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PPC: It is a graph/model that shows the maximum combination of goods and services that may be produced at a

given time assuming stock of resources and given technology. [Graph]

Scarcity: All goods that you have to pay for are scarce because they are not free. However, those goods may be

Opportunity cost: The next best alternative foregone when an economic decision is made.

Choice: What you decide to spend your money in.

Resources: Factors of production with which goods and services are made: natural resources, capital, labor and

Economic development: Is a measure of welfare and well-being. It takes into consideration not just monetary
terms but also education, health and social indicators.

Market: Is a physical or virtual institution where potential buyers and sellers interact, exchanging those
goods/services for money, determining the equilibrium price and quantity and ultimately, resource allocation.

Demand: Is the quantity of a good/service that consumers are willing and able to purchase at a particular price
and at a determined moment in time, ceteris-paribus.

Supply: Is the quantity of a good/service that producers are willing and able to produce at a determined price and
at a determined moment in time, ceteris paribus.

Law of demand: As the price of the product falls, the quantity demanded of the product will usually increase,
ceteris paribus.

Law of supply: As the price of a product rises, the quantity supplied increases, ceteris paribus.

Ceteris Paribus: Means that all other things remain constant, it is a necessary assumption for theory analysis.

Equilibrium: A state of rest, self- perpetuating in the absence of any outside disturbance. Economists study
situations that change equilibrium and why.

Price mechanism: Supply and demand forces acting on their own, interacting to generate prices, attracting or
expelling resources towards certain economic activities.

Economic growth: Is an increase in actual output, a movement from a point inside the PPC to a point that is nearer
to the curve. It is measured by the National Income (NI).

Consumer surplus: The extra satisfaction (or utility) gained by consumers from paying a price that is lower from
the one they were prepared to pay.

Producer surplus: The excess of actual earning that a producer makes from a given quantity of output, over and
above the amount the producer was expecting to accept for that output.

Excess demand: Also known as shortage. Occurs when more is being demanded than supplied at a certain price,
occurs at prices below the equilibrium price.

Excess supply: Also known as surplus. Occurs when more is being supplied than demanded at a certain price,
occurs at prices above the equilibrium price.

Allocative efficiency: When a market is in equilibrium with no external effects. This means that the resources are
allocated in the most efficient way from society’s point of view.

Elasticity: Is a measure of responsiveness of one variable to a percentage change in another, key elasticities in
economics are PED, PES, YED, XED.

Price inelastic demand: Occurs when a given percentage change in price leads to a less than proportional change
in quantity demanded. PED is less than one, in absolute terms.

Price elastic demand: Occurs when a given percentage change in price leads to a more than proportional change
in quantity demanded. PED is greater than one, in absolute terms.

XED: It is the percentage change in quantity demanded of good A over the percent change in price of good B. It
allows us to analyze the relation between the two goods, either as substitutes, complementary or unrelated goods.

PED: It is the percent change in quantity demanded over the percent change in quantity demanded over the percent
change in the price of a product, it allows us to identify the demand as a price-elastic, price-inelastic or perfectly

PES: It is the percent change in the quantity supplied of the product over the percent change in the price of the
product. It allows us to identify the demand a price-elastic, price inelastic and perfectly inelastic.

YED: Is the percent change in the quantity demanded over the percent change in income. It allows us to identify
if a product is a normal good or an inferior good and whether it is a luxury or a basic necessity.

Normal goods: Are those whose demand is known to increase if income were to rise. For example, air travel is
shown in the diagram bellow. In this case as income rises the demand curve for air travel moves to the right.

Inferior goods: A good is considered to be inferior when the demand for the product will fall as income rises and
the consumers start to buy higher priced substitutes in place of the inferior good. E.g.: Supermarket detergent.

Substitute goods: Two goods are substitutes if they can satisfy a particular desire with a minimum degree of loss
of satisfaction or utility. E.g.: Coke-Pepsi.

Complementary goods: Two goods are complementary if they need to be used jointly in order to satisfy a
particular desire. For example DVDs-DVD Players.

Taxes: compulsory transfer of funds from firms or individuals to the government. There are different types of
taxes, such as direct, indirect, progressive, etc.

Indirect tax: Is one imposed upon expenditure. It is placed upon the selling price of a product, so it raises the
firms’ costs and shifts the supply curve upwards by the amount of the tax. Therefore, less products will be supplied
at every price.

Specific tax: Specific or fixed tax that is imposed upon a product. [Graph]

Percentage tax: This is when the tax is a percentage of the selling price and so the supply curve will shift. [Graph]

Subsidies: Are payments made by the government to firms that will in effect reduce their costs and stimulate
output, may be used as a protectionist measure against imports.

Giffen goods: Are a unique type of inferior goods, very poor people tend to buy more of the basic foodstuff on
which they depend when the price rises and less when the price falls.

Veblen goods: Some products become more popular as their price rises because they have a “snob value”, it is a
good of ostentation.

Maximum (low) price policy: It is a type of price control policy where the government sets a price below what
the market would have generated, effectively acting as a ceiling price. It is designed to protect consumers but it
also leads to shortages and a black market incentive.

Minimum (high) price policy: It is a price control policy designed to protect producers by setting a price above
of what the market would have generated. It leads to surplus. It leads to an excess supply.

Market failure: Occurs when demand and supply forces, acting on their own (without government intervention)
fail to allocate resources to its social optimum level, the main areas of market failure are: externalities, provision
of public goods, income distribution and business cycles.

Social optimum: Also known as Paretto-efficient, is a resource allocation that maximizes society’s welfare or
utility, where no one can be better off without making someone worse off.

Externalities: Costs or benefits (measured in monetary value) passed to third parties not involved in an economic
transaction, may result from the production or consumption of a good or service, can be positive (benefit) or
negative (cost).

Rationing system: Are implemented by the government to alleviate the impact of a shortage, usually through
“purchasing cards” (maximum number of units per customer).

Basic necessity: When income increases, the demand increases but less than proportionately. E.g.: Milk, butter.

Luxury good: As income increases the demand increases more than proportionately. E.g.: Air travel.

Merit goods: Are those goods or services that generate positive externalities on third parties when consumed or
produced. Example: vaccines.

Demerit goods: Goods or services that generate negative externalities on third parties when consumed or
produced. Example: alcohol.

Public goods: Economic good that cannot be sold through market mechanisms and have the characteristics of
being non-excludable and non-rival; E.g.: National Defense.

Non-excludable: It is physically impossible to prevent the use of the good once it has been provided, there is no
exclusion mechanism and thus prices cannot act as a gate of entry.

Non-rival: Additional simultaneous users do not reduce the level of satisfaction of pre-existing users.

Private good: A good that can be sold, is excludable and rival.

Government provided goods: Relates to a wide range of goods/services that aim at improving the standards of
living of the poor (hospitals/schools/food/shelter, etc.).

Marginal Private Benefit: Utility or satisfaction extracted by an individual out of the next unit consumed, it is the
market demand curve.

Marginal Private Cost: It is the cost faced by the firm out of the next unit produced; it reflects wage, rents,
interests, profits, etc. It is the payment to the factors of production; it is the market supply curve.

Marginal Social Benefit: Are the benefits enjoyed by society as a whole out of the consumption of a good or
service, if no externalities exist on consumption then MSB=MPB.

Marginal Social Cost: Are the costs faced by society as a whole out of the production of a good or service, if no
externalities exist, then MPC=MSC.

Market structures: Number of firms, type of products, barriers to entry, all together determine how a market
operates. Each different type of operation is determined by its structure.

Number of firms: Not a specific number but the relative number of firms in relation to the size of the market.

Macroeconomics: The study of economic aggregates at an economy wide level, unemployment, inflation and
economic growth become the focus of the study.

Real Gross Domestic Product: It is the sum of the value of final goods or services produced in the local economy
during a period of one year, excluding the effects of inflation, through a price index. It is the main indicator of
the level of economic activity.

Tariff: Is a tax on imports, it makes imported products relatively more expensive as seen by the local market.

Quota: It is a physical limit on the number of units that may enter the country as imports, once the quota is fulfilled
local producers carry on production to satisfy local demand.

Transfer payments: Transfer of funds from the government to “selected groups” individuals for which no counter
part is expected in return (grants), this specially go to: extreme poverty families, handicapped, war veterans.

Business Cycle: Periodic upturns and downturns in the levels of economic activity, accompanied by changing
levels of inflation and/or unemployment. This series of recessions and growth seem to be characteristic of market
economies and may be generated by local/foreign factors.

Aggregate demand: Total planned expenditure by all agents of the economy on locally produced goods
(AD=C+I+G+X-M) its main determinant is the level of economic activity.

Consumption: Expenditure of households on goods/services. E.g. food.

Durable consumption: Expenditure by households on goods that are designed to last over a year, usually bought
through credits.

Investment: Fixed capital formation such as machinery or new factory plants (may be understood as human capital
formation (H&E) depending on the context).

Interest rate: Opportunity cost of money, it represents the money lost by not depositing savings in the banks or
the extra cost of asking for a loan.

Government expenditure: Spending by all levels of government on goods/services (from chalk to missiles).

Budget: Plan spending and tax revenues decided through a political process.

Exports: Purchases/expenditure made by foreign agents on locally produced goods and services. For example,

Imports: Purchases/expenditure made by local agents on foreign goods and services. It is susceptible to
protectionist measures like tariffs or quotas.

Aggregate Demand Curve: Shows the correlation between total expenditure on all locally produced goods and
services at different price levels.

Price level: Is an indicator of nominal prices on all goods and services produced in the local economy, an increase
will denote inflation and a decrease would denote deflation.

Fiscal policy: Set of government policies dealing with taxation and/or government spending with the objective of
affecting the aggregate demand and ultimately the levels of inflation and/or unemployment.

Contractionary fiscal policy: Faced with full employment or approaching full employment, the government may
want to implement a CFP, where by rising taxes consumption expenditure by families will fall and by reducing
government expenditure, the government expenditure of the AD would fall.

Expansionary fiscal policy: Faced with unemployment the government may want to implement EFP, whereby
reducing taxes, consumption by families will increase and by increasing government expenditure the government
expenditure component of AD rises.

Monetary policy: It is the control by the central bank of the legal-reserve ratio and of money supply with the
objective of modifying the interest rate and ultimately the AD, through its investment and durable consumption
components, the objective is to affect the levels of inflation and/or unemployment.

Government budget: When we refer to government budget, we are talking about the total spending by all levels
of government in a country, including central, regional and local government.

Aggregate Supply: Shows all planned production by local firms utilizing the existing installed capacity, it reflects
the productive capabilities of a country.

Aggregate Supply curve: Shows the correlation between planned production out of the existing installed capacity,
and the price level.

Inflation: Sustained increase in the average price level of an economic activity over a period of time, formally
measured through a price index.

Deflation: Sustained decrease in the average price level of an economic activity over a period of time, formally
measured through a price index.

Dis-Inflation: Is a decrease in the rate of increase of the price level, while still rising, prices are doing so at a slow

Central Bank: A government institution in charge of controlling the local commercial banks, setting the legal
reserve ratio. It has the capability of affecting the interest rate and ultimately investment.

Legal Reserve Ratio: It is the fraction of every deposit that commercial banks must keep and not loan out. It is
determined by the central bank and serves as a security measure against sudden withdrawals.

Money Supply: It represents all means of payment where the transaction is cancelled the moment it is made (cash
or debit accounts) money supply= monetary base/LRR.

Unemployment: Able bodied individuals, within the legal working age that are actively searching for a job (within
the last two weeks) and cannot find one.

Seasonal unemployment: Unemployment related with the season of the year, where individuals might be
periodically out of work. E.g. Ski instructor.

Real wage unemployment: Unemployment that results from setting a minimum wage above the equilibrium level,
usually the result of labor union renegotiations.

Demand deficient/cyclical unemployment: Unemployment associated with the downturn of the business cycle
(recessions), where the AD contracts away of full employment.

Structural unemployment: Result of the changing structure of an economy, this occurs when there is a permanent
fall in demand for a particular type of job. Usually long term.

Frictional unemployment: Is the short-term unemployment that occurs when people are between jobs, or in search
of a better one. Also known as natural unemployment.

Demand-pull inflation: Is an inflationary process caused by an overstimulated AD that puts pressure on existing
productive capabilities, this usually occurs as the AD reaches full employment.

Cost push inflation: An inflationary process caused by the increase in price of a key factor of production or raw
material, most commonly crude oil.

Stagflation: Denotes the joint occurrence of rising unemployment and inflation at the same time, usually the result
of cost push inflation.

Supply side policies: Set of policies designed to stimulate the productive capabilities of a nation, through the
improvement in the “quality” and/or “quantity” of its factors of production.

Interventionist supply side policies: This policies are based on the idea that the government has a fundamental
role to play in actively encouraging growth.

Market oriented supply side policies: Focus on allowing markets to operate freely, with minimal government
Tax incidence/tax burden: Refers or relates to the proportion of an indirect tax that is faced by consumers in terms
of a price increase (consumer’s burden) and the proportion faced by producers in terms of loss of revenues. These
proportions are directly related to the price elasticity demand of consumers and the price elasticity supply of
producers. The more price inelastic the higher the burden faced by consumers.

Common-access resources: Are typically natural resources like fisheries, pastures, rainforests hat meet two
characteristics: property rights over are not clearly defined/nonexistent AND it is very difficult ($$$) to. The
market failure arises when these goods are over exploited, therefore the private benefit is bigger than the social

Asymmetric/Imperfect information: When one party involved in the economic transaction knows more
information than the other and takes advantage of it. E.g.: Used cars.

Automatic adjustment mechanism: Is an argument of the market orientated thinkers in favor of less/no
government intervention in macroeconomics. Where, faced with unemployment and inflation, wages are assumed
to be flexible and adjust back to equilibrium.

The crowding-out effect: It is an argument of the non-interventionists against government interventionists.

Assumed phenomenon though which any increase in government expenditure financed through loans, will lead
to an increase of interest rates, reduce the public sector investment and “less” overall economic efficiency.

Keynesian multiplier: Factor by which any given increase in government spending (or any other injection)
increases more than proportionally the level of economic activity. This is based on the fact that an expenditure
(purchase) is income for the factors of production. It is used by the pro-interventionist as an argument in favor of
increase government spending.

Marginal propensity to consume (MPC): Indicates how much out of every extra unit of income will be consumed
(and thus which fraction will be saved).

Marginal propensity to tax (MPT): Indicates how much out of every extra unit of income will be charged as tax.

Marginal property to imports (MPM): Indicates how much out of every extra unit of income will be spent in

Free trade: Is the international exchange of goods and services without any protectionist measure, they are usually
based on the different allocation of resources.

Economies of scale: For some industries, the grater the scale/volume of production, the lower the per-unit costs,
bulk buying and division of labor are some sources of economies of scale. Free trades allows grater markets and
thus to develop economies of scale. While protectionism would limit the market size to that of the country.

Dis-economies of scale: Phenomenon by which as the scale of output rises (scale of the firm), the average costs
per unit rises. This is due to, for example, miss-communication, logistics costs, and loss of worker’s identification
with firm spirit.

Comparative advantage model: States that by specializing 100% in the production of the good for which the
country has a lower opportunity cost (comp. adv.) and through trading, both countries will be able to consume
beyond their own PPC (although producing on it).

Infant industry argument/sunrise argument: Is an argument in favor of protectionism that states; newly created
industries (infant) should be protected from foreign competition until they achieve international efficiency level.

Senile industry argument: Is an argument against free trade. Is state that if industries are declining and inefficient
they may require a large investment to make them efficient again. Protection for these industries would act as an
incentive to farm firms to invest and reinvent themselves. However, protectionism could also be an excuse for
protecting inefficient firms.

Protectionism: A policy on set of policies designed to restrict trade with the objective of protecting local industries
and/or promote labor. May be market based (quotas, tariffs or subsidies) or non-market based (health and quality
standards, currency controls, license and permits, etc.).

Quotas: It is a physical or monetary limit in the amount of imports that may enter a country. It is a market based
protectionist policy.

Non market based protectionist policies: Set of policies designed to restrict imports, acting in an indirect way on
market quantities on price.

Health and sanitary standards: Set of government regulations set on importations of goods/services, which targets
the goods production process or components in terms of “potential” healthy/quality harmful effects. It is a non-
market based protectionist measure.

Exchange control/foreign currency control: The government regulates, limits or prohibits access to foreign
currencies. Given that foreign produced goods must be paid in the exporting country currency this policy is to
limit imports.

License and permits: A permit/license must be obtained in order to import.

Red-tape/bureaucracy: Lengthy/costly paper work to be able to import.

Exchange rate: It is the value of one currency expressed in terms of one currency expressed in terms of another.
There are three major exchange rate systems; fixed, free floating and managed (or dirty-float).

Flexible/free floating exchange rate system: It is an exchange rate system where the value of one currency
expressed in terms of another is determined by market supply and demand forces, there is no intervention of
government in determining the value of currencies.

Fixed exchange rate system: It is an exchange rate system where the value of one currency expressed in terms of
another is set and defended by the central bank. It may lead to foreign debt as to keep the currency ratios,
especially if faced with a deficit.

Managed exchange rate: Where the value of one currency is allowed to float freely (supply and demand forces)
but within an upper and a lower boundary. The central bank will intervene periodically to keep the exchange rate
within those boundaries.

Appreciation: Is the increase in the value of one currency in terms of another in the contest of a floating exchange
rate system Under a fixed exchange rate system it is called revaluation.

Revaluation: Is the increase in the value of one currency in terms of a fixed exchange rate system. Unser a free
floating exchange rate system it is called appreciation.

Depreciation: Is the decrease in the value of one currency in terms of another in the context of a floating exchange
rate system. Under a fixed exchange rate system it is called devaluation.

Devaluation: It is the decrease in the value of one currency in terms of another in the context of fixed economy.
Under a floating exchange rate system it is called depreciation.

Interest rate: Is the opportunity cost of money, yield that could be earned on deposits so cost of incurring in a
debt. It is the main determinant of investment (physical capital) and of financial operations (deposits, currency

Balance of payments: It is a registry of all transactions between the residents of one country and the residents of
all other countries in the world. There are three main parts in the balance of payments: current account, financial
accounts and capital account.

Current account: It is a registry of trade in: goods (visible balance)/services (invisible balance); net income flows
and net current transfers (family transfers of funds, government aids).


Financial account: It is a measure of the buying and selling of assets between countries. It measures the net change
in foreign ownership of domestic assets: direct investment, portfolio investment and reserve investment measure.

Direct investment: A measure of the purchases of long-term assets, where the purchase is aiming to gain a lasting
interest in a company in another economy. For example, the buying of a proper, purchasing a business or stocks
or share all expecting to have a positive return in the future but there is no guarantee of this.

Portfolio investment: A measure of stock as purchases, which are not direct investment since they do not lead to
a lasting interest in a company (treasury bills and government bonds).

Reserve assets: The reserves of gold and foreign currencies which all countries hold and which are itemized in
the official reserve account.

Expenditure switching policies: Policies whose main aim is to re-direct import-expenditure towards local products
(protectionist measures). This may lead to retaliation by other countries.

Expenditure reducing policies: Policies whose main aim is to cool-down the economy, contractionary measures
(fiscal and monetary) as imports depend on the level of income of households. This slows down growth and leads
to unemployment.

World Trade Organization: It is an organization that sets rules for local trading and resolves disputes between
member countries. Aims to increase international trade by lowering trade barriers and providing a forum
Development: Broad concept associated with the standards of living. It is the expansion of human freedoms;
freedom to live (no hunger, ensure health and life); freedom to think (education, religion freedom, equal rights,

freedom of speech) and freedom to act (judicial system, speech, education). IT IS NOT THE SAME AS
Actual economic growth: Is the increase in RGDP, it is usually accompanied by a reduction of unemployment
and an increase in inflation. Expansionary fiscal/monetary policies should be implemented for it to happen.
Potential economic growth: Is the expansion of productive capabilities of a country through the improvement of
fixed capital, such as infrastructure and human capital with education and health. GRAPH SHOWING THE
Vicious cycle of poverty: Self-perpetuating phenomenon where poor countries remain in poverty due to their
inability to invest in both, human and physical capital. The VCP can be broken through aids, debts or foreign
direct investment.
Absolute poverty: The inability of an individual or a family to afford a basic standard of goods and services,
where the standard is absolute and unchanging over time. Absolute poverty is defined in relation to a nationally
or internationally determined 'poverty line', which determines the minimum income that can sustain a family in
terms of its basic needs.
Relative poverty: Is the condition in which people lack the minimum amount of income needed in order to
maintain the average standard of living in the society in which they live. It is defined relative to the members of
a society and, therefore, differs across countries. The government will set a level of income that is defined as
minimum and anyone who earns less than it will be considered poor.
Aid: Source of funds that would not have been granted by normal market forces. They may be official (given
form gov to gov) or unofficial (given by NGOs). There are two main types of aids: humanitarian and development
Humanitarian aid: Are aids given to alleviate short-term problems that result from events such as wars or natural
disasters. Usually that are given in the form of grants (they do not have to be paid back). They may be official or
Development aid: Long term assistance designed to alleviate fundamental development constraints, most of time
is official. Either trough individual country’s development agencies or multilateral organizations (World Bank,
United Nations). There are four types of development aids: long-term loans, tied-aid, project aid and technical
Long term loans: At low interest rates or past concessional destines to long-term health/education programs.
Usually they are official, through the WB.
Tied-aid: Grants or loans given under the condition that funds must be spent on goods/services produced by the
diner country. E.g.: Argentina and Cuba.
Project aid: Grants or loans for specific use. They are usually given by the WB.
Technical assistance aid: Engineers/either sent or by subsidizing the education in MEDCs.
Debt: Access to funds through multilateral institutions or the private sector (banks). It is one of the ways of
braking the vicious cycle of poverty.
World Bank: Is a multilateral credit organization whose main aim is to finance long term, low interest loans
destined to health and infrastructure projects. Together with the IMF they constitute the two major multilateral
credit organizations and share some of the same criticisms.

International Monetary Fund: is an international credit organization whose main aim is to finance short term loans
to prevent balance of payment disequilibria and currencies devaluation. Together with the World Bank they
constitute the two major multilateral credit organizations and share some of the same criticisms.
Washington Consensus: Is a set of policies that countries should implement according to what the IMF, the World
Bank and the US treasury department believes constitute sounds policies towards a dynamic economy. Some of
the policies are an interest rate liberation and a trade liberalization.
Foreign Direct Investment (FDI): Investment done by multinational corporations in a third country. Usually linked
to exploitation of natural resources and/or cheap labor (among other reasons).
Multinational corporations: Firms with production units in more than one country usually with headquarters in
MEDC’s. Given by their relative size they have great lobby/negotiation power.
Transfer pricing: Ability that multinationals possess by which they may sell/buy intermediate goods between
branches of the same company in different countries, allowing them to “manipulate" profit margins as to pay
lower capital gain tax.
Micro credits: Small scale loans granted to individuals which would not have had access to credit through the
traditional banking system, due to their lack of collateral (assets presented as guarantees).
Fair trade: Scheme organized by NGO’s through which producers may sell their products at a fair price, by
informing consumers of the benefits they may pass to those producers by consuming fair-trade labelled products.
The NGO’s, on the other hand, guarantees those premium prices are effectively used is the communities benefits.
Import substitution strategy: Industrialization strategy based on promoting local production through the raising
of protectionist measures (tariffs, quotas, subsidies) in order to ensure inward-orientated strategy.
Export promotion substitution: It is an outward oriented growth strategy based on opens towards international
trade concentrating on export-led-growth. Countries would stimulate areas/industries for which they have a
comparative advantage.