Glossary

• Abnormal profit

  This arises when average revenue is greater than average cost (greater than the minimum return required by a firm to remain in a line of business)
• Absolute advantage

  A country has an absolute advantage in the production of a good if it can produce more of it with the same resources or, equivalently, if it can produce the same amount using fewer resources compared to another country
• Absolute poverty

  People living below the minimum income necessary to satisfy basic physical needs (food, clothing, and shelter); as of October 2015, the World Bank international poverty line is set at US$1.90 PPP per day
• Abuse of market power

  When a firm acts with the intention to eliminate competitors or to prevent entry of new firms in a market
• Actual growth

  Occurs when real output (real GDP) increases through time and is a result of greater or better use of existing resources
• Administrative barriers

  Trade barriers in the form of regulations that aim to limit imports into a country
• Adverse selection

  A type of market failure involving asymmetric information, where the party with the incomplete information is induced to withdraw from the market
• Aggregate demand (AD)

  Planned spending on domestic goods and services at different average price levels, per period of time
• Aggregate demand curve

  A curve showing the planned level of spending on domestic output at different average price levels
• Aggregate supply (AS)

  The planned level of output domestic firms are willing and able to offer at different average price levels
• Aggregate supply curve

  A curve showing the planned level of output that domestic firms are willing and able to offer at different average price levels
• Allocative efficiency

  Achieved when just the right amount of goods and services are produced from society’s point of view so that scarce resources are allocated in the best possible way
• Allocative inefficiency

  When either more or less than the socially optimal amount is produced and consumed so that misallocation of resources results
• Anchoring

  Refers to situations when people rely on a piece of information that is not necessarily relevant as a reference point when making a decision
• Anti-dumping

  Typically refers to tariffs that aim at raising the artificially low price of a dumped imported good to the level of the higher domestic price
• Anti-monopoly regulation

  Laws and regulations that are intended to restrict anti-competitive behaviour of firms that are abusing their market power
• Appreciation

  When the price of a currency increases in a floating exchange rate system
• Appropriate technology

  Technology that relies mostly on the relatively abundant factor an economy is endowed with
• Asymmetric information

  A type of market failure where one party in an economic transaction has access to more or better information than the other party
• Automatic stabilizers

  Institutionally built-in features (like unemployment benefits and progressive income taxation) that tend to decrease the short-term fluctuations of the business cycle without the need for governments to intervene
• Average costs

  Total costs per unit of output produced
• Average revenue

  Revenue earned per unit sold; average revenue is thus equal to the price of the good
• Average tax rate

  The ratio of the tax paid by an individual over their income expressed as a percentage
• Balance of payments

  A record of the value of all transactions of a country with the rest of the world over a period of time
• Balance of trade in goods

  Part of the balance of payments, it is the value of exports of goods of a country minus the value of imports of goods over a given period of time
• Balance of trade in services

  Part of the balance of payments, it is the value of exports of services of a country minus the value of imports of services over a given period of time
• Barriers to entry

  Anything that deters entry of new firms into a market, for example, licenses or patents
• Behavioural economics

  A subdiscipline of economics that relies on elements of cognitive psychology to better understand decision-making by economic agents
• Biases

  Systematic deviations from rational choice decision-making
• Bilateral trade agreement

  An agreement between two countries to phase-out or eliminate trade related barriers
• Bounded rationality

  A term introduced by Herbert Simon that suggests consumers and businesses have neither the necessary information nor the cognitive abilities required to maximize with respect to some objectives
• Bounded self-control

  The idea that individuals, even when they know what they want, may not be able to act in their interests
• Bounded selfishness

  The idea that people do not always maximize self-interest but also have concern for the well-being of others
• Budget deficit

  When government expenditures exceed government (tax) revenues usually over a period of a year
• Business confidence

  A measure of the degree of optimism that businesses have about the economic future
• Business cycle

  The short-term fluctuations of real GDP around its long-term trend (or potential output)
• Business tax

  Tax levied on the income of a business or corporation
• Capital

  Physical capital refers to means of production that include machines, tools, equipment and factories; the term may also refer to the infrastructure of a country
• Capital account

  A subaccount of the balance of payments that includes credit and debit entries for non-produced, non-financial assets as well as capital transfers between residents and non-residents
• Capital flight

  Occurs when money and other assets flow out of a country to seek a “safe haven” in another country