Glossary of Economics terms

Topic 0: Introduction to economics

Factor of Production/Resource: is anything that people use to make goods and to
offer a service or to do work.
Land is any natural resource found on earth. The payment made (fee) to owner of
land is known as RENT.
Labor is human effort used in production. This include physical and mental
contributions. Labor is work that is paid for. Payment for labor is WAGE.
Capital is a man-made productive asset (something of worth) used to produce goods
and services. The fee for use of capital is INTEREST.
Enterprise/entrepreneur is a human factor
 starting up a business
 employing/organizing/managing resources or factors of production
 taking risks and gaining profit

Scarcity is defined as a situation in which wants exceed (is more than) the amount
that can be produced with the resources available.
A need is defined as, something that we must have in order to remain alive.
Wants are defined as, the things we desire but which we don’t need. They simply
make our lives better.
Choice is a trade-off, when you get something; you need to give up the alternatives.
Resource allocation it is concerned with how resources (land, labor, capital, and
management) are distributed and assigned in different uses in an economy.
Incentives are rewards and penalties that encourage or discourage activities (actions).
Opportunity cost is defined as the cost or value of the next best alternative not taken
(forgone).
Economics is the study of choices leading to the best possible use of scarce resources
in order to best satisfy unlimited human needs and wants.
Economic good: a good or service which is relatively scarce and so has a price. An
opportunity cost is involved if it is consumed.
Production Possibility Frontier(PPF): is a curve that shows all maximum output
possibilities for two or more goods that can be produced when all the available
resources are fully (the maximum amount of scarce resource available) and efficiently
(given the technology level) used.
Ceteris paribus: all other things being equal.
Positive economics: matters of economics that can be proven to be right or wrong by
looking at the facts.
Normative economics: matters of economics that are based upon opinion and so are
incapable of being proved to be right or wrong.
Actual output: the actual production of goods and services in an economy in a given
time period.
Potential output: the possible production that would be possible in an economy if all
available factors were being employed.
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Economic growth: the growth of real output in an economy over time. Usually
measured as growth in real GDP.
Economic development: it is a broad concept involving improvement in standards of
living, reduction in poverty, improved health and education. (May add increased
freedom and economic choice.).
Free market economy (market economy): an economy where the means of
production are privately held by individuals and firms. Demand and supply determine
how much to produce, how/how many to produce, and for whom to produce.
Planned economy (command economy): an economy where the means of
production are owned by the state. The state determines how much to produce,
how/how many to produce, and for whom to produce.

Microeconomics Topic 1.1: Demand supply, price mechanism and market

efficiency

Demand: the willingness and ability to purchase a good or service at difference prices
over a given time period.
Quantity demanded: of a product/service is the amount that consumers are willing
and able to buy at a specific price.
Law of demand: as the price of a good falls, the quantity demanded will normally
increase, ceteris paribus.
Individual demand: is the amount of a particular good that the individual is willing
and able to buy at a given price and time.
Market demand: is the sum of all individual demand for that product. Add up the
demand for all individuals and you have the market demand for that good.
The income effect: when price of a product A increases, real income of the
consumers consuming few products including A will decrease, leading to less
consumption of A
The substitute effect: when price of product A increases, consumers will turn to its
substitutes, thus buying less of A and more of its alternatives.
Supply: producers’ willingness and ability to offer a good/service to the market at
different quantities, over a given time period.
Law of supply: as the price of a good rises, the quantity supplied will normally rise,
ceteris paribus.

None price determinants of demand/supply: factors that changes the

supply/demand of a product other than price, it changes the condition of the market
that can be illustrated by a shift of supply/demand curve.
Substitutes: Two goods are substitutes if a fall in the price of one of the goods makes
consumers less willing to buy the other good. XED>0
Complements: Two goods are complements if a fall in the price of one good makes
people more willing to buy the other good. XED<0
Joint supply: when two products are supplied together

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Competitive supply: when the production of two products are competing for same
type of resource.
(Income) Normal Goods: When a rise in income, ceteris paribus, increases the
demand for a good – that good is a normal good. YED>0
Luxury goods: YED>1
Necessity:0<YED<1
(Income) Inferior Goods: When a rise in income, ceteris paribus, decreases the
demand for a good, it is an inferior good.YED<0
Surplus (of a good): is presented when quantity supplied exceeds quantity demanded
at particular market price Surpluses occur when the price is above the equilibrium
level.
Shortage (of a good): is presented when quantity demanded exceeds quantity
supplied at a particular market price Shortages occur when the price is below the
market equilibrium level.
Market Equilibrium of a good: is defined as a state in which quantity supplied of a
good is equal to quantity demanded of a good.
Price at which the quantity supplied is equal to quantity demanded is called
equilibrium price. There will be no market surplus or market shortage at the
equilibrium; therefore, the equilibrium price is also called the market clear price.
Price Mechanism: The price mechanism describes how price coordinate supply and
demand in allocation of scarce resources between competing uses.
Signal function of price mechanism: price communicates information to decision-
makers about the market condition whether there is a shortage or a surplus.
Market prices for a competitive market are flexible; they change quickly toward the
equilibrium.
Incentive function of price mechanism: The change in market prices incentivizes
producers and consumers to react to this change.
Marginal social benefit: is the benefit gained from consuming an additional unit of
economic activity. From the society’s point of view.
Marginal social cost: is the cost generated from producing an additional unit of
economic activity. From the society’s point of view.
Marginal private benefit: is the benefit gained from consuming an additional unit of
economic activity. From the private consumers’ point of view.
Marginal private cost: is the cost generated from producing an additional unit of
economic activity. From the private producers’ point of view.
A Market is efficient if it produces the amount of product/service that achieve both
Productive and Allocative efficiency.
Allocative efficiency: when scarce resources are allocated to the amount that
maximizes social surplus/social welfare.
When there is no externalities: (MSC=MPC; MSB=MPB) resources are efficiently
allocated at the market equilibrium of a competitive market.

Productive efficiency: when the resources and technology are fully utilized, to the
maximum of output for per unit input. In the other words, the economy cannot
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increase the production of one product without sacrificing the chance for producing of
others.

Consumer surplus: Consumer surplus is the additional benefit (marginal benefit)

received by a consumer in purchasing a good where the market price is less than the
maximum price he/she would be willing to pay.
Producer surplus: is the additional benefit (revenue) received by a producer in
selling a good where the market price is above minimum price that the producers
would be willing to accept.
Social(community) welfare/surplus: is the sum of consumer surplus and producer
surplus and welfare gained by other members/organizations in the society(e.g.
government revenue).

Microeconomics topic 1.2:Elasticities

The price elasticity of demand (PED): is a measure of the responsiveness of the
quantity demanded for a good with respect to a change in the price of the good.
(Price) elastic demand/supply: percentage change in quantity demanded/supplied is
more than proportionate to the percentage change in price.
(Price) inelastic demand/supply: percentage change in quantity demanded/supplied
is less than proportionate to the percentage change in price.
Determinants of PED/PES: factors that help economists to make prediction of the
relative elasticity of a product or service.
Price elasticity of supply (PES): is a measure of responsiveness of the quantity
supplied due to changes in price of the product.
Total revenue (of an industry): is defined as income received by firms in that
particular industry at a period of time. It is also the total expenditure paid by
consumers of that industry. It is illustrated as the area under any specific point on the
demand curve given by the price times quantity.
Primary product: is defined as a product that is in its natural state and has not been
processed into anything, oil ,crops, mineral and other raw materials are of this type.
Manufactured products: are products that have been processed by using primary
products. Intermediate products (engines, pipes, circuit board etc.) and final products
(cars and computers) are all manufactured products.
Cross price elasticity of demand(XED): measures the responsiveness of the demand
of one good(Qx) to a change in the price of another good(Py)
Engel curves: a curve describes the relationship between quantity of good consumed
to income.

Income elasticity of demand(YED): measures the responsiveness of quantity

demanded to a change in consumers’ income.

Microeconomic topic 1.3: Government intervention

A tax: is a charge, placed on individual or firm, that is payable to the government
under punishment of law.
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Direct tax: is taxation imposed on people’s income or wealth, and on firms’ profits.
Indirect tax: a tax on expenditure. It is added to the selling price of a good or
service. Tax burdens can be shifted from the payer to others.
Fixed amount/flat rate tax (specific tax):an indirect tax where a specific amount,
e.g. $1, is added to the selling price of each unit.
Ad valorem tax (percentage tax): an indirect tax where a percentage, e.g. 20%, is
added to the selling price of each unit.
A stakeholder: is any group of people or organization with a direct interest in, and is
affected by the government economic policies.
Tax incidence (HL): a measure of a consequence of a tax on consumers and
producers, the burden of tax.
A subsidy is a payment, provided by government on individuals or firms, for the
purpose to increase the purchase or supply of a good or service.
Transfer Payment: government provide money to individuals and firms without
exchange for goods and services. Subsidy is a type of transfer payment.
Maximum price (price cap/price ceiling): a legal maximum price set below the
market equilibrium, prevent the market price to rise above that maximum price.
Minimum price (price floor): a legal minimum price set above the market
equilibrium, prevent the market price to fail below that minimum price.
Black market (parallel market): a market where a product or service is sold at an
illegal price.

Microeconomics Topic 1.4: Market Failure

A market is said to be failing when it produces at a quantity where
society/community surplus/welfare is not maximized (when it fails to achieve
allocative efficiency). A necessary condition for welfare maximization is at the market
output Marginal Social Cost(MSC)=Marginal Social Benefit(MSB)

Marginal social benefit: is the benefit gained from consuming an additional unit of
economic activity. From the society’s point of view.
Marginal social cost: is the cost generated from producing an additional unit of
economic activity. From the society’s point of view.
Marginal private benefit: is the benefit gained from consuming an additional unit of
economic activity. From the private consumers’ point of view.
Marginal private cost: is the cost generated from producing an additional unit of
economic activity. From the private producers’ point of view.

Overprovision means too many resources are allocated to its production

(overallocation); and underprovision means too few resources are allocated to the
product’s production (underallocation)

Externalities are defined as good/bad effect to the by-standers of

consumption/production of a product or services. The existence of externalities
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divergence social cost and benefit to private (supplier and consumers’ of a
product/service) costs and benefits: making social costs and benefits not equal to
private costs and benefits.

Negative externalities of production(NEP): external costs (harmful effects) suffered

by a third party as a result of an economic transaction when a good or service is
produced.

Market-based policies are policies that alter behavior through altering incentives
using the price mechanism of the market.

Internalizing an externality (a property of market-based policies):

policies force the private businesses that created the negative externalities to pay for
the external costs. For example indirect taxation increases the cost of production
(private costs) and creates tax revenue (social welfare). Or policies compensate
private businesses that create positive externalities.

Non-market Based Policies: Command and control through external forces to

achieve a certain level of output/price.

Pollutant tax: per unit indirect tax charged according to quantity of pollutant
emitted/discharged.

Exercise duties (specific tax): An indirect tax based on quantity of a specific product
being produced.

Tradable permits (cap and trade scheme): a license, such as a permit allowing a
company to pollute up to a particular level. The permits can be bought and sold in
free- market.

/Governments fix total amount of pollution permitted and distribute the pollution
permits to private firms. The permits are tradable in the open market.

Negative Externality of Consumption(NEC): external costs (harmful effects)

suffered by a third party as a result of an economic transaction when a good or service
is consumed.

Demerit goods: are goods whose consumption creates external costs (negative
externalities) to the society.

Positive Externality of Production(PEP): external benefits gained by third-party as

a result when a good or service is produced.

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Positive Externality of Consumption(PEC): external benefits gained by third-party
as a result when a good or service is consumed.

Merit Goods: are goods whose consumption creates external benefits (positive
externalities) to the society.

Public goods: are goods that have two particular characteristics.

They are: Non-excludable - once the goods are provided, it is not possible to exclude
people from using them even if they haven't paid. This allows 'free-riders' to consume
the good without paying.
Non-rival - this means that consumption of the goods by one person does not
diminish the amount available for the next person.

Free rider problem: is stated as those who do not pay for (normally through
taxation) providing the public goods cannot be excluded from getting the benefits of
the public goods.

Common Access Resources(CAR) are the resources where the ownership of a

resource is not clearly defined and it is difficult to exclude people from using these
resources. On the other hand, they are rival, the utilization of the resource reduces the
available of benefits for someone else.

The terms sustainability can be understood in the following ways:

Economically it is development that meets the needs of the present generation
without compromising the ability of future generations to meet their needs.
Naturally, the capacity of the resource will not be perished by human activities, in
other words, the preservation of the environment over time.

Since CARs are non-excludable and often nobody could claim the property rights
over the CARs. Increasing in demand will not lead to increase in market price and no-
incentive is created to ration the behavior of the consumers. As a result, overuse of
the CARs are presented, leading to degradation/depletion of the CAR.

The global nature of CARs: Another problem with CARs, the ownership of CARs
may not belong to one country.

Clean technologies: are technologies that aim towards a more efficient use of natural
resources and reduction of the adverse effects on environment from production.
Information asymmetry(HL): exists when one party in a transaction (buyer or
seller) has access to more information or better information than the other party and
may use it to his/her advantage at the expense of the less informed side.
Adverse selection(HL): form of market failure resulting when products of different
qualities are sold at a single price because of asymmetric information, so that too
much of the low-quality product and too little of the high-quality product are sold. A
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bad product drives out a good product, eventually leading to the dysfunction of
the market.
In general, moral hazard(HL) occurs when a market participant take an excessive
risk because they do not bear the full costs of the risk; the risk is borne by other
parties.

Microeconomics Topic 1.5: Theory of the firms and market structure (HL)

Costs/Revenue and Profit: Goals of the firms

Textbook P160

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Short run: the period of time in which at least one factor of production is fixed.

The Law of Diminishing Marginal Returns (on variable inputs): As more and
more of a variable resource (usually labor) is added to fixed resources (capital and
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land) towards production, the marginal product (the additional product created by one
additional unit of input) of the variable resource will increase until a certain point,
beyond which marginal product declines.

Law of Diminishing Average Returns (on variable inputs): As more and more of a
variable resource (usually labor) is added to fixed resources (capital and land) towards
production, the product produced per unit of variable resource (average product) will
increase until a certain point, beyond which marginal product declines.

Long run: the period of time in which all factors of production are variable.

Economies of scale:
 an increase in all inputs leads to a proportionately greater increase in output
 an increase in all inputs by x% leads to a greater than x% increase in output

Diseconomies of scale:
 an increase in all inputs leads to a proportionately fewer increase in output
 an increase in all inputs by x% leads to a less than x% increase in output

Constant returns to scale:

 An increase in all inputs by x% leads to a x% increase in output

Normal profits:
 it is the amount of revenue needed to cover the total costs of production,
including the opportunity costs.
 When economic profit is equal to zero.
 The amount of profit to keep a firm in business in the long run

Abnormal profits/super normal profit/economic profit: a level of profit that is

greater than that required to ensure that a firm will continue to supply its existing
good or service. (An amount of revenue greater than the total costs of production,
including implicit and explicit costs.)

Loss: the amount of revenue earned is less than the sum of explicit and implicit cost.
When economic profit is less than zero.

Profit-maximizing level of output: the level of output where Marginal

Revenue(MR) is equal to Marginal Cost(MC)./The level of output where Total
Revenue(TR) minus Total Cost(TC) reaches its maximum./

Satisficing: referring to the idea that firms try to make enough profit in order to
achieve satisfactory of different stakeholders rather than optimal or ‘best’ results (i.e.
maximize revenue/growth in size of the firm).
(Short Run) Shut down price: the price where average revenue is equal to average
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variable cost. Below this price, the firm will shut down in the short run.

Breakeven price: the price where average revenue is equal to average total cost.
Below this price, the firm will shut down in the long run.

Shutdown price: the price where average revenue is equal to average variable cost.
Below this price, the firm will shut down in the short run.

Allocative efficiency:
 In a market resources are used in their best way
 The market produces an output that maximizes the social welfare:

The level of market output where Marginal Cost (MC) is equal to average revenue
(market price P). The firm sells the last unit it produces at the amount that it cost to
make it.
Or Marginal Social Cost(MSC)=Marginal Social Benefit(MSB)
Or Consumers’ surplus + producers’ surplus is maximized

Productive efficiency: it exists when production is achieved at lowest cost per unit of
output.
This is achieved at the point where average total cost is at its lowest value.
This is achieved when market produces a quantity at which an average firms’ / the
monopolist’s Marginal Cost (MC) is equal to Average Total Cost (ATC)

Market power/Monopoly Power: the ability of a firm to set the market price.

Perfect competition: it is a market structure where there are a very large number of
small firms, producing identical products that are incapable of affecting the market
supply curve. Because of this, the firms are price takers. There are no barriers to
entry or exit and all the firms have perfect knowledge/information of the market.

Monopolistic competition: it is a market structure where there are many buyers and
sellers, producing differentiated products, with no barriers to entry or exit. Each seller
has a little market power in influencing the market price.

Product differentiation: ways in which suppliers attempt to make their products

different from those of their competitors, e.g. differences in quality, performance,
design, styling, or packaging. It is a form of non-price competition.

Oligopoly: it is a market structure where there are a few large firms that dominate the
market. Each firm has some market power, their decision on output and prices are
interdependence.

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A concentration ratio provides an indication of the percentage of output produced by
the largest firms in an industry.

Collusive oligopoly: where a few firms in an oligopoly act together to avoid

competition by resorting to agreements to fix prices or output.

Cartel (a type of formal collusive oligopoly): A group of firms in an industry that

join together to fix prices by limiting the total output. These are usually illegal in most
countries.

Informal collusive oligopoly:

price leadership
informal agreements where firms agree to use a rule for co-ordinating prices. One
such rule is limit pricing, where the firms informally agree to set a price that is lower
than the profit-maximizing price

Non-collusive oligopoly: where firms in an oligopoly do not resort to agreements to

fix prices or output. Prices tend to be stable, firms tend to involve in non-price
competition.

Monopoly: a market forms where there is only one firm in the industry, so the firm is
the industry. A monopolist exercises tremendous market power due to absence of
competition. There are no close substitutes and there are significant barriers to entry.

Barriers to entry: obstacles in the way of potential newcomers to a market, such as

economies of scale, product differentiation, and legal protection.

Natural monopoly (the first three points):

 Is an industry at which one firm that can produce the entire output of the market
at an average total cost lower than what it would be if there were several firms.

 With natural monopolies, economies of scale are very significant so that

minimum efficient scale is not reached until the firm has become very large in
relation to the total size of the market.

 The market demand must be above the Long-run average total cost curve for a
large range of output; therefore, it enables a sole producer to be profitable (at
least break even) while enjoying the economies of scale when expending its
output.

 Normally, the start-up fixed cost to enter into the industry is extremely high;
therefore, there will be higher barriers for new entrant.

 In other cases, competition will cause all firms to suffer a loss: the output for each
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 firm after competition will not be able to cover the fixed costs. Decrease in
demand facing every firm will be set below the LRATC curve.

Dynamic efficiency (X-efficiency): As firms have market power are able to earn
abnormal profits in the long run there may be a faster rate of technological
development that will reduce variable costs and marginal cost and produce larger
quantity of items with cheaper prices.
Contestable market (supplementary): a market that appears to be an oligopoly or
monopoly, where the threat of potential competition forces firms to behave in a more
competitive manner than theory would predict.

Price discrimination: it occurs when a producer charges different prices to different

customers for an identical good or service. Price discrimination is considered as
monopoly behaviour, it presented under the following conditions:

(1) The firm must possess some degree of market power

(2) There must be groups of consumers with differing price elasticity of demand for
the product.
(3) The firm must be able to separate groups to ensure that no resale of the product
occurs.

The purpose is to turn consumer surplus into producer surplus and increase the profit
retained by the firms.

Topic 2.1 Level of overall economic activities

Circular flow diagram is a tool to illustrate how macro-economic activities and

national income is determined
Close economy circular flow diagram shows the flow of income and expenditure
and the flow of products and factors. It can be used to show that total
expenditure=total income=value of output
Open economy circular flow diagram shows the flow of income and expenditure for
an economy consists of government, financial sector and open to international trade.

It can be used to show the injection and leakage effect, and the effect of a change
happened to a specific sector (government, foreign trade, financial sector) of an
economy.

Infrastructure: the large scale public systems, services, and facilities of a country
that are necessary for economic activity. They are accumulated through investment,
usually by the government. Added to Capital Stock.

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Injection effect: expenditure from non-household sectors that is spent on buying
domestically produced goods and services. It includes government spending,
investment and export revenue.

Leakage effect: the proportion of income that is not spent on buying goods and
services produced domestically. It includes tax, savings and import expenditure.

Consumption(C): a component of aggregate demand, it is spending by all households

(consumers) on goods and services over a time period.
Savings(S): are the proportion of income that is not spent on buying domestically
produced goods and services and the purpose for saving is to utilize the future value
of money (gaining interests).
Investment(I):
 expenditure/spending by firms on capital accumulation
 addition to the capital stock of the economy
 increases the productivity of the economy

Imports(M): are goods and services produced in other countries and purchased by
domestic buyers.
Exports(X): are goods and services produced domestically and purchased by
foreigners.
Taxes(macro, T): are a proportion of the nation’s income paid to the government! It
is controlled by raising and lowering income tax rates.
Government spending(G): government makes current purchase to provide the nation
with valuable infrastructure, education, defense, support for health care and so on.

Gross Domestic Product: Market value of all final products produced with in the
boarder of a country within a period of time normally a year.
Expenditure approach: measures GDP by recording the component of spending in
the good and service market side of the circular flow diagram C+I+G+NX/ C+I+G+
(X-M)
The Income approach: Measures GDP by recording the income of household in the
resource market side of the circular flow of income.
The Output approach: Measures the value of the total output produced in the
different sectors of the economy.
Nominal GDP: measures the value of a nation’s output produced in a year, expressed
in the value of the prices charged for that year. It is also refers to as GDP at current
price.
Real GDP: the value of a nation’s output in a particular year adjusted for changes in
the price level from a base year.
It also refers to GDP at constant price.
GDP deflator: is a price index commonly used to convert nominal GDP to real GDP.
GDP deflator (year n)=nominal GDP (year n)/real GDP (year n)
GNI(Gross National Income) (Gross National Product): Total Income that is
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earned by the citizens, both domestic and aboard, of a country who owns the Factors
of production, regardless where the factories, firms(assets) are located.
GNP/GNI=GDP+ net income from abroad.
Green GDP: is a measure of economic activity which subtracts from real GDP the
losses to the environment and biodiversity resulting from economic growth and cost
for compensating the damages.
Green GDP = GDP − the value of environmental degradation − Price Paid for
Environmental Compensation.
Business circular diagram: Changes in a nation’s real GDP over time.

Topic 2.2 Aggregate Demand and Aggregate Supply

Aggregate Demand: is the total quantity of goods and services that all buyers in an
economy (consumers, firms, government and foreigners) are planned to buy over a
particular time period, at different possible price levels.

Consumer Confidence: related to the expectations of consumers about the future of

economic conditions, (especially income) and affects the level of consumption.
Business Confidence: related to the expectations of businesses about the future of
economic conditions, (which may be optimistic or pessimistic) and affects the level of
investment.
Aggregate Supply: is defined as the total quantity of goods and services produced in
an economy over a particular period of time.
Keynesian aggregate supply curve has three sections based on the spare capacity of
unused capital and resource.

(a)Horizontal section (when there is a lot spare capacity of unused resource)

When income and output Y0 is very low, wages and prices are downwardly inflexible:
The higher menu cost (cost of change the product prices) and fearfulness of involving
in price competition result in downwardly in flexible product prices.
The power of union, minimum wage legislation lead to rigidity wage (factor price).
When economy is getting better, because the existence spare capacity of resource, PL
and resource price does not to increase.
(b) Trade-off section (output is close to full capacity)
Increasing in output is accompanied by an increase in average price level. At a level
of output closes to its full employment level. Usage of FOP is closed to its bottleneck.
Increase in output will lead to increase in resource price and only in case product
prices are higher, firm will be induced to produce more.
(c) Vertical section (inflationary section)
Output is to the maximum YFE, price level may by driven up by an increase in AD
but the output will no

Monetarist assumes wages, as factor costs, are fixed in the short-run and are flexible
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in the long-run. Wages takes the largest proportion of factor costs.
Short-run Aggregate Supply(SRAS) shows the relationship between the price level
and the quantity of real output (real GDP) produced by firms when resource prices
(especially wages) are relatively inflexible according to changes of product price
Long-run aggregate supply the economy producing potential level/full employment
level of output when factor prices (especially wages) can be adjusted according to the
status (product price) of the macro-economy
Short-run equilibrium: at a price level, when AD equals to SRAS, the macro-
economy is in short-run equilibrium.
Long-run equilibrium: when AD equals to SRAS and the real output determined by
AD and AS is at the full employment level of output YFE the macro-economy is in
long-run equilibrium.
Full employment level of output/Potential output: the output of goods and services
achieved when a nation is producing at or near its potential by employing all possible
resources.

Inflationary gap:
 the economy is (in equilibrium) at a level of output that is greater than the full
employment level of output or above potential output (Monetarist)
or
 an increase in aggregate demand (when the economy is at full employment)
results in an increase in the average price level with no increase in real GDP
(Keynesian view)

Recessionary gap:
 the economy is (in equilibrium) at a level of output that is less than the full
employment level of output or below potential output

Recession: occurs when an economy experiences two consecutive quarters of falling

output (negative growth).

The Keynesian multiplier (HL): is defined as the total change in real GDP divided
by the initial change in any of the components of the aggregate demand.

Topic 2.3 Macroeconomic Objectives

Unemployment: is defined as number of people in the Total Labor Force(TLF) that

are actively seeking for jobs but do not have a job.
The Total Labor Force(TLF): This is the population of individuals in a nation who
are of legal working age and are willing and able to work:
TLF excludes people who are under the legal working age (16 for most countries) and
whose age are above the legal working age (e.g. retirees of an age above 65) (not of
legal working age).
TLF excludes people cannot work due to illness (ability).
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TLF excludes people who do not want to be in the labor market(e.g. housewives and
university students) (willingness).
The Unemployment Rate: This is the percentage of the total labor force that is
unemployed.
Hidden unemployment: individuals may give up looking for a job when cannot find
employment after a long time period, since official statistics only account those who
are not employed and are actively looking for jobs, the existence of hidden
unemployment underestimate unemployment.
Underemployment: basically, the figures do not distinguish full time and part-time
employment, people who are doing part time jobs are underemployed. Moreover,
those who work at jobs in which their skills are underutilized are also under
employed.

The Natural Rate of Unemployment (NRU): An economy producing at its full

employment level is expected to have only frictional, seasonal and structural
unemployment. Since there is always an element of voluntary unemployment in the
economy, it is natural. The percentage of workers voluntarily unemployed is the
natural rate of unemployment.
Frictional unemployment: labors are not employed because they are searching for
jobs or waiting to take jobs soon.
Seasonal unemployment: occurs when the demand for labor in certain industries
changes on a seasonal basis: it is higher on some period of the year and lower in other
periods.

Structural unemployment: long-term unemployment that is caused as a result of a

decline in the demand for a particular type of labor: a mismatch of the skills that
labors has and skills required. It is normally caused by change in geographical
locations of multinational firms, change in technology and industrial reforms as well
as labor market rigidity.
Cyclical/demand-deficient unemployment: If the aggregate demand for a nation’s
output falls, firms will, in the short-run, reduce the number of workers they employ
and reduce their output. This type of unemployment is known as demand-deficient
unemployment.

Inflation: is defined as persistent increase in the average price level of goods and
services in an economy over time.
Deflation: is defined as persistent decrease in the average price level of goods and
services in an economy over time.
Disinflation: Disinflation means inflation rate decreases but the economy still
involves a positive inflation rate (increase in general price level).

The Consumer Price Index (CPI):is a weighted average price index of a market
basket of consumer goods and services that a typical household consumes.
The Inflation Rate: Is measured by the percentage change in the CPI between two
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years.

Demand-pull inflation: Occurs when there is an increase in total demand for a

nation’s output, either from domestic households, foreign consumers, the government
or firms (C, Xn, G or I). When demand increases without a corresponding increase in
aggregate supply, the nation’s output cannot keep up with the demand, and prices are
driven up as goods become scarcer.
Cost-push inflation: Occurs as the result of a negative supply shock, arising from a
sudden, often unanticipated, increase in the costs of production for the nation’s
producers.

Stagflation: A condition of increased price level together with decreasing real output.

Inflation Spiral: a combination of higher inflation expectation (wage and cost hike,
decrease in SRAS) and money illusion (increase in AD) lead to persistent increase in
inflation rate.

Deflationary spiral: lower prices lead to lower confidence and AD that lead to even
lower prices.

Real wage: monetary earnings retained by labors adjusted for effects of inflation.

Long-run Phillips curve(LRPC/HL): it shows that there is no trade-off between

inflation and unemployment. When wages can be adjusted according to inflation
expectation.
Short-run Phillips curve(SRPC/HL): it shows that there is a trade-off/inverse
relationship between inflation and unemployment. When wages are fixed.

Economic growth: is defined as percentage change in real GDP over a period of

time.
Actual growth: is defined as growth in actual GDP through making better use of
unused resources with no change on the quantity and quality of productive resource. It
is represented by a movement from a point within a PPC to a new point closer to the
PPC.
Potential growth: is defined as growth in potential GDP, an improvement in
productivity or production possibilities with an improvement in quality and quantity
of factors of production. It is represented by an outward shift of the PPC.

Human capital: the skills, ability and knowledge acquired by the labor force.
Natural resource: including marketable minerals and oil and non-marketable ones
such as biodiversity.
Physical capital: include factories, machinery and infrastructure. Factories and
machinery are accumulated through investment while infrastructure is accumulated
through government Capital expenditure.
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Productivity: the amount of output that can be produced with one unit of factor input.

Absolute poverty: is defined as a person earns an income less than a threshold that is
sufficient to afford minimal standards of food, clothing and other living expenses.
In 2015, World bank updated a figure of $1.9 per day(at 2011 purchasing power parity
in US Dollars) as the world poverty line. Population earn an income below this line is
considered to live in absolute poverty.

Relative poverty: it is defined as a person earns an income less than a particular

percentage(50%-60%) of the median income in a society.
Under this measure, the median income is adopted to estimate the typical standard of
living in the society. If a person earns an income less than, say 50%, of this median
income, the person is said to be live in relative poverty!

Equity in the distribution of income: The concept of equity in economics deals with
the highly normative concept of fairness in the distribution of wealth and income.
Equity can be:
Everyone gets a fair chance to earn higher income.
The ones that work harder get a larger share.
Giving disadvantaged members of society ‘fair shares’.

Equality in the distribution of income: Statistically everyone gets the same amount
of income.
Lorenz curve (a measure of equality): shows the cumulative percentage of income
attributable to the cumulative percentage of the population, when ranked according to
their income.
Gini coefficient: areas of A over the total area of (A+B) in the Lorenz curve diagram.

Quartiles: 25% Quintiles: 20% Deciles: 10%

Direct taxes: are levied on economic agents’ income, wealth or property. They are
paid directly to the government by the agents on whom the taxes are imposed.

Indirect taxes: are levied on consumption and expenditure. That are added the selling
price of the goods and services. Tax burdens can be shifted from the payer to others.

Progressive tax: means that the percentage of tax paid increases as income rises – a
larger proportion of income goes to tax as income rises. Income tax in most countries
is progressive thus it works as a tool to redistribute income.
Regressive tax: A same amount (flat-rate) of tax is imposed to all households
regardless of income is a regressive tax – a decreasing proportion of income goes to
tax as income rises.
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Proportional tax: When the percentage paid is the same no matter what income
level, the tax is proportional – the same proportion of income goes to tax regardless of
income.
Average tax rate (HL): ratio between total tax payment and total income.
Marginal tax rate(HL): additional tax payable for gaining additional income.

Transfer Payment: Any government fund granted to households – without exchange

for corresponding output– is a transfer payment. By giving out transfer payments, the
government can directly redistribute income collected in the form of taxation.

Topic 2.4 Fiscal Policy

Demand-side policies: also known as demand management, is the kind of policies

that implemented by the government or central banks to influence aggregate demand
and to achieve macro-economic objectives: such as price stability, full employment
and economic growth.

Fiscal Policy: is type of demand-side policy when government planning on its budget
to influence Aggregate Demand.

Expansionary fiscal policies: that government manage the budget by:

1. lowering taxes (affect C and I component of the AD indirectly)
2. increasing government expenditure by increasing
government spending (affect G component of the AD directly)
transfer payment(affect C component of AD indirectly)
to increase AD.

Contractionary fiscal policies: that government manage the budget by:

1. Increasing taxes (affect C and I component of the AD indirectly)
2. decreasing government expenditure by decreasing
government spending (affect G component of the AD directly)
transfer payment(affect C component of AD indirectly)
to stop the fast growing trend in AD.

Government Budget: is a plan of a country’s tax revenues and expenditures over a

period of time (usually a year).

If tax revenues are equal to government expenditures over that period, the government
is said to have a balanced budget. However, in practice, the government’s budget is
rarely if ever balanced. If expenditures are larger than tax revenues, there is a budget
deficit. If expenditures are smaller than tax revenues, there is a budget surplus.

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Public debt: Over time, the government’s accumulation of deficits minus surpluses is
referred to as public debt, or government debt.
Current Expenditures: is the day to day cost of running the government.
Capital Expenditures: are investments made by the government in capital equipment
and infrastructure.
Privatization: government sells state-owned enterprises (assets) to the private sector.

Debt servicing: government revenue spends on paying the debts for each financial
year. Increased debt servicing naturally means higher outlays for government. The
government has to reduce the spending on services provided to the public in terms of
spending foregone to roads and hospitals etc.
Automatic stabilizer: the level of government tax revenue and welfare spending that
varies automatically with the change in level of economic activities and national
incomes. The stabilizers reduce the short-run fluctuation in national incomes.

Time lags: occurs between the onset of an economic problem and the full impact of
the policy intended to correct the problem.

Crowding out effect: Increase in G lead to increase in borrowing from the loanable
funds market. Interest charged for loans will increase, resulting in difficulties for
private sectors to make loans, therefore, reduces their level of Investment (I is crowd
out by G)

Topic 2.5 Monetary Policy

Money: is defined as anything that is acceptable as payment for goods and services.
Interest rate:
 Normally expressed as a percentage to the money borrowed
 It is the cost of borrowings
 It is also known as return on savings
 Can be understood as the opportunity cost of holding the money

Exchange rate: is defined as the price of a currency expressed in terms of another

currency.

Money Supply(MS): How much money (spendable currency and deposits) are there
in circulation at different interest rates. The quantity of money supply is independent
from interest rate. Central bank controls the monetary base together with deposit
created by commercial banks forms the economy’s money supply.

Open Market Operation(OMO): central bank buying and selling bonds in the
financial market in order to alter the bond price and target interest rates.

Money Demand(MD): How much money (spendable currency and deposits) are
willing to be held by households and firms at different interest rates. Money demand
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responses to change in opportunity cost of holding the money (Interest Rate) and
determined by non-interest factors such as real income. Non-interest factors include
transactional and precautionary demand.

Central banks:
 regulator of commercial banks
 banker to the government
 control of interest rates
 control of money supply
 maintenance of price stability
 control of exchange rate policy

Inflation targeting: means Central Banks are responsible for using monetary policy
to keep inflation close to the agreed level. Normally 2%+/-1%. This policy stabilizes
inflationary expectations.
Monetary Policy: is defined as Central Bank planning on the quantity of money
supply to influence/alter interest rate and Aggregate Demand (AD) and to achieve
macroeconomic objectives.

Topic 2.6 Supply-side Policies

Supply-side policies: are policies aim at positively affecting the production side of an
economy by improving the institutional framework and the capacity to produce,
increasing the quantity and/or quality of factors of production.
Interventionist Supply-side policy: government directly participated in improving
the quality and quantity of factors of production, an increase in productivity and a
shift of LRAS.
(1) infrastructure spending
(2) supporting Research and Development(R&D)
(3) Education spending
(4) Industrial policies
Market-based Supply-side policy: free-functioning market work on reducing cost of
production, refinement, achieving productive and allocative efficiency. Result in
improving the quality and quantity of factors of production, an increase in
productivity and a shift of LRAS.
(1) incentive related policies
(2) labor-market reform
(3) policies aim at encourage competition

Topic 3.1 Free Trade and Protectionism

International Trade: is defined as exchange of goods and services across
international boundaries
Specialization: where a country specializes in the production of goods and services
where they have a comparative advantage in production. They will then trade to get
the goods and services that they do not specialize in.
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Over-Specialization: refers to the production of a narrow range of products is so
adopted to function in a specific environment. It is often very difficult for an over-
specialized economy to transfer to a diversified economy producing a wider range of
products
Absolute advantage (HL): where a country is able to produce more output than other
countries using the same input of factors of production.
Comparative advantage (HL)：where a country is able to produce a good at a lower
opportunity cost of resources than another country.
Free trade：international trade that takes place without any barriers, such as tariffs,
quotas, or subsidies.
Dumping ： it is the practice of selling of a significant large amount of goods in
another country at a price below its cost of production or below the price sold at the
domestic market.
World Trade Organization(WTO): is an international body that sets the rules for
global trading and resolves disputes between its member countries. It also hosts
negotiations concerning the reduction of trade barriers between its member nations. It
promotes trade liberalization.
Protectionism: The use of tariffs, quotas, subsidies or administrative measures aimed
at making domestic producers more competitive with foreign producers by limiting
the quantity of imports into the nation.

Tariff: a tax that is placed upon imports to protect domestic industries from foreign
competition (and to raise revenue for the government).
Quota: import barriers that set limits on the quantity or value of imports that may be
imported into a country.
Protective Subsidy: an amount of money paid by the government to a firm, per unit
of output, to encourage output and to give the firm an advantage over foreign
competition.
Voluntary Export Restraints (VERs): an agreement between two nations to limit
trade in particular commodities so that the producers in one nation can remain in
business providing commodities to the domestic market, rather than be forced to
compete with more efficient foreign producers.
Administrative Barriers: Also called the Technique Barriers of Trade(TBT).
May include overly burdensome quality controls, safety regulations, living-wage and
other workplace standards and environmental protection standards to be met by
foreign producers. If foreign producers cannot meet these standards, their products are
forbidden from being sold domestically.

Topic Related terms:

Economies of Scale(HL)
Allocative efficiency
Productive efficiency
Production Possibility Frontier
Opportunity Cost
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Fixed cost
Variable cost

Topic 3.2 Exchange Rate

Exchange rate: the value of one currency expressed in term of another, e.g. €1 =
US$1.5.
Fixed exchange rate: an exchange rate regime where the value of a currency is fixed,
or pegged, to the value of another currency, (or to the average value of a selection of
currencies, or to the value of some other commodity, such as gold).
(Freely) Floating exchange rate: an exchange rate regime where the value of a
currency is allowed to be determined solely by the demand for, and supply of, the
currency on the foreign exchange market.
Depreciation: a fall in the value of one currency in terms of another currency in a
floating exchange rate system.
Appreciation: an increase in the value of one currency in terms of another currency
in a floating exchange rate system.
Devaluation: a decrease in the value of a currency in a fixed exchange rate system.
Revaluation: an increase in the value of a currency in a fixed exchange rate system.
An Overvalued Currency: is one that has a value that is too high relative to its
equilibrium free market value. Its exchange rate has been set at a higher level than the
equilibrium market exchange rate.
An Undervalued Currency: is one whose value is too low relative to its equilibrium
free market value; its exchange rate is low relative to the one the market would have
determined.

Topic Related terms:

Interest Rate
Central Bank
Foreign Direct Investment(FDI)
Investment
Consumption
Portfolio investment
Inflation
Unemployment
Economic growth
Current Account Balance
Balance of trade in current account
Indebtedness: is refer to the situation when a country is not able to pay back its debt
timely by using tax revenue or export revenue.
Monetary Policy
Debt servicing
Reserve Assets

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Topic 3.3 Balance of Payments
Balance of Payment (BOP accounts):is the record of all monetary transactions
(value of all transactions) of the country with the rest of the world over a period of
time, normally a year.
Current Account: it is a record of the flow of funds from trade in goods and services
(value of exports minus imports), plus net income flows (profits, interest, wages,
rents) and net transfers of money (foreign aid, grants, pensions, etc).
Capital Account: records capital transfers and transactions in non-produced, non-
financial assets.
Financial Account: records
 flows of foreign direct investment
 flows of portfolio investment
 changes in reserve assets
Reserve Assets: gold reserve and foreign exchange reserve that are readily available
to a government for direct financing of international payment imbalance or/and to
affect the exchange rate
Payments received from other countries/capital inflow are recorded Credits.
Payments made to other countries/capital outflow are recorded as Debits.

Foreign Direct Investment (FDI):

 long-term investment
 investment by a multinational corporation (MNC)
 investment representing at least 10% ownership

Portfolio Investment: MNCs buying of selling stocks, shares and government bonds
and other form of financial investment.
Balance of trade (the major component of current account): the record of cash
inflow and output through imports and exports of physical goods and services
between a country and the rest of the world.
Current account surplus: where the revenue from the export of goods and services
and income flows is greater than the expenditure on the import of goods and services
and income flows in a given year.
Current account deficit: where revenue from the exports of goods and services and
income inflows is less than the expenditure on the import of goods and services and
income outflows in a given year.
Expenditure-switching policies(HL): policies implemented by the government that
attempt to switch the expenditure of domestic consumers away from imports towards
domestically produced goods and services.
Expenditure-reducing policies(HL): policies implemented by the government that
attempt to reduce overall expenditure in the economy, including expenditure on
imports.
Marshall-Lerner condition (HL): states that a depreciation, or devaluation, of a
currency will only lead to an improvement in the current account balance if the
elasticity of demand for exports plus the elasticity of demand for imports is greater
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than one.
J-Curve Effect (HL): suggests that in the short term, a fall in the value of the
currency will lead to a worsening of the current account deficit, before things improve
in the long term.
Price Elasticity of demand for exports(PEDx/HL): a measure of the
responsiveness of the quantity demanded of exports when there is a change in the
price of exports (normally due to the change in exchange rate).
Price Elasticity of demand for imports(PEDm/HL): a measure of the
responsiveness of the quantity demanded of imports when there is a change in the
price of imports (normally due to the change in exchange rate).

Topic related terms:

Exchange rate
Interest rate
Supply-side policies
Externalities

Topic 3.4 Economic Integration

Economic integration: refers to co-operation between countries and co-ordination of
their economic policies, leading to increased economic links between them. Economic
integration is driven by the potential gains that can be derived from cooperation.
Preferential Trade Agreements: it is a type of economic integration that removes (or
reduces) trade barriers for certain products to countries that are in the agreement.
Bilateral Trade Agreements: This is trade agreement between two countries.
Multilateral Trade Agreements: This is a trade agreement between multiple/many
countries.
Regional trade agreements: which as the term suggests involves agreements
between a group of countries that are within a geographical region.
A Trading Bloc is a group of countries that join together in some form of agreement
in order to increase trade between themselves and/or to gain economic benefits from
co-operation on some level.
Free trade area (FTA): a trading bloc abolishes trade barriers between members, but
each member country maintains its own trade barriers towards non-member countries.
Customs union: an agreement made between countries, where the countries agree to
trade freely among themselves, and they also agree to adopt common external barriers
against any country attempting to import into the customs union.
Common market: a customs union with common policies on product regulation, and
free movement of goods, services, capital, and labor.
A Monetary union is a common market with a common currency and a common
central bank.
Trade Creation(HL): occurs when the entry of a country into a customs union leads
to the situation where higher cost products (imported or domestically produced) are
replaced by lower cost imports.
Trade Diversion(HL): occurs when the entry of a country into a customs union leads
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to the situation where lower cost imports are replaced by higher cost imports from
member countries.

Topic related terms:

Tariff
Central Bank
Interest Rate
Exchange Rate

Topic 3.5 Terms of Trade(HL Only)

Terms of trade(HL): is an index that shows the value of a country’s average export
prices relative to their average import prices. It measures the amount of imports that
can be bought through the sale of a fixed units of exports.
Deterioration in terms of trade(HL): where the average price of exports falls
relative to the average price of imports. More exports have to be forgone in exchange
for a given amount of imports.
Improvement in terms of trade(HL): where the average price of exports increases
relative to the average price of imports. Fewer exports have to be forgone in exchange
for a given amount of imports.

Topic related terms:

Income Elasticity of Demand(YED)
Price Elasticity of demand for exports(PEDx/HL)
Price Elasticity of demand for imports(PEDm/HL)
Inflation
Exchange Rate

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Section 4: Development Economics

4.1 Natural of economic development

Poverty trap/cycle:
 A vicious cycle starts from and ended by poverty
 low incomes lead to low saving which leads to low investment which leads to low
growth which leads to low income
 low incomes lead to low levels of human capital that leads to low productivity
that leads to low incomes.
 Can only be broken out through intervention

Informal Sector:
it is economic activity that is
 unrecorded (illegal/not taxed) in national income accounts
 unauthorized by the government (authorities)
 eg moonlighting.

Common Characters of ELDCs:

 low levels of GDP per capita
 high levels of poverty
 relatively large agricultural sector
 large informal sectors
 high birth rates (population growth rates)

Millennium Development Goals (MDGs):

 eradicate extreme poverty and hunger
 achieve universal primary education
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 promote gender equality and empower women
 reduce child mortality
 improve maternal health
 combat HIV/AIDs, malaria and other diseases
 ensure environmental sustainability
 develop a global partnership for development.

4.2 Measure development

HDI
A composite indicator that measures development by weighting:
 real national income per head (real GNI/GDP per capita)
 life expectancy
 mean years of schooling
 expected years of schooling.

GDP=GNI - Net Factor Income/Net income from abroad

GNI-GDP= Net Property(Factor) Income/Net income from abroad
When GNI-GDP is positive, there must be a positive figure (balance) for net property
income (current transfers)
When GNI-GDP is negative, there must be a negative figures(balances) for net
property income (current transfers)

GDP per capita at (2011) Purchasing Power Parity in (US Dollars):

Per capita income measured by a particular currency is converted into 2011’s US
dollars (international currency) using an estimated purchasing power parity exchange
rate that allows the same product/service to be sold at a same price across countries.

4.3 The role of domestic factors

micro-credit:
 a loan
 allows poor people to set up a small-scale business
 micro-credit is loaned to borrowers who do not have security/collateral
 micro-credit contributes to the empowerment of women.

Infrastructure:
 large scale public systems (services or facilities) of a country
 necessary for economic activity
 add to the capital stock of the economy
 usually supplied by the government.

Appropriate technology:
 refers to make full use of existing local resources such as labors and land.
 Appropriate according to the stage of development; use capital intensive tech. to
replace labor intensive tech. according to the stage of development.
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Labor intensive technologies: use more labor in relation to capital. These increase
local employment and the use local skills and materials. Incomes and poverty
alleviation should also increase.

Related terms
Absolute Poverty
Relative Poverty
Equality in income distribution
Progressive tax
Regressive tax
Transfer Payment

4.4 The role of international trade

Import substitution(ISI) involves replacing foreign imported goods and services
with goods and services produced domestically.

Export Promotion(EPI) government intervenes in order to expand its export industry

and promote economic growth and economic development.

Diversification
it is a strategy
 to reallocate resources into new activities that broaden the range of goods or
services produced
 to reduce the risks of overspecialization and the reliance on exporting a narrow
range of products

Privatization: government sells state-owned enterprises (assets) to the private sector.

Infant industries:
 are new industries
 which do not benefit from economies of scale
 need protection to compete with imports

4.5 The role of FDI

A Multinational Company: is a company that has productive units in more than one
country. It carries out foreign direct investment in another country.

Foreign Direct Investment (FDI):

 long-term investment
 investment by a multinational corporation (MNC)
 investment representing at least 10% ownership

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4.6 The roles of foreign aid and multilateral development assistance

International Monetary Fund(IMF) is an international body:

 ensure the stability of the international monetary system
 promote international monetary cooperation
 lend money to help members in balance of payments difficulties.

Bilateral aid： aid that is given directly from one country to another.
Multilateral aid：aid that is given by countries to international aid agencies, such as
the World Bank, and then distributed by the agencies.
Soft loans ： loans given to developing countries that have a rate of interest
significantly below the usual market rate.
Grant： short term aid provided as a gift that does not have to be repaid (food aid,
medical aid, and emergency aid).
Official Development Assistance ： aid that is provided to a country by another
government or an official government agency. It may be multilateral or bilateral in
nature.
Unofficial aid ： aid that is organized by a Non-Governmental
Organizations(NGOs), such as Oxfam.
Tied aid*：grants or loans that are given to a country, but only on the condition that
the funds are used to buy goods and services from the donor country.
Humanitarian aid*：Short-term assistance in response to crisis (disease, war ,nature
disaster) normally in the form of food, medical aid and other emergency relief
Development aid：aid that promotes long run development for a country:
Program aid (development aid): aid target a specific sector related to economic
development (for example educational sector)
Project aid (development aid): aid given to a specific project(construct a new
school/hospital), smaller in scale compare to program aid
Non-governmental Organization(NGO): are non-profit social organizations that are
not operated by the government, their aims are to promote economic development in
LEDCs, humanitarian ideal and/or sustainable development.

4.7 The role of debt

Foreign Debt: is also called external debt refers to loans that are borrowed from
creditors of foreign country, there are three types of foreign debts:
(i) government borrowing from multilateral organizations
(ii) government borrowing from foreign commercial banks
(iii) Government sales of bonds to foreigner

Indebtedness: relates to the high levels of debt that developing countries owe to
developed countries. The repayments on this debt act as a significant barrier to
growth for developing countries.

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Debt servicing: government revenue spends on paying the debts for each financial
year. Increased debt servicing naturally means higher outlays for government. The
government has to reduce the spending on services provided to the public in terms of
spending foregone to roads and hospitals etc.

Debt Crisis: is refer to the situation when a country is not able to pay back its debt
timely by using tax revenue or export revenue.

Rescheduling debts: normally by replacing the old debt repayment terms with new
ones. It involved granting of new loans that were stretched out over longer periods of
time and at lower interest rates.

Structural Adjustment Policies(SAP): IMF provides loan to the Heavily Indebted

Poor Countries (HIPCs), mostly the market based supply-side policies, reducing the
power of government and liberalize the market in HIPCs.

4.8 The balance between markets and intervention

Market Oriented Policies: are policies that support the allocation of resources by
supply and demand (or the price mechanism) rather than through government
intervention in markets.
Interventionist policies: are policies that support the allocation of resources through
government invention (micro and macro level policies)

Social safety net is a system of government transfers of cash or goods to vulnerable

groups, undertaken to ensure that these groups do not fall below a socially acceptable
minimum standard of living

Dual-economy: A dual economy (or dualism) arises when there are two different and
opposing sets of circumstances that exist simultaneously at an economy.
Examples include:
• wealthy, highly educated people and poor, illiterate people
• a formal and informal urban sector
• a high-productivity industrial sector and a low productivity traditional sector
• a low-productivity agricultural sector and a high-productivity, urban industrial sector
• a ‘modern’ commercial agricultural sector and a ‘traditional 'subsistence agricultural
sector.

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