methods other than price (such
operate as a single supplier. essential: they have a price inelastic demand as product differentiation, advertising
(PED<1) and income inelastic demand and branding). Non-price competition
monopoly power Occurs whenever a (YED<1). To be contrasted with luxuries. occurs in oligopoly and monopolistic
firm has the ability to control the price of competition.
the product it sells (also known as ‘market negative causal relationship A
power’). relationship between two variables in non-price determinants of demand The
which an increase in the value of one variables (other than price) that can
multilateral development assistance causes a decrease in the value of the other, influence demand, and that determine the
Lending to developing countries for the i.e. the two variables change in opposite position of a demand curve; a change in
purpose of assisting their development directions; also known as an indirect any determinant of demand causes a shift
on non-concessional terms (market rates relationship. of the demand curve, which is referred to
of interest and repayment periods) by as a ‘change in demand’.
multilateral organisations, i.e. organisations negative externality A type of
composed of many countries, including externality where the side-effects on non-price determinants of supply The
development banks such as the World third parties are negative or harmful, also variables (other than price) that can
Bank, and the International Monetary known as ‘spillover costs’. To be contrasted influence supply, and that determine the
Fund; to be contrasted with foreign aid. with positive externality; see also externality. position of a supply curve; a change in
any determinant of supply causes a shift of
multilateral trade agreement A negative externality of consumption A the supply curve, which is referred to as a
trade agreement (or agreement to lower negative externality caused by ‘change in supply’.
international trade barriers) between many consumption activities, leading to a
countries; at the present time these are situation where marginal social benefits non-price rationing The apportioning
mainly carried out within the framework are less than marginal private benefits or distributing of goods among interested
of the World Trade Organization (WTO), and (MSB < MPB); see also externality and users/buyers through means other than
involve agreements between WTO member negative externality. price, often necessary when there are price
countries. May be contrasted with bilateral ceilings (maximum prices); may include
trade agreement and regional trade agreement. negative externality of production A waiting in line (queues) and underground
negative externality caused by production markets; to be contrasted with ‘price
multinational corporation (MNC) A activities, leading to a situation where rationing’, which involves distributing
firm involved in foreign direct investment marginal social costs are greater than goods among users by means of market-
(FDI); it is a firm that is based in one marginal private costs (MSC > MPC); see determined prices.
country (the home country) and that also externality and negative externality.
undertakes productive investments in non-produced, non-financial assets A
another country (the host country). net exports Refers to the value of exports part of the capital account of the balance
minus the value of imports. of payments, which includes a variety
multiplier See Keynesian multiplier. of items such as mineral rights, forestry
nominal GDP Gross domestic product rights, fishing rights and airspace.
national income The total income of an measured in terms of current (or nominal)
economy, often used interchangeably with prices, which are prices prevailing at the non-rivalrous A characteristic of some
the value of aggregate output, particularly time of measurement. Does not account goods where the consumption of the
in the context of macroeconomic models for changes in the price level; to be good by one person does not reduce
(such as the AD-AS model). distinguished from real GDP. consumption by someone else; it is one of
the two characteristics of public goods (to
national income statistics Statistical nominal value Value that is in money be contrasted with rivalrous). See also non-
data used to measure an economy’s terms, measured in terms of prices that excludable.
national income and output as well as prevail at the time of measurement, and
other measures of economic performance. that does not account for changes in the normal good A good the demand
price level; to be distinguished from real for which varies positively (or directly)
nationalisation A transfer in ownership values. with income; this means that as income
of a firm away from the private sector increases, demand for the good increases.
and toward government ownership; a non-collusive oligopoly A type of
nationalised firm is a government-owned oligopoly where firms do not make normal profit The minimum amount
firm. agreements among themselves (i.e. do of revenue that a firm must receive
not collude) in order to fix prices or so that it keeps the business running
natural capital Refers to an expanded collaborate in some way. See the kinked (as opposed to shutting down); also
meaning of the factor of production land, demand curve, one of the better-known defined as the amount of revenue
including everything that is included in models of non-collusive oligopoly. needed to cover implicit costs, including
land plus additional natural resources entrepreneurship. (This presupposes that
occurring naturally in the environment non-excludable A characteristic of some total revenue is also enough to cover
such as the air, biodiversity, soil quality, goods where it is not possible to exclude explicit costs.) Normal profit is included
the ozone layer and the global climate. Is someone from using a good, because it is among the economic costs of the firm,
considered to be a type of ‘capital’ because not possible to charge a price; it is one of and is earned when economic profit is
it provides a stream of future benefits as the two characteristics of public goods (to zero.
it is necessary for humankind’s ability to be contrasted with excludable). See also
live, survive and produce in the future. non-rivalrous. normative economics The body of
economics based on normative statements,
natural monopoly A single firm (a non-governmental organisations which involve beliefs, or value judgements
monopoly) that can produce for the entire (NGOs) Non-profit organisations that about what ought to be. Normative
market at a lower average cost than two provide a very wide range of services and statements cannot be true or false; they
or more smaller firms. This happens when humanitarian functions; in developing can only be assessed relative to beliefs and
the market demand for the monopolist’s countries they provide foreign aid, value judgements. Normative economics
product is within the range of falling all of which takes the form of grants forms the basis of economic policies; to be
long-run average cost, where there are (there are no loans involved). They are contrasted with positive economics.
economies of scale. involved with an enormous range of
Glossary 549

Official Development Assistance perfectly elastic supply Refers to a price positive externality A type of externality
(ODA) The most important part of elasticity of supply value of infinity, and where the side-effects on third parties
foreign aid, referring to foreign aid that is arises in the case of a horizontal supply are positive or beneficial, also known as
offered by countries or by international curve; see price elasticity of supply. ‘spillover benefits’; to be contrasted with
organisations composed of a number of negative externality; see also externality.
countries (it does not include aid offered perfectly inelastic demand Refers to a
by non-governmental organisations). price elasticity of demand value of zero, positive externality of consumption A
and arises in the case of a vertical demand positive externality caused by consumption
oligopoly One of the four market curve; see price elasticity of demand. activities, leading to a situation where
structures, with the following marginal social benefits are greater than
characteristics: small number of large perfectly inelastic supply Refers to a marginal private benefits (MSB > MPB); see
firms in the industry; firms have price elasticity of supply value of zero, and also externality and positive externality.
significant control over price; firms arises in the case of a vertical supply curve;
are interdependent; products may be see price elasticity of supply. positive externality of production A
differentiated or homogeneous; there are positive externality caused by production
high barriers to entry. Examples include personal income taxes Taxes paid by activities, leading to a situation where
the car industry, airlines, electrical households or individuals in households marginal social costs are less than
appliances (differentiated products) and on all forms of income, including wages, marginal private costs (MSC< MPC); see
the steel, aluminium, copper, cement rental income, interest income, and also externality and positive externality.
industries (homogeneous products). dividends (income from ownership
of shares in a company); is the most potential output (potential GDP) The
open collusion See formal collusion. important source of government tax level of output (real GDP) that can be
revenues in many countries (especially produced when there is ‘full employment’,
open economy An economy that economically more developed countries). meaning that unemployment is equal to
has international trade: (imports and the natural rate of unemployment; also
exports) usually appears in connection Phillips curve A curve showing the known as the full employment level of output.
with economic theories and models relationship between unemployment and
as virtually all economies in the real inflation. The short-run Phillips curve poverty The inability of an individual
world are open economies (though to shows a negative relationship between the or family to afford an adequate standard
varying degrees). To be contrasted with rate of inflation and the unemployment of goods and services; this standard may
closed economy. rate (as the rate of inflation increases, be absolute or relative; see absolute poverty
unemployment falls) suggesting that in and relative poverty.
opportunity cost The value of the next the short run policy-makers can choose
best alternative that must be given up or between the competing alternatives of poverty cycle Arises when low incomes
sacrificed in order to obtain something low inflation or low unemployment result in low (or zero) savings, permitting
else. by selecting appropriate demand-side only low (or zero) investments in physical,
policies. The long-run Phillips curve human and natural capital, and therefore
output approach A method used to is a vertical line at the natural rate of low productivity of labour and of land,
measure the value of aggregate output of unemployment, indicating that there is which in turn gives rise to low, if any,
an economy, which calculates the value no negative relationship between inflation growth in income (sometimes growth
of all final goods and services produced in and unemployment, and suggesting may be negative), and hence low incomes
the country within a given time period. that policy-makers do not have a choice once again. A poverty cycle may occur
As suggested by the circular flow model, between the two competing alternatives. in a family, a community, a part of an
it is equivalent to measurement by the In the long run, the only impact of economy, or in an economy as a whole.
expenditure approach and the income an increase in aggregate demand is to An important feature of the poverty
approach. increase the rate of inflation, while the cycle is that poverty is transmitted from
level of real output is unaffected and the generation to generation.
overallocation of resources Occurs unemployment rate remains unchanged at
when too many resources are allocated to the natural rate of unemployment. poverty trap See poverty cycle.
the production of a good relative to what
is socially most desirable, resulting in its physical capital One of the factors of preferential trade agreement An
overproduction. production, which is itself produced (it agreement between two or more countries
doesn’t occur naturally), used to produce to lower trade barriers between them on
overvalued currency A currency whose goods and services; includes machinery, particular products, resulting in easier
value is higher than its free-market value; tools, factories, buildings, road systems, access to the markets of other members for
may occur if the exchange rate is fixed airports, telephone supply lines, etc. Also the selected products, compared with the
(or pegged), or in a managed exchange referred to as ‘capital’, or ‘capital good’ or access of countries that are not members.
rate system, but not in a freely floating ‘investment good’.
exchange rate system. To be contrasted price ceiling A maximum price set by
with undervalued currency. portfolio investment Financial the government for a particular good,
investment, including investment in meaning that the price that can be legally
parallel market See underground stocks and bonds. Appears as an item in charged by the sellers of the good cannot
market. the financial account of the balance of be higher than the legal maximum price.
payments. Results in a shortage of the product.
per capita Per person, or per head. For
example, GDP per capita is total GDP positive causal relationship A price competition Occurs when a firm
divided by the number of people in the relationship between two variables in lowers its price to attract customers away
population. which an increase in the value of one from rival firms, thus increasing sales at
causes an increase in the value of the the expense of other firms. May occur in
perfect competition One of the four other, i.e. the two variables change in the the case of monopolistic competition or
market structures, with the following same direction; also known as a direct oligopoly, but not in perfect competition
characteristics: a large number of small relationship. (or monopoly).
firms; no control over price; all firms sell
a homogeneous product; no barriers to positive economics The body of price control Setting of minimum or
entry, perfect information and perfect economics based on positive statements, maximum prices by the government (or
resource mobility. Examples include which are about things that are, were or private organisations) so that prices are
agricultural commodity markets and the will be. Positive statements may be true unable to adjust to their equilibrium level
foreign exchange market. or false. They form the basis of theories determined by demand and supply. Price
and models that try to explain economic controls result in shortages or surpluses.
perfectly elastic demand Refers to a events. To be contrasted with normative
price elasticity of demand value of infinity, economics. price deflator A price index used to
and arises in the case of a horizontal calculate real GDP from nominal GDP;
demand curve; see price elasticity of demand. better known as the ‘GDP deflator’.

550 Glossary

price discrimination The practice of tries to capture market shares from rival is full employment of resources and
charging a different price for the same firms; results in lower profits for firms. productive efficiency.
product when the price difference is not
justified by differences in costs of production. prices as incentives The ability of production possibilities curve (PPC) A
prices, and changes in prices, to convey curve showing production possibilities.
price elastic demand Relatively high information to consumers and producers
responsiveness of demand to changes in that motivates them to respond by production possibilities frontier
price; PED (price elasticity of demand) > 1. offering them incentives to behave in (PPF) See production possibilities curve.
See price elasticity of demand. their best-self-interest; compare with prices
as signals, which together with prices as productive efficiency Occurs when
price elastic supply Relatively high incentives lead to an efficient allocation of firms produce at the lowest possible cost;
responsiveness of supply to changes in resources (assuming no market failures). is one of the conditions for producing on
price; PES (price elasticity of supply) > 1. the production possibilities curve (PPC).
See price elasticity of supply. prices as signals The ability of prices, The condition for productive efficiency is
and changes in prices, to communicate that production takes place where ATC is
price elasticity of demand (PED) A information to consumers and producers, minimum.
measure of the responsiveness of the quantity on the basis of which they make economic
of a good demanded to changes in its price, decisions. productivity Refers to the quantity of
given by the percentage change in quantity output produced for each hour of work of
demanded divided by the percentage primary commodity Any product that the working population; for an economy
change in price. In general, if there is a large is produced in the primary sector, which as a whole it can be measured as real GDP
responsiveness of quantity demanded (PED includes agriculture, forestry, fishing and divided by the total number of hours
> 1), demand is referred to as being elastic; the extractive industries; also known as worked. Increases in productivity are a
if there is a small responsiveness (PED < 1), ‘commodity’. major factor leading to economic growth.
demand is inelastic.
primary products All products produced profit A payment, per unit of time, to
price elasticity of supply (PES) A in the primary sector of an economy; also owners of entrepreneurship/management
measure of the responsiveness of the known as commodities; see primary sector. (a factor of production). See economic profit
quantity of a good supplied to changes in and normal profit.
its price, given by the percentage change primary sector A part of an economy
in quantity supplied divided by the that is dominated by agriculture, also profit maximisation The goal of firms,
percentage change in price. In general, if including fishing, forestry and all according to the standard theory of the firm.
there is a large responsiveness of quantity extractive activities (such as mining). It involves making profit as large as possible,
supplied (PES > 1), supply is referred and is achieved by producing the level of
to as being elastic; if there is a small prisoner’s dilemma A problem in game output where the difference between total
responsiveness (PES < 1), supply is inelastic. theory showing that in some situations, revenue and total costs is the largest, or where
although it is in the best interests of marginal cost is equal to marginal revenue.
price floor A minimum price set by decision-makers to co-operate, when each
the government for a particular good, actor acts in his/her best interests there programme aid Foreign aid involving
meaning that the price that can be legally results an outcome where they are all worse financial support to sectors, such as education,
charged by the sellers of the good cannot off. Is often used to illustrate the strategic health care, agriculture, urban development,
be lower than the legal minimum price. interdependence of oligopolistic firms. the financial sector (credit, banking,
Results in a surplus of the product. insurance), the environment, or others.
private good A good that is both
price inelastic demand Relatively low rivalrous and excludable. To be contrasted progressive taxation Taxation where,
responsiveness of demand to changes in with public good. as income increases, the fraction of
price; PED (price elasticity of demand) < 1. income paid as taxes increases; there is an
See price elasticity of demand. privatisation A transfer of ownership increasing tax rate.
from the public sector (the government) to
price inelastic supply Relatively low the private sector, i.e. private owners. project aid Foreign aid involving support
responsiveness of supply to changes in for specific projects, such as building
price; PES (price elasticity of supply) < 1. producer price index (PPI) Consists schools, clinics, hospitals, irrigation systems,
See price elasticity supply. of several indices of prices received by other agricultural infrastructure, or others.
producers of goods at various stages in the
price leadership A type of tacit (or production process (such as a PPI for inputs, proportional taxation Taxation where,
informal) collusion among oligopolistic a PPI for intermediate goods, and a PPI for as income increases, the fraction of
firms, where a dominant firm in the final goods); considered to be predictors of income paid as taxes remains constant;
industry (which may be the largest, or the changes in the consumer price index (CPI) there is a constant tax rate.
one with lowest costs) sets a price and also because they measure price changes at an
initiates any price changes; the remaining earlier stage in the production process. protection of trade See trade protection.
firms in the industry become price-takers,
accepting the price that has been established producer surplus Refers to the difference public debt Refers to the government’s
by the leader. Under price leadership price between the price received by firms for accumulation of budget deficits minus
changes tend to be infrequent, and are selling their good and the lowest price budget surpluses; is the total amount
undertaken by the leader only when major they are willing to accept to produce the owed by the government to all creditors
demand or cost changes occur. good. In a diagram, it is shown as the area (lenders); also known as ‘government debt’.
under the price received by producers and
price support Minimum prices (or above the supply curve. public good A good that is non-rivalrous
price floors) set by the government (its consumption by one person does not
for agricultural products; see minimum price. product differentiation Occurs when reduce consumption by someone else) and
each firm in an industry tries to make non-excludable (it is not possible to exclude
price taker A firm that accepts a price at its product different from those of its someone from using the good). Since it is
which it sells its product. Usually refers to competitors; usually in order to create not possible to exclude someone from using
firms in perfect competition, which being some monopoly power; products can be the good even though they do not pay for it,
small and numerous have no control differentiated by physical differences, firms do not have an incentive to produce it.
over price, and therefore accept the price quality differences, location, services, and Public goods are therefore provided by the
determined in the market; may also be product image. government. This is a type of market failure.
used to refer to firms in oligopoly that
practice tacit collusion and accept a price production possibilities All possible purchasing power parity (PPP) exchange
set by a price leader (see price leadership). combinations of the maximum amounts rates Special exchange rates between
of two goods that can produced by an currencies that makes the buying power of
price war Competitive price-cutting by economy, given fixed and unchanging each currency equal to the buying power
firms; usually in oligopoly. As each one resources and technology, when there of US$1, and therefore equal to each other.
The use of PPP exchange rates to convert
GDP (or GNI or any other output or
income variable) eliminates the influence

Glossary 551

of price level differences across countries taken to be a particular percentage (often short run (i) In microeconomics, it is a
and is very important for making cross- 50%) of society’s median income. As time period during which at least one input
country comparisons. incomes increase and the median income is fixed and cannot be changed by the firm.
rises, the standard also rises. (ii) In macroeconomics, it is the period of
quintiles Division of a population into time during which the prices of resources,
five equal groups with respect to the rent A payment, per unit of time, to particularly the price of labour (wages) do
distribution of a variable, such as income; owners of land resources who supply their not change (they are constant).
for example, the lowest income quintile land to the production process.
refers to 20% of the population with the short-run aggregate supply (SRAS)
lowest income. reserve assets Refers to foreign currency curve A curve showing the relationship
reserves that the central bank maintains between the price level and the quantity
quota A type of trade protection that and can buy or sell to influence the value of real GDP produced by firms when
involves setting a legal limit to the of the country’s currency exchange rate; resource prices do not change.
quantity of a good that can be imported in the balance of payments appears as an
over a particular time period (typically item in the financial account. Also known short-run equilibrium level of
a year). (More generally, a ‘quota’ is a as ‘official reserves’. output In the monetarist/new classical
limited or fixed number of things.) model, it is the level of output (real
resources Factors of production, used by GDP) determined by the intersection
rate of interest See interest rate. firms as inputs in the production process; of the aggregate demand and short run
see factors of production. aggregate supply curves; in the Keynesian
rational economic decision- model, it is the level of output determined
making The assumption in economics resource allocation Assigning available by the intersection of the aggregate
that all economic decision-makers resources, or factors or production, to demand and Keynesian aggregate supply
act in their best self-interest, trying to specific uses chosen among many possible curves. In both models, equilibrium may
maximise the satisfaction or benefit they and competing alternatives; involves occur where there is (i) a recessionary
receive from their economic decisions; answering the ‘what to produce’ and ‘how (deflationary) gap, (ii) an inflationary gap,
for example consumers try to maximise to produce’ basic economic questions. or (iii) full employment output.
the satisfaction of consumption, firms
maximise profit, workers try to secure the returns to scale Refers to the short-run Phillips curve See Phillips
highest wage possible, etc. relationship between inputs and output, curve.
and in particular by how much output
real GDP Gross domestic product (GDP) changes if all inputs change (increase or shortage In the context of demand and
measured in constant prices, i.e. prices decrease) by the same proportion; see supply, is the amount by which quantity
that prevail in one particular year, called constant, increasing and decreasing returns demanded is greater than quantity
a ‘base year’; this is useful for making to scale. supplied.
comparisons of changes in GDP over time
that have taken into account the influence revaluation (of a currency) Refers to an shut-down price The price at which
of changing prices. increase in the value of a currency in the
context of a fixed exchange rate system a firm that is making losses and will
real value Value that has eliminated the (compare with appreciation, which is an
influence of changes in the price level. increase in currency value in the contest stop producing in the short run. In
of a floating or managed exchange rate
reallocation of resources Refers to system). perfect competition, it is given by price =
reassigning resources to particular uses, so
that the allocation of resources changes revenue maximisation The objective minimum average variable cost. (If price is
and becomes a new allocation. of some firms to maximise revenue
(rather than profit, as assumed by the greater than average variable cost, the firm
recession An economic contraction, standard theory of the firm). The revenue-
where there is falling real GDP (negative maximising firm produces the level of will go on producing in the short run even
growth) and increasing unemployment of output where its marginal revenue is equal
resources which last six months or more. to zero (as that is where total revenue is if it is making a loss.)
maximum).
recessionary gap A situation where slope In the case of a straight line, refers
real GDP is less than potential GDP, and rivalrous A characteristic of a good to the change in the dependent variable
unemployment is greater than the natural according to which its consumption by divided by the change in the independent
rate of unemployment; it arises when the one person reduces its availability for variable between any two points on
AD curve intersects the SRAS curve at a someone else; most goods are rivalrous. It the line. According to mathematical
lower level of real GDP than potential is one of the two characteristics of ‘private convention, where the dependent
GDP. Also known as ‘deflationary gap’. goods’. See also excludable. variable is plotted on the vertical axis,
the slope is the ‘rise over run’ (i.e. the
redistribution of income Refers to satisficing A goal of firms to achieve vertical change divided by the horizontal
changing the distribution of income, satisfactory results, rather than pursue a change), however in microeconomics
giving rise to a new distribution. single maximising objective, such as to where quantity, the dependent variable, is
maximise profits or revenues; based on the plotted on the horizontal axis, the slope is
regional trade agreement A trade argument that large, modern firms have the ‘run over rise’ (the horizontal change
agreement (or agreement to lower numerous objectives which may partly divided by the vertical change).
international trade barriers) between overlap or conflict, thus forcing them to
several countries that are located within compromise and reconcile conflicts, rather social optimum Refers to a situation
a geographical region (such as NAFTA, or than pursue optimal results. that is the best from the social point of
North American Free Trade Agreement). view, determined by the achievement
May be contrasted with bilateral trade scarcity The condition in which of allocative efficiency (or economic
agreement and multilateral trade agreement. available resources (land, labour, capital, efficiency); occurs when marginal social
entrepreneurship) are limited; they are not benefits are equal to marginal social costs
regressive taxation Taxation where, enough to produce everything that human (MSB=MSC).
as income increases, the fraction of beings need and want.
income paid as taxes decreases; there is a social safety net A system of
decreasing tax rate. seasonal unemployment A type of government transfers of cash or goods to
unemployment that occurs when the vulnerable groups, undertaken to ensure
relative poverty The inability of demand for labour in certain industries that these groups do not fall below a
an individual or a family to afford an changes on a seasonal basis because of socially acceptable minimum standard of
adequate standard of goods and services, variations in needs; for example, farm living; see also transfer payments.
where the adequate standard is relative workers are hired during peak harvesting
and changes over time; this standard is seasons and let off for the rest of the year. social sciences Academic disciplines
defined as what is ‘typical’ in a society, that study human society and social
relationships, concerned with discovering
552 Glossary general principles describing how societies
function and are organised; include
anthropology, economics, political
science, psychology, sociology and others.

social scientific method The same as substitute goods Two or more goods economy to continue to produce and
the scientific method, it is a method of that satisfy a similar need, so that one satisfy needs and wants into the future;
investigation used in sciences and social good can be used in place of another. If depends crucially on the preservation
sciences allowing the accumulation of two goods are substitutes, an increase in of the environment over time.
scientific and social scientific knowledge; the price of one leads to an increase in the Related to the concept of sustainable
involves making a hypothesis based on demand for the other. development, meaning ‘Development
observations, testing the hypothesis, and which meets the needs of the present
rejecting or accepting the hypothesis supernormal profit Refers to positive without compromising the ability of
based on empirical (real-world) evidence. economic profit, arising when total future generations to meet their own
revenue is greater than total economic needs’ (according to the Brundtland
social surplus The sum of consumer costs (implicit plus explicit costs); is also Commission), which is the idea that the
and producer surplus; it is maximum in known as ‘abnormal profit’. See economic use of natural resources in the present
a competitive market with no market profit. should not leave behind fewer or lower
failures. See consumer surplus and producer quality resources for use by future
surplus. supply Indicates the various quantities generations.
of a good that firms (or a firm) are willing
social welfare See welfare. and able to produce and sell at different tacit collusion Refers to cooperation
possible prices during a particular time that is implicit or understood between
spare capacity Refers to physical capital period, ceteris paribus (all other things cooperating oligopolistic firms,
that firms have available but do not being equal). without a formal agreement, with
use; arises in a recession when there is the objectives to coordinate prices,
unemployment of resources. supply curve A curve showing the avoid competitive price-cutting, limit
relationship between the quantities of competition, reduce uncertainties and
specialisation Occurs when a firm a good that firms (or a firm) are willing increase profits; may take the form of
or a country concentrates production and able to produce and sell during a price leadership.
on one or a few goods and services. In particular time period and their respective
international trade theory, specialisation prices, ceteris paribus (all other things being tariffs Taxes on imported goods;
forms the basis for the gains from trade, equal). they are the most common form of
arising when countries specialise according trade restriction. Tariffs may serve two
to their comparative advantage, and when supply of money The amount of money purposes: to protect a domestic industry
firms specialise in production of goods in circulation, determined by the central from foreign competition (a protective
and services that offer them economies of bank of a country; in combination with tariff); or to raise revenue for the
scale. Specialisation of labour occurs when the demand for money, the supply of government (a revenue tariff). Whatever
workers perform one or a few tasks, and is money determines the equilibrium rate of the purpose, the impacts on the economy
one factor leading to economies of scale. interest. (In practice central banks have are the same.
difficulties in accurately controlling the
specific tax A tax calculated as an supply of money.) tax incidence Refers to the burden of a
absolute amount per unit of the good or tax, or those who are the ultimate payers
service sold. supply shock Events that have a of the tax.
sudden and strong impact on short-run
speculation (currency) Buying and aggregate supply (SRAS), leading to SRAS technical efficiency See productive
selling of something in the hope of curve shifts; for example, a war or violent efficiency.
making a profit. ‘Currency speculation’ conflict that destroys physical capital
involves buying and selling currencies and disrupts the economy, favourable or terms of trade Relates the prices a
based on expectations of changes in the unfavourable weather conditions, etc. country receives for its exports to the
value of a currency (exchange rates) in prices paid for its imports, and is given
order to make a profit in the future. supply-side policies A variety of policies by the ratio of index of average export
that focus on aggregate supply, namely prices to index of average import prices
stagflation Arising from a combination factors aiming to shift the long-run times 100. An increase in the value
of the works ‘stagnation’ and ‘inflation’, aggregate supply (LRAS) curve to the right, of this ratio indicates a terms of trade
refers to the simultaneous appearance of in order to achieve long-term economic improvement, meaning that a country
inflation and recession (and therefore also growth. They do not attempt to stabilise can now buy more imports for the same
unemployment). the economy (i.e. to reduce the severity amount of exports; a decrease in the value
of the business cycle). There are two of this ratio indicates a terms of trade
strategic interdependence Characteristic major categories of supply-side policies: deterioration, meaning that a country
of oligopolies, refers to the mutual market-based and interventionist. To be can now buy fewer imports for the same
interdependence of firms and their strategic contrasted with demand-side policies. amount of exports.
behaviour (planning their actions based on
guesses about what their rivals will do), in surplus In general, this is the excess of theory of absolute advantage According
view of the expectation that what happens something over something else to which to this theory, if countries specialise in
to the profits of one firm depends on the it is being compared. (i) In the context of and export the goods in which they have
strategies adopted by the other firms. demand and supply, it is the extra supply an absolute advantage (can produce
that results when quantity supplied is with fewer resources), there results an
structural unemployment A type of greater than quantity demanded. (ii) In the improvement in resource allocation and
unemployment that occurs as a result case of consumer and producer surplus, increased production and consumption in
of technological changes and changing it is the extra benefit consumers get by each country.
patterns of demand (causing changes paying less for a good than the amount
in demand for labour skills), as well as they are willing to pay, or the extra benefit theory of comparative
changes in the geographical location of producers get by receiving a higher price advantage According to this theory (also
jobs, and labour market rigidities. for the good they are selling than the price known as a law), as long as opportunity
they are willing to receive. (iii) In the case costs in two (or more) countries differ,
subsidy An amount of money paid by of the government budget, a surplus occurs it is possible for all countries to gain
the government to firms for a variety when government revenues are greater from specialisation and trade according
of reasons: to prevent an industry from than government expenditures. (iv) In to their comparative advantage; this
failing, to support producers’ incomes, or the balance of payments, a surplus in an results in an improvement in the global
as a form of protection against imports account occurs when the credits (inflows allocation of resources, resulting in greater
(due to the lower costs and lower prices of money from abroad) are larger than global output and consumption. Is a
that arise from the subsidy). A subsidy the debits (outflows of money to other more powerful explanation of the gains
given to a firm results in a higher level countries). from trade than the theory of absolute
of output and lower price for consumers. advantage.
May also be paid to consumers as financial sustainability Refers to maintaining
assistance or for income redistribution. the ability of the environment and the Glossary 553

third degree price discrimination See also free trade area, customs union and value of output flow In the circular flow
Occurs when a firm price discriminates common market. of income model, refers to the value of
(i.e. changes different prices that are not output that is sold by firms and purchased
justified by difference in costs) among transfer payments Payments made by by consumers, which is equal to the
different consumer groups; is based on the the government to individuals specifically expenditure flow and the income flow.
principle that different consumer groups for the purpose of redistributing income,
have different price elasticities of demand thus transferring income from those who variable costs Costs that arise from the
(PED) for a product, so that higher prices are work and pay taxes towards those who use of variable inputs, and that vary or
charged to consumers with a lower PED and cannot work and need assistance. Groups change as output increases or decreases
lower prices to consumers with a higher PED. receiving transfer payments may include (hence they are ‘variable’). An example of
older people, sick people, very poor people, a variable cost is wages, or the payment
tied aid The practice whereby donors children of poor families, unemployed for labour resources (a variable input).
make the recipients of foreign aid spend people and others; in their entirety they
a portion of the borrowed funds on the are referred to as ‘vulnerable groups’. wage A payment, per unit of time, to
purchase of goods and services from those who provide labour; this includes all
the donor country. It occurs only in the underallocation of resources Occurs wages and salaries, as well as supplements
context of bilateral (not multilateral) aid. when too few resources are allocated to (such as bonuses and commissions).
the production of a good relative to what
tight monetary policy See contractionary is socially most desirable, resulting in its weighted price index A measure of
monetary policy. underproduction. average prices in one period relative to
average prices in a reference period called
total costs The sum of fixed and variable underemployment The number of a base period; a weighted price index is
costs. underemployed people, defined as all a price index that ‘weights’ the various
people above a particular age (i.e. not goods and services according to their
total product The total quantity of children) who have part-time jobs when relative importance. In the consumer
output produced by a firm. they would prefer to have full-time jobs; price index (CPI), goods and services
or have jobs that do not make full use of are weighted according to their relative
total revenue The amount of money their skills and education. importance in consumer spending.
received by firms when they sell a good (or
service); it is equal to the price (P) of the underground market Refers to a market welfare In general, refers to the well-
good times the quantity (Q) of the good that arises whenever a buying/selling being of a population. In microeconomics,
sold. Therefore total revenue = P × Q. transaction is unrecorded; may involve it is measured by the amount of social
legal goods and services (such as plumbing surplus (consumer and producer surplus)
tradable permits Permits that can done by a plumber who does not report that is generated in a market. Welfare is
be issued to firms by a government or the income) or illegal goods and services greatest, i.e. social surplus is greatest, in
an international body, and that can be (such as drugs). May also arise due to the competitive market equilibrium when
traded (bought and sold) in a market, the imposition of price ceilings leading to there are no externalities, and marginal
objective being to limit the total amount shortages. Also known as ‘parallel market’. social benefits are equal to marginal social
of pollutants emitted by the firms. If a costs (MSB=MSC).
firm can produce its product by emitting a undervalued currency A currency
lower level of pollutants than the level set whose value is lower than its free-market welfare loss Refers to loss of a portion of
by its permits, it can sell its extra permits value; may occur if the exchange rate social surplus that arises when marginal
in the market. If a firm needs to emit more is fixed (or pegged), or in a managed social benefits are not equal to marginal
pollutants than the level set by its permits, exchange rate system, but not in a freely social costs (MSB≠MSC), due to market
it can buy more permits in the market. floating exchange rate system. To be failure.
Tradable permits are part of cap-and-trade contrasted with overvalued currency.
schemes. withdrawals See leakages.
unemployment The number of
trade creation The replacement of unemployed people, defined as all people World Bank A development assistance
higher cost products (imported or above a particular age (i.e. not children) organisation, composed of 185 member
domestically produced) by lower cost who are not working and who are actively countries which are its joint owners,
imports that results when a trading bloc is looking for a job. that extends long-term credit (loans) to
formed and trade barriers are removed. (To developing country governments for
be contrasted with trade diversion.) unemployment rate A measure of the the purpose of promoting economic
amount of unemployment in an economy, development and structural change.
trade diversion The replacement expressed as a percentage, calculated by It consists of two organisations: the
of lower cost products (imported or taking the total number of unemployed International Bank for Reconstruction
domestically produced) by higher cost people in an economy and dividing by the and Development (IBRD), which lends
imports that results when a trading bloc is labour force, and multiplying by 100. to middle income countries on non-
formed and trade barriers are removed. (To concessional (i.e. commercial) terms
be contrasted with trade creation.) unit elastic demand Refers to a price (therefore its activities and lending do
elasticity of demand value of one; see price not form part of foreign aid); and the
trade liberalisation The policy of elasticity of demand. International Development Association
liberalising (freeing up) international (IDA), which has similar activities to the
trade by eliminating trade protection and unit elastic supply Refers to a price IBRD but extends loans to low income
barriers to trade (i.e. tariffs, quotas, etc.) elasticity of supply value of one; see price countries on highly concessional terms;
elasticity of supply. these activities form part of foreign aid
trade protection Government (see concessional loans). About 75% of
intervention in international trade urban informal sector That part of World Bank lending is through the IBRD.
through the imposition of trade an urban economy that lies outside the
restrictions (or barriers) to prevent the formal economy, consisting of economic World Trade Organization (WTO) An
free entry of imports into a country and activities that are unregistered and legally international organisation that provides
protect the domestic economy from unregulated. In developing countries these the institutional and legal framework for
foreign competition. activities are often a very large part of the trading system that exists between
the urban economy; unlike in developed member nations worldwide, responsible
trading bloc A group of countries countries, where they are usually pursued for liberalising trade, operating a system of
that have agreed to reduce tariff and to avoid taxes and labour laws, in trade rules and providing a forum for trade
other barriers to trade for the purpose of developing countries they are a matter of negotiations between governments, and
encouraging the development of free or physical survival of substantial portions of for settling trade disputes.
freer trade and cooperation between them. the population.

554 Glossary

Index

Note: Page numbers in bold indicate Higher Level appropriate technologies 465–7
topics Asian Tigers 497–8
asymmetric information 132–5
ability-to-pay principle 315 automatic stabilisers 325, 326
abnormal profit 159 average cost pricing 194
absolute advantage 356–8 average costs (AC) 146
absolute poverty 305–6, 307–8 average fixed costs (AFC) 146
actual output 232–5 average product (AP) 140, 141–2, 143
AD-AS model 253–4, 258 average revenue (AR) 156
average tax rate 316
and economic growth 299–300 average total costs (ATC) 146
short-run aggregate supply 241–3
short-run equilibrium 244–7 long-run ATC curve 151–4
and unemployment 272 average variable costs (AVC) 146
ad valorem taxes 73–4
administrative barriers 375 balance on capital account 397
adverse selection 134–5 balance on current account 396–7
advertising balance on financial account 398
by oligopolies 210 balance of payments 395–400
to correct negative externalities 110, 111–12, 117, 118
aggregate demand/AD curve 236–8 calculating elements of 406
determinants of 238–41 and exchange rates 400–5
effect of multiplier on 262–3 J-curve effect 410–11
and fiscal policy 322–8 Marshall-Lerner condition 409–10
and monetary policy 333–4 and persistent current account deficits 406–9
and possible causes of business cycle 246–7 and persistent current account surpluses 411–12
and price-level 250, 253–4 balance of trade 395–7
and short-run equilibrium 244–7, 252–3 Marshall-Lerner condition and J-curve 409–11
aggregate output value see national income and the terms of trade 427–30
aggregate supply/AS curve 241–2 balanced budget 321
changes in over long term 254–7 banks/banking 330–3
Keynesian model 251–2 access to credit 467–70
long-run AS curve 248–50 barriers to entry 182–3
short-run AS curve 242–7 benefits-received principle 315
agricultural sector bilateral trade agreements 413, 491–3
and appropriate technology 465–6 birth rates, developing countries 442
deteriorating terms of trade 432– 4 brain drain 464–5
in developing countries 441 branding 182, 197
price supports 93–4, 480–1 break-even point 158
see also primary commodities break-even price 172, 178
aid 506–15 budget deficit 321–2, 323, 344
‘aid for trade’ perspective 515 budget surplus 321, 323
allocation of resources see resource allocation business confidence 239
allocative efficiency 15–16, 42, 90, 94, 179, 180, 211 business cycle 230–5
failure to achieve 101 and equilibrium states 244–5, 252–3
and market equilibrium 43–4 monetarist vs Keynesian models 256, 259
and Pareto optimality 99–100 possible causes of 246–7
social optimum condition 102–3 stabilisation policies 320
and taxation 317–18 business taxes 239, 243, 323, 342
and transfer payments 318
allocative inefficiency see welfare loss cap and trade schemes 106, 126, 130
anti-dumping 379 capital 3, 4
appreciation of currency 383–7
investment in 296–8
see also human capital; natural capital; physical capital

Index 555

capital account 397 corporate indebtedness 239
capital expenditures 321 corporate social responsibility (CSR) 165–6
capital goods see physical capital
capital-intensive technologies 466 multinational corporations 505
capital liberalisation 495–7 corruption 483, 511, 514, 535
capital transfers 397 cost of living measures 275–6
carbon taxes 106, 125–7, 130 cost curves 146–50
cartels 205–7
cash transfers 310 and product curves 149–50
central banks, role of 330–3 cost-push inflation 281, 349, 386–7, 405
ceteris paribus 10–11 costs of production 144, 160
China, and the global economy 404
choice 1–2 in the long run 151–5
circular flow of income model 216–18 in the short run 145–50
clean technologies 128 credit, access to by poor people 467–70
climate change see sustainability creditors, effects of inflation 278
climate differences 447 credits 395
closed economy 216 cross-price elasticity of demand (XED) 58–9
collusion 202 applications of 60–1
complements 60, 61
open/formal 204–5 substitutes 59–60, 61
tacit/informal 206–7 crowding out 329
commercial banks 330, 332–3 currency appreciation 383–7
commodities see primary commodities currency convertibility 496–7
common access resources 121, 298 currency demand & supply functions 393–4
Ostrom’s work on managing 131–2 currency depreciation 383–7, 409
role of international co-operation 129–30 currency devaluation/revaluation 389
and sustainability 121–4 current account 397
common market 414–15 and economic growth 527–8
community surplus 43 independence from financial account 399
comparative advantage 358–62 and terms of trade 427–30
competition current account balance
lack of in monopoly 191 effects of exchange rate changes 387
legislation protecting 192–3 current account deficits 395, 396–7, 398–400
supply-side policies 340–1, 409 consequences of persistent 406–8
competitive markets 20–1 and exchange rates 400–2
demand and supply 21–30 methods to correct 408–9
efficiency in 42–5 current account surpluses 398–400
market equilibrium 30–9 consequences of persistent 411–12
and price mechanism 39–41 and exchange rate 400–2
competitive supply 28–9 current expenditures 321
complementary goods (complements) current transfers 396
prices of 24 customs duties see tariffs
and XED 58–9, 60, 61 customs union 414
composite indicators 457–60 cyclical unemployment 271–2, 347, 387
concentration ratios 203–4
conditional aid 511–12 deadweight loss see welfare loss
constant returns to scale 151, 154 debits 395
consumer confidence 238 debt 239, 321–2, 421–3, 519–22
consumer price index (CPI) 275–6, 283–6 deciles 303
consumer surplus 42–3, 77–9, 86–7, 90, 94 decision-making, rational 11
consumption patterns 276 decreasing returns to scale 151
consumption spending 219 deficit 395
and automatic stabilisers 325 deflation 275, 282–3
causes of changes in 238–9 deflationary gaps see recessionary gaps
demand-side policies 323, 326, 333–4 demand 21–5
effect of price ceilings on 92 demand curve 22
versus investment 299
contractionary fiscal policy 323–4 downward slope of 22
contractionary monetary policy 334 linear functions 33–5
core rate of inflation 276 movement along 25
shifts of 23–4, 25, 31–2
556 Index demand-deficient unemployment 271–2
demand management 320
demand-pull inflation 280, 348–9, 387

demand-side policies 320 importance of banking and credit 467–70
fiscal policy 320–30 and income distribution 473–5, 527
monetary policy 330–8 and inflation 526
and infrastructure 475–7
demerit goods 109–10 and investment in capital 296–8
Denmark, ‘flexicurity’ 346 Keynesian perspective 258, 259
depreciation of currency 383–4 and living standards 524–5
long-term vs short-term 256
causes & effects of 385–7 and the LRAS curve 299–300
expenditure-switching policy 409 monetarist/new classical perspective 257, 258, 259
deregulation 340 possible consequences of 301
devaluation, currency 389 and production possibilities model 295–6
development aid 506–7 productivity as source of 298
development diamond, World Bank 461–2 relating to economic development 439–40
development economics see economic significance of 294–5
supply-side policies 343–4
development and sustainability 528–30
direct investment 397 trade strategies for 482–98
direct taxes 72, 311–12 and unemployment 525–6
discretionary fiscal policy 325–6 versus economic development 436–8
diseconomies of scale 153–4 economic integration 413
disinflation 275 monetary union 418–23
disposable income 238–9 preferential trade agreements 413–14
distribution of income 3, 301–2 trade creation & diversion 416–18
trading blocs 414–16
and allocative efficiency 318 Economic Partnership Agreements (EPAs) 492
and economic growth 473–5, 527 economic profit 158–9
equality/inequality measures 302–5 economically less developed (ELD) countries 440
equity versus efficiency in 317–18 common characteristics 440–4
and foreign aid 510 diversity among 446–8
methods of promoting equity in 309–11 foreign debt 519–22
poverty 305–9 foreign finance 499–519
and taxation 311–15 sources of economic growth in 438–9
distribution of output 3 terms of trade deterioration 432–3, 434
diversification 378, 478, 493–4 trade barriers 477–82
Doha Development Round 490 trade strategies 482–98
domestic assets, sale of 407–8 economically more developed countries 440
dual economies 444, 533 economics 2, 7–11
dumping 379 economies of scale 153, 415
as a barrier to entry 182
easy monetary policy 333 in a monopoly 187–8, 192
economic activity 216–18 economists’ political beliefs and ideology 259–60
low unemployment vs low inflation 290–1
business cycle 230–5 economy
measures of 219–30 impact of minimum wages 97–8
economic costs 144–5 impact of price ceilings 89–90
economic development 13, 436–8, 448 impact of price floors on 93–4
appropriate technologies 465–7 education 338–9, 463–5
banking and credit 467–70 education indicators 457, 458
education & health 463–5 efficiency see allocative efficiency
and international trade barriers 477–82 efficiency-equity conflict 16, 318
measurement of 449, 452–62 elasticities 47
relating to economic growth 439–40 cross-price elasticity of demand (XED) 58–62
and trade strategies 482–98 income elasticity of demand (YED) 62–5
versus economic growth 436 price elasticity of supply (PES) 66–71
economic efficiency see allocative efficiency summary of concepts 71
economic fluctuations see business cycle entrepreneurship 4, 216
economic growth 13, 230–5, 293 and profits 158–9
and AS curve shifts 255 environmental sustainability see sustainability
calculating 293–4 equality, income distribution 301–2
and commodity-type natural resources 439 equilibrium 31
consequences of 524–30
and the current account 527–8 Index 557
in economically less developed countries 438–9
effect of exchange rate changes 387
and fiscal policy 326–7

equilibrium exchange rate 382–3 fiscal policy 320
equilibrium level of output/real GDP 244 and automatic stabilisers 325, 326
equilibrium price 31, 38 conflicting objectives 405
equilibrium quantity 31, 38 evaluation of 327–9
equilibrium states, Keynesian model 244–5, 252–3 government budget 320–2
equity 16 and long-term economic growth 326–7
equity in income distribution 301–2 role of 322–4

policies promoting 309–11 fixed costs 145
role of taxation in promoting 311–15 fixed exchange rates 388–9, 401–2, 403
supply-side policies 344–5 ‘flexicurity’, Denmark 346
versus efficiency 317–18 floating exchange rates 381–7, 402, 403
ethical concerns, firms 165–6 food aid 513
European Monetary Union (EMU) 418–19 food price controls 91
and Greek debt problem 421–3 foreign aid 506–15
optimum currency areas (OCAs) 420–1 foreign currency reserves 386, 388, 398, 402–3
excess demand see shortages foreign debt 519–22
excess supply see surpluses foreign direct investment (FDI) 500–4
exchange rate changes 383–4 formal collusion 205
causes of 384–6 formal sector 441
and changes in net exports 240 free entry and exit 168
effects of 386–7 free rider problem 119–20
and terms of trade 430 free trade 356–63
exchange rates 382
appreciation & depreciation 383–4 moral judgement in favour of 380
and balance of payments 400–5 versus trade protection 364–5
calculations 392–4 free trade agreements (FTAs) 491–3
government intervention in 388–91 free trade area (FTA) 414
purchasing power parities (PPPs) 453–4 freely floating exchange rates 381–7
excise taxes see indirect taxes frictional unemployment 270–1, 348
excludabilty, private goods 119 full employment 271
expansionary fiscal policy 322–3 see also natural rate of unemployment
and crowding out of private investment 329 full employment level of output/real GDP 232, 245
and size of multiplier 325–6 demand-side policies 322–4
expansionary monetary policy 333 Keynesian model 252–3, 258, 259
expenditure approach 219–20, 227 monetarist/new classical model 248–50, 258
expenditure flow 216–17
expenditure-reducing policies 408 game theory 202–3
expenditure-switching policies 408–9 GATT (General Agreement on Tariffs and Trade) 363
explicit costs 144 GDP deflator 229, 285–6
export promotion 484–5 GDP per capita 294
export subsidies 375
exports 217–18, 220 and GNI per capita 452–3
developing countries 514–15 and human development 459
effect of inflation on 279 in terms of PPPs 453–4
external benefits see positive externalities gender inequalities 470–3
external costs see negative externalities geographic isolation 515
externalities 101–3 Germany, prosperity of 423
negative consumption 108–12 Gini coefficient 304
negative production 103–8 global demand and supply 425–6
positive consumption 115–18 global redistribution of income, terms of trade 427
positive production 113–15 global warming see sustainability
GNI per capita 440, 441
factor endowments 354–5 comparing in terms of PPPs 453–4
factors of production 1, 3–4, 216–17 and education indicators 457, 458
and GDP per capita 452–3
and income distribution 302 and health indicators 455–6
role in economic growth 296–8 Human Development Index (HDI) 459
financial account 397–8 see also gross national income
independence from current account goals of firms 161–6
governance 535–6
399 government budget 320–2, 344
financial capital 4 government debt 321–2
financial capital flows 385, 495–7 government intervention 14–15, 72, 251–2, 253, 259

558 Index

and allocative efficiency 318 implicit costs 144–5
and efficiency-equity trade-off 16, 318 and profit 158–9
and income distribution 311
indirect taxes 72–81 import quotas 368–70
inflation policies 281, 348–9 calculating effects of 371
and managed exchange rates 390–1
price controls 88–99 import substitution 482–4
subsidies 81–8 imports 217–18, 220
to maintain fixed exchange rates 388–9
unemployment policies 272–3, 347–8 changes in spending on 240
see also interventionist policies tariff barriers 479–80
government policy, failure of 137 and trade agreements 413–14, 490–3
government regulation trade creation & diversion 416–18
correcting negative externalities 104–5, 107–8, 110, and trading blocs 414–18
incentive-related policies 342, 343–4, 345
125 incidence of taxes see tax incidence
information asymmetry 133 income approach 220
and monopoly power 136 income, current account 396
of natural monopoly 193–4 income distribution see distribution of income
government revenue 77 income elasticity of demand (YED) 62
government spending 217, 220, 321 applications of 63–5
causes of changes in 239 interpreting 62–3
on subsidies 86–7 long-term impacts on primary commodity prices 65
see also expansionary fiscal policy income flow 216–17
grants 506 income inelastic demand 63, 64
Greece, debt problem 421–3 income redistribution see redistribution of income
green GDP 225–7, 529 increasing returns to scale 151
gross domestic product (GDP) 220 indebtedness 239
and the business cycle 230–5 indicators of development 449–52
calculations of 227–30 composite indicators 457–60
green GDP 225–7 education indicators 457, 458
nominal versus real 221–2, 227–9 health indicators 454–6
real GDP 228–9, 262–3 Millennium Development Goals 448–9, 450–1
total versus per capita 222 single indicators 452–4
versus GNI/GNP 221 indirect taxes 72–3, 312, 313–14
gross investment 222–3 calculating effects of 75–9
gross national income (GNI) 221 consequences for stakeholders 74–5
calculating 227 equity & efficiency in product markets 317–18
inaccuracy of measure 223–5 impact on market outcomes 73–4
total versus per capita 222 and negative consumption externalities 110–12
versus gross domestic product (GDP) 221 and price elasticities of demand 57–8
versus nominal value 221–2 and price elasticities of demand and supply 79–81
see also GNI per capita individual demand 21–2
gross national product (GNP) see gross national income individual supply 26
growth maximisation 164–5 industrial policies 339–40, 534
industry growth 64
health 338–9, 463–5 infant industries 377
health indicators 454–6 infant mortality 455, 456
hidden unemployment 266 inferior goods 24
homogeneous products 168, 201 inflation 274–5
household indebtedness 239 calculating rate of 284–6
human capital 4, 296–7 consequences of 277–80
core rate of 276
developing countries 446–7 and currency depreciation 385
and economic growth 297–8, 438 and economic growth 526
investment in 338–9, 463–5, 534 and exchange rate changes 386–7
human development 437–8 and GDP deflator 285–6
indicators of 457–60 measuring 275–7
Human Development Index (HDI) 459–60 and terms of trade 430
human rights 463, 477 types and causes of 280–1
humanitarian aid 506 and unemployment 287–91
hyperinflation 279–80 inflation targeting 335–6, 349
hypothesis testing 8–9, 17 inflationary gaps 244–6
creating and eliminating 249–50

Index 559

informal collusion 206, 206–7 labour market reforms 341–2
informal sector 441–2, 470, 533 labour market rigidities 269–70, 341
information, asymmetric 132–5 land 3, 297
infrastructure 310–11, 339, 475–7, 534 law of demand 22
injections 217–18 law of diminishing returns 142–4, 149
law of supply 26
effect of multiplier on 260–2 leakages 217–18
insurance services, asymmetric information 133–5
interest 216 and the multiplier 260–2
interest rate see also taxes
legal barriers to entry, monopoly 182–3
control by central banks 332, 333 legislation
and currency value 385 anti-monopoly laws 136, 192–3
determination of 331–2 and externalities 117, 118, 125
micro-credit schemes 470 minimum wage 311, 341
role of monetary policy 333–4 life expectancy at birth 455, 456
interest rate changes linear functions
and aggregate demand 238, 333 and currency 393–4
and investment 239, 329, 389, 407, 408 demand curve 33–5
interest rate effect 237, 241 indirect (excise) taxes 75–9
international co-operation 129–30 and market equilibrium 38–9
international debt 519–22 subsidies 84–8
international development goals 448–9, 450–1 supply curve 35–8
International Monetary Fund (IMF) 518–19 tax incidence 79–81
international trade 354–5 living standards see standards of living
barriers to 477–82 loans 278–9, 330, 331, 332–3
free trade 356–63 for current account deficits 406–7
objectives of 477 from the IMF 518–19
trade protection 364–79 from the World Bank 516–17
World Trade Organization 363–4 micro-credit schemes 468–70
international trade effect 237 long-run (in macroeconomics) 241–2
interventionist policies equilibrium, monetarist model 248
balancing with market-oriented 536–7 Keynesian analysis 251–2
strengths & weaknesses of 533–5 long run (in microeconomics) 139
supply-side 338–40, 343, 344–5, 348 costs of production 151–5
investment goods see physical capital long-run aggregate supply (LRAS) curve 248–50
investment spending 219–20 and economic growth 299–300
in capital 296–8 factors causing shift in 254–7
causes of changes in 239 long-run average total cost curve 151–4
crowding out 329 long-run Phillips curve 288–90
demand-side policies 334 long-term growth trend 232
gross versus net 222–3 Lorenz curve 303–5
and multiplier effect 261–3 loss minimisation see profit maximisation
versus consumption 299 loss (negative economic profit) 159
luxuries 52, 63
J-curve effect 410–11
joint supply 29 macroeconomics 12, 215
aggregate demand/supply 236–64
Keynesian cross model 264 demand-side policies 320–38
Keynesian model 250–2, 258–60, 350 distribution of income 301–18
economic activity 216–35
AS curve 252, 255–6, 258 economic growth 293–301
equilibrium economic states 252–3 inflation & unemployment 274–90
and fiscal policy in a recession 337 paradigm shifts 350–1
key features of 253–4 supply-side policies 338–49
with the ratchet effect 324
Keynesian multiplier 260–3 managed exchange rates 390–1, 401, 403–4, 409
kinked-demand curve 207–8 managerial utility maximisation 165
manufactured products
labour 3, 297
and minimum wage 96–9 relatively high PED 56, 57
see also human capital relatively high PES 69–70
relatively high YED 64
labour-intensive technologies 466 manufacturing sector 63–4
labour market flexibility 341

560 Index

marginal benefit 22, 43–4 theory of the firm 139–214
marginal cost pricing 193–4 see also government intervention
marginal costs (MC) 43–4, 146 Millennium Development Goals (MDGs) 448–9,

cost curves 146–50 450–1
and profit maximisation 163 minimum price see price floors
marginal private benefits & costs 102–3 minimum wage 96–9, 341
marginal product (MP) 140–3, 149 model building 9–11
marginal propensities 261–2 monetarist/new classical model 248, 350–1
marginal revenue (MR) 156
and profit maximisation 163 comparing with Keynesian model 254, 255, 256,
marginal social benefits & costs 102–3 258–60
marginal tax rates 316
market 20–1 and fiscal policy in a recession 337
market-based policies link between SRAS-LRAS curves 257
supply-side policies 340–5, 348 long-run aggregate supply & equilibrium 248–50
to correct negative production externalities 105–7 monetary policy 320, 333–4
to reduce negative consumption central bank & interest rates 330–4
and conflicting objectives in an open economy 405
externalities 110–12 evaluation of 336–7
market demand 22–3 and inflation targeting 335–6
market equilibrium 30–1 monetary union 418–19
advantages & disadvantages 419–20
and allocative efficiency 43–4 optimum currency areas (OCAs) 420–1
calculation using linear functions 38–9 money 331
changes in 31–2 money supply, control of 331–3
market failure 101 monopolistic competition 195–6
and abuse of monopoly power 135–7 demand and revenue curves 196–7
and asymmetric information 132–5 efficiency in 199
due to lack of public goods 119–20 profit maximisation 197–9
and environmental sustainability 121–32 versus other market structures 199–200
and externalities 101–19 monopoly 181–2
problem of government failure 137 advantages & disadvantages of 194–5
market-oriented policies barriers to entry 182–3
balancing with interventionist 536–7 demand and revenue curves 183–5
strengths & weaknesses of 531–3 efficiency of 189–92
market outcomes natural monopoly 187–8
effects of excise taxes on 73–4, 76–9 output and PED 185
impact of minimum wages 96–7 profit maximisation 185–7
impact of price ceilings on 89 regulation of 192–4
impact of price floors on 93 revenue maximisation 187
impact of subsidies 82–3, 84–7 monopoly power, abuse of 135–7
market power 136 moral hazard 134
market structure 168 multilateral development assistance 516–19
monopolistic competition 195–201 multilateral trade agreements 413
monopoly 181–95 multinational corporations (MNCs) 500–5
oligopoly 201–11 multiplier 260–4
perfect competition 168–81 and fiscal policy 325–6
market supply 27
market system and income distribution 302 national income 219
Marshall–Lerner condition 409–10 measurement of 219–21
maternal mortality 455, 456 and shifts in the AD curve 240
maximum price see price ceilings statistics, evaluating 223–5
mergers 193
merit goods 116–17 nationalisation 136
direct or subsidised provision of 310–11, 318 natural capital/resources 4, 297
education and health 463–5
micro-credit schemes 468–70 in developing countries 446, 501, 502
microeconomics 12, 19 and economic growth 298, 439
demand and supply 21–45 and green GDP 226, 529
elasticities 47–71 overuse of 13–14, 121–2, 444
market failure 101–37 natural monopoly 187–8
market structures 168–214 natural rate of unemployment 232, 235, 255–6, 271
production, costs, revenues & profit 139–66 and the long-run Phillips curve 288–90
and short-run equilibrium 244–5, 252–3
supply-side policies reducing 344, 347–8

Index 561

necessities 52, 63 PED see price elasticity of demand
negative economic profit (loss) 159 pegged currencies 390–1
negative externalities 102 per capita measures 222
perfect competition 168–9, 211
of consumption 108–12
of production 103–8 demand and revenue curves 169–70
net exports (exports minus imports) 220 efficiency of 179–80
causes of changes in 240 evaluation of 180–1
net investment 222–3 and profit maximisation 170–7
new classical economics see monetarist/new classical shut-down & break-even price 173
perfectly elastic demand 49, 50
model perfectly elastic supply 67, 68
New Development Consensus 487 perfectly inelastic demand 49, 50
new technology 438 perfectly inelastic supply 67, 68
persistent current account deficits 406–9
investment in 297, 339 persistent current account surpluses 411–12
and terms of trade 426 personal income taxes 238–9, 311, 342
nominal GDP 222 Peru, economic growth 537–8
calculations 227–9 PES see price elasticity of supply
nominal vs. real values 221–2, 277–8, 279 Phillips curve 287–91
non-collusive oligopoly 207–8 physical capital 4, 296, 438
non-convertible currency 495–6 consumption versus investment 299
non-discretionary fiscal policy 326 depreciation of 409
non-excludability, public goods 119 in developing countries 446–7, 465–6
non-governmental organisations (NGOs) 506, 509 gross and net investment 222–3
evaluation of 512–14 and technological advances 297
non-price competition 197, 208–9 political instability 447–8
non-price determinants of demand 23–4 pollution 103
non-price determinants of supply 28–9 affluence versus poverty 123–4
non-price rationing 89 attempts to reduce 104–8
non-produced, non-financial assets 397 population growth 442–3, 446
non-renewable resources 124 portfolio investment 397–8
non-rivalry, public goods 119 positive economics 11–12
normal goods 24 positive externalities 102
normal profit 158–9 of consumption 115–18
normative economics 12 education & health 464
of production 113–15
Official Development Assistance (ODA) 507–9 potential output 232–5
evaluation of 510–12 and fiscal policy 326–7
supply-side policies 343
oligopoly 201–4 see also full employment level of output
collusive 204–7 poverty 305–8
evaluating 209–11 and pollution 123–4
non-collusive 207–8 possible causes & consequences 308–9
and non-price competition 208–9 poverty cycle (trap) 444–6
and foreign aid 510
open access resources 121, 122, 123, 129, 131 preferential trade agreements 413–14, 490–3
open collusion 205 price as incentives 40
open economy 218 price ceilings 89–91
open market operations 332–3 calculating effects of 92
opportunity cost 4 price competition 196–7
price controls 88
economic costs as 144–5, 158–9 price ceilings 89–92
of large debt service payments 521–2 price floors 92–9
optimum currency areas (OCAs) 420–1 price deflator 229, 285–6
output approach 220–1 price discrimination 211–14
output gap 232–3 price elasticity of demand (PED) 47–51, 72
overallocation of resources 3 applications of 54–8
and asymmetric information 133–5 determinants of 51–2
due to subsidies 86–7 for exports and imports 428–30
and price support for farmers 94, 481 and incidence of indirect taxes 80–1
see also welfare loss and monopolist’s output 185
overvalued currencies 391

paradigm shifts 350–1
parallel markets 89–90
Pareto optimality 99–100

562 Index

and the slope 51 programme aid 507
and steepness of demand curve 53–4 progressive taxation 312–14, 318
price elasticity of supply (PES) 66
applications of 69–71 calculations 316
determinants of 68–9 equity versus efficiency 317
and incidence of indirect taxes 80–1 stabilising effect of 325
interpreting 66–8 project aid 507
price fixing 98–9 proportional taxation 312–14
price floors 92–5 public debt 321–2
calculating effects of 96 public goods 119–20
minimum wages 96–9 purchasing power 277–8, 279
price index 229 purchasing power parities (PPPs) 453–4
price inelastic demand 49, 52, 56
price inelastic supply 67, 68 quasi-public goods 120
price leadership 206 quintiles 303
price level quotas 368–70, 371
differing domestic, GDP & GNI 224
downward inflexibility of 251–2 rate of interest see interest rate
effect of changes in 237 rational economic decision-making 11
effect of multiplier on 263 real GDP 222
and increases in aggregate demand 253–4
and long run change in AD 250 calculations 228–30
price mechanism 39–41 and economic growth 230–4
price support 93–4, 480–1 effect of multiplier on 262–3
price taker 169 and unemployment 232
prices as incentives 40 see also aggregate demand; aggregate supply
prices as signals 40 real income, calculating 285
primary commodities 56 real vs. nominal values 221–2, 277–8, 279
dependency on 478 reallocation of resources 3
and economic growth 298, 439 recession 231, 233
impact of low YED 65, 432 and fiscal policy 327–8, 337
and low PED 56–7 and monetary policy 337–8, 405
and low PES 69–70 recessionary gaps 244, 245
price volatility of 479–80 Keynesian model 252–3, 259
primary sector 64–5, 478 persistence over long time periods 249–50,
prisoner’s dilemma, game theory 202–3
private financing initiatives 340–1 253
private goods 119 wage and price inflexibility 251–2
privatisation 340 redistribution of income 3
producer price index (PPI) 277 and deflation 282
producer surplus 43, 77–9, 86–7, 90, 94 effects of inflation 278–9
product curves 139–43 and inflation 278–9
and cost curves 149–50 Lorenz curves illustrating 304–5
product differentiation 195–7 methods used for 309–11
product markets 21, 26, 40, 216, 317 role of taxation in 311–14
production possibilities curves (PPCs) 5–7 terms of trade 427
absolute advantage 356–8 regional trade agreements 413, 491, 493
and comparative advantage 358–61 regressive taxation 312–13
production possibilities model 295–6 indirect taxes 313–14
production subsidies 372–4 regulation see government regulation
calculating effects of 374–5 relative poverty 306–8
productive efficiency 5, 179–80, 211 renewable resources 124
productive inefficiency 190–1, 194–5, 199 rent 216
productivity 444 rent controls 91
and economic growth 298 research & development (R&D) 191, 195, 197, 339
and terms of trade 426 clean technologies 128
profit 158–9, 160, 216 reserve assets 398
profit maximisation 161–3, 166 resource allocation 2–3, 90, 94, 317–18
by the monopolist 185–7 government intervention 14–15, 16
monopolistic competition 197–9 and indirect (excise) taxes 72, 73
and perfect competition 170–7 role of price mechanism in 39–41
and subsidies 81, 82
and sustainability 14
see also market failure

Index 563

resource endowments 446–7 consequences for stakeholders 83
resource markets 41, 216, 317 correcting market failure 114–15, 117–18
resources see factors of production effects on markets & social welfare 84–7
returns to scale 151, 154 environmentally harmful 128–9
revaluation of currency 389 export subsidies 375
revenue maximisation 164, 187 impact on market outcomes 82–3
revenues 155–8, 160 production subsidies 372–5
rivalry, private goods 119 reasons for 81–2
and resource allocation 81
safety in the workplace 135 substitute goods 24
sales taxes 312, 314, 317 cross-price elasticity of demand 60–1
satisficing 165 and degree of substitutability 59–60
savings/savers 217, 278 number and closeness of 51–2
scarcity 1–2, 39 supernormal profit 159
seasonal unemployment 271, 344, 348 supply of money 331–3
self-interested behaviour 131, 165 supply shocks 243, 288
short run (in macroeconomics) 241–2 supply-side policies 338
evaluation of 342–5
equilibrium in AD-AS model 244–7, 252–3 interventionist 338–40
Keynesian perspective 251–2, 254 market-based 340–2
short run (in microeconomics) 139 to increase competitiveness 409
costs of production 145–50 supply & supply curve 26–8
short-run aggregate supply curve (SRAS) 242–3 linear functions 35–8
and LRAS curve 257 movement along 28, 29
and short-run equilibrium 244–7, 252–3 shifts of 28, 29, 32
short-run Phillips curve 287–90 upward slope of 27
shortages (excess demand) 30–1 vertical 27–8
calculating 38–9 surpluses (excess supply) 30–1, 396
and price controls 88–92, 98–9 calculating 38–9
shut-down price 173, 178 and price controls 88–9, 93–4, 96
single indicators 452–4 as result of minimum wage 97–8
slope 51 social surplus 77–9, 86, 90, 94, 98
social optimum 102, 104, 109, 113–14, 116 sustainability 13–14, 121–2
social safety net 534 and common access resources 121–3
social sciences 7 conflict with economic growth 528–30
social scientific method 7–9, 17 economic thinking on 131–2
social surplus 43, 77–9, 86, 90, 94, 98 government action 125–9
social welfare see welfare and international co-operation 129–30
spare capacity 252 threats to 123–5
specialisation 153, 354–5 sustainable development 13–14, 122, 124, 517, 530
and trade 356–62
specific taxes 73 tacit collusion 206
speculation 385–6, 405 tariffs 312, 366–7
stabilisation policies see fiscal policy; monetary policy
stagflation 246, 257, 287–8 barriers and escalation 479–80, 489
stakeholders calculating effects of 367–8
certainty & exchange rates 402 as source of government revenue 378–9
consequences of minimum wage 98 tax incidence 79–81
consequences of subsidies 83 taxes 217, 311–14
impact of indirect taxes on 74–5 and allocative efficiency 317–18
impact of price ceilings on 90–1 calculations 316
impact of price floors on 95 carbon taxes 106, 125–7, 130
standards of living on consumption externalities 110–12
comparisons over time/between countries 225 equity principles 315
and economic growth 436, 524–5 excise (indirect) 72–5, 75–81
GDP/GNI as inaccurate measures of 224–5 lowering 342, 343–4, 345
GNI per capita as indicator for 452–3 on production externalities 105–6, 107
and poverty 309 technology
strategic interdependence, oligopolies 201–3 appropriate 465–7
strategic trade policy 377–8 clean technologies 128
structural unemployment 268–70, 341, 344, 347–8 innovation in monopoly 191
subsidies 29, 81 investment in new 297, 339

564 Index

and production 28, 150, 177 and inflation 287–91
and terms of trade 426 link to actual & potential output 232, 233
terms of trade 424 measurement difficulties 266
calculating 424–5 and minimum wages 97, 98
causes of changes in 425–7 supply-side policies reducing 344, 347–8
effects on current account 427–30 types and causes of 268–73, 387
long-term changes in 482 see also natural rate of unemployment
long-term deterioration 432–4 unemployment benefits 321, 341
short-term fluctuations 431–2 see also transfer payments
textile industry 270, 489 unit elastic demand 49, 50, 55–6
theories/theory building 9–11, 17 unit elastic supply 67, 68
third-degree price discrimination 212–14 urban informal sector 441–2
tied aid 508–9 Uruguay Round 489–90
tight monetary policy 334
total costs (TC) 146 value of output flow 217
total product (TP) 140, 143 value added tax (VAT) 312, 314, 317
total revenue (TR) 54, 155, 156–7 variable costs 145–6
and profit maximisation 161–2 vertical supply curve 27–8
total vs. per capita measures 222
tradable permits 106, 107 wages 216, 241–2
trade agreements 413–14, 490–3 downward inflexibility of 251–2
trade creation & diversion 416–18 effects of changes 243, 248–9
trade deficits 399, 404, 405, 409–11 and minimum wage 96–9
trade liberalisation 136–7, 341, 485–7, 494, 498 protection of 379
‘trade, not aid’ perspective 514–15
trade protection 364–6 Washington Consensus 485–7
arguments for & against 375–9 wealth effect 237, 241
developing country imports 479–80 weighted price index 283–5
import quotas 368–70, 371 welfare 44
subsidies 372–4, 375–6
tariffs 366–8 effects of excise taxes on 75–9
and terms of trade 426–7 effects of subsidies on 84–7
to correct current account deficits 408–9 maximum social welfare 44, 45, 99–100
trade surpluses 399, 404, 405, 410–11 welfare loss 77–9
trading blocs 414–16 in a monopoly 189–91
transfer payments 309–10, 321 and minimum wage 98
and allocative efficiency 318 negative consumption externalities 109
automatic stabiliser 325 negative production externalities 104
‘flexicurity’, Denmark 346 positive consumption externalities 116
reducing 341 positive production externalities 113–14
and price controls 90, 94
Unasur (Union of South American Nations) 417 and subsidies 86–7
underallocation of resources 3 subsidies correcting 114–15
withdrawals see leakages
and asymmetric information 132–5 women, empowerment of 470–3
see also welfare loss workplace safety 135
underemployment 265 World Bank 440, 457, 461–2, 516–17
underground markets 89–90, 223–4, 266 World Trade Organization (WTO) 363–4, 488–90
undervalued currencies 391, 409
unemployment 265 XED (cross-price elasticity of demand) 58–61
calculating rate of 265–6, 266–7
and changes in short-run equilibrium 245–6 YED (income elasticity of demand) 62–5
consequences of 267–8
and economic growth 525–6 zero economic profit 159

Index 565

Acknowledgements

The authors and publishers acknowledge the following sources of copyright material and are grateful for the
permissions granted. While every effort has been made, it has not always been possible to identify the sources of
all the material used, or to trace all copyright holders. If any omissions are brought to our notice, we will be happy
to include the appropriate acknowledgements on reprinting.
For the syllabus content throughout from the Economics guide for first examinations in 2013, thanks to the
International Baccalaureate Organization for permission to reproduce its intellectual property.
pp. 131–132 quotes from interview with Elinor Ostrom by Fran Korton, February 2010, Yes Magazine
p. 257 from ‘Stagflation is back. Here’s how to beat it’ article by Professor Jeffrey Sachs in Fortune Magazine, June
2008, by permission of Professor Sachs’ office at the Earth Institute, Columbia University
pp. 290–291 from ‘The Phelps Factor’ by Joseph Stiglitz for Project Syndicate, December 2002, used with
permission
Artwork created by eMC Design Ltd and Aptara Inc.

566 Acknowledgements