Glossary of economic terms
The following is not intended to be a definitive list of terms and definitions, but is given to show
the depth of knowledge expected by the specification.
Economic term
Description
Administrative regulations
Regulations imposed by the government of a country to
regulate trade, usually applied to imports, for example
insisting upon imports meeting minimum standards.
Age distribution
The number of people in each age group of the
population. This can be shown on a population pyramid.
It may be simplified into three categories: under
working age, working age and retirement age.
Ageing population
The average age of the population is increasing.
Allocation of resources
Economic decisions concerning the uses of the factors
of production.
Appreciate/appreciation (of a
currency)
The value of a countrys currency rises in terms of other
currencies. Exports will become more expensive and
imports cheaper.
Average cost
Total cost divided by output.
Balance of payments
The record of a countrys international financial
transactions.
Balance of payments on current
account
This shows the trade in goods and services, profits,
interests and dividends (net income from abroad) and
current transfers.
Balance of trade
Visible exports minus visible imports.
Barriers to entry
In competition, barriers to entry prevent or make it
difficult for firms to enter an industry, eg brand image
or government regulations (licensing).
Barter
Exchange of goods and services without the use of
money.
Budget deficit
Government expenditure greater than government
revenue.
Budget surplus
Government expenditure less than government revenue.
Bureaucracy
A diseconomy of scale resulting from a more than
proportionate increase in management and leading to
difficulties in communication and decision-making.
Capital
Goods used to produce other goods, for example
machines in a factory.
Cartel
Oligopolists work together (collude) to enjoy monopoly
profits by agreeing on price and output.
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Teachers guide Edexcel International GCSE in Economics (4EC0) Issue 1 July 2012 Pearson Education Limited 2012
Economic term
Description
Central bank
The main bank in a country, which issues notes and
coins and implements monetary policy. It is sometimes
called the governments bank as it manages the
governments accounts.
Commodity trade
Trade in primary products.
Competition
The process by which firms selling similar products in
the same market achieve a larger share of the market. It
can be price or non-price competition.
Complementary goods
Goods that are related to each other: if the price of one
increases the demand for the other falls and vice versa,
for example petrol and cars. The cross-elasticity of
complementary goods is negative.
Conglomerate
A firm that consists of unrelated businesses.
Cost-push inflation
Producers facing rising costs of production increase the
prices of their goods and services, leading to inflation.
Current private transfers
Transfers of money by individuals and firms to other
countries. It is part of the balance of payments on
current account.
Cyclical unemployment
This is caused by falling demand due to a downturn in
the trade cycle.
Deficit
Expenditure is greater than revenue. When applied to
government expenditure and revenue it is called the
budget deficit. When applied to visible imports and
visible exports it is called the trade deficit.
Deflationary (policy)
This is used to reduce economic activity in order to
reduce inflation.
Deindustrialisation
The tendency in a developed economy for the
manufacturing sector to decline.
Demand curve
A line that shows the relationship between price and
quantity demanded.
Demand-pull inflation
Excess demand in the economy puts pressure on prices,
leading to inflation.
Demerit goods
Goods that are thought to be harmful to
consumers/society, eg cigarettes and addictive drugs.
Depreciate/depreciation (of a
currency)
The value of a countrys currency falls in relation to
other currencies. Exports will become cheaper and
imports more expensive.
Deregulation
The removal by the government of rules and regulations
from businesses in order to promote competition.
Devaluation
Depreciation of a currency brought about by official
interference in exchange rates, usually associated with
fixed exchange rates.
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Economic term
Description
Direct taxes
Taxes on income and wealth, eg income tax and
inheritance tax.
Diseconomies of scale
As output increases the average cost of production may
rise due to diseconomies which include the
disadvantages of division of labour and bureaucracy.
Division of labour
Breaking down of a job into smaller tasks.
Economies of scale
As output increases the average cost of production may
fall due to economies which include marketing,
financial, managerial, technical and risk bearing.
Economic growth
The increase in gross domestic product over time.
Efficiency
This occurs when resources are used effectively, for
example labour efficiency = productivity (output per
worker).
Elastic demand/elastic supply
An increase in price will result in a more than
proportionate increase in quantity demanded/supplied;
elasticity will be greater than 1.
Embargoes
These prohibit trade in a product with another country.
They are usually imposed for political reasons.
Enterprise/entrepreneur
The factor of production which organises the other
factors of production and bears the risk.
Equilibrium price
The price at which quantity demanded and quantity
supplied are equal.
Equity
Government policy relating to fairness, for example
progressive taxation is based on ability to pay.
Excess demand
Demand is greater than supply.
Exchange control
This limits the amount of foreign currency available to
importers, thus limiting the amount they can import.
Exchange rate
The price of one currency in relation to another for
example = 1.3 (euro).
Exports
Goods and services sold to other countries.
External economies of scale
Benefit the whole industry not just individual firms.
Externalities
Costs and benefits which are the result of production but
which are not accounted for in a firms costs and
revenues. The main externalities are negative (costs),
for example pollution and congestion.
Factors of production
Land, labour, capital and enterprise.
Fiscal policy
Means by which the government controls the level of
spending in an economy by manipulating government
expenditure and government revenue.
Foreign Direct Investment (FDI)
Flows of private capital from one country to another.
Foreign exchange market
The market where currencies are bought and sold.
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Teachers guide Edexcel International GCSE in Economics (4EC0) Issue 1 July 2012 Pearson Education Limited 2012
Economic term
Description
Frictional unemployment
This is caused by workers changing jobs. The time
between leaving one job and starting another is called
frictional unemployment. It is a temporary form of
unemployment.
Geographical immobility
The inability of workers to move from one job in a
particular area to a job in another area.
Global economy
The interdependence of the worlds economies.
Government grants
Money given to firms by the government which does
not have to be repaid.
Governments economic
objectives
These include full employment, low inflation, economic
growth and eliminating balance of payment deficits.
Government income (revenue)
This is obtained mainly from taxation but also includes
income from rent, profits of state industries, fines and
revenue from the sale of state-owned industries.
Government expenditure
The amount a government spends, for example on
defence, social security benefits, health.
Gross Domestic Product (GDP)
The sum total of a countrys output over a period of
time, usually a year.
Human capital
The levels of education and skill possessed by the factor
of production, labour.
Human Development Index
A measure of the standard of living which considers the
quality of life. It is constructed by the United Nations
and takes into account other factors, for example life
expectancy, rather than just the income per person in a
country.
Imports
Goods and services brought into a country from abroad.
Income elasticity of demand
Measures the responsiveness of demand to a change in
income. Income elasticity of demand equals the
percentage change in quantity demanded, divided by the
percentage change in income.
Industrial inertia
Historical reasons for location in a particular area
disappear but firms do not move to new areas. There is
no longer an economic reason for a firm to stay in that
area.
Inelastic demand/supply
An increase in price will result in a less than
proportionate increase in quantity demanded/supplied.
Elasticity will be less than 1.
Inferior goods
Goods that decrease in demand as income increases.
Income elasticity of demand for inferior goods is
negative.
Inflation
The general and persistent rise in the level of prices in a
country.
Teachers guide Edexcel International GCSE in Economics (4EC0) Issue 1 July 2012 Pearson Education Limited 2012
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Economic term
Description
Inflationary (policy)
This is used to increase economic activity in order to
increase demand and employment.
Infrastructure
The man-made environment, eg transport links, schools,
hospitals.
Interest rate
See Rate of interest
Internal economies of scale
These benefit firms by decreasing average costs as
production increases (see Economies of scale).
International debt
The amount owed by one country to another. It is
especially important for developing countries as they
may have problems repaying international debt (loans
and interest payments).
International Labour
Organisation (ILO)
Organisation concerned with employment. The ILO
unemployment rate is defined as people who are not
working but who are actively seeking work.
International Monetary Fund
(IMF)
An international organisation set up in 1944. Mainly
concerned with exchange rates and loans to countries
with persistent trade deficits.
Investment
The purchase of capital equipment, for example
machinery by firms and the government.
Invisible balance
Invisible exports minus invisible imports.
Invisible exports
Services sold to other countries.
Invisible imports
Services bought from other countries.
Involuntary unemployment
Workers who are willing to work but cannot find
employment.
Land
The factor of production which includes its fertility,
mineral deposits, natural vegetation.
Labour
The factor of production comprising people in the
process of production.
Loans
Borrowed money which is paid back by instalments plus
interest. Loans are issued for a fixed time period.
Localisation
Industry (several firms producing the same good or
service) situated in one area due to particular advantages
to the industry, for example proximity to raw materials.
Location
The decision taken to place a firm in a particular part of a
country.
Macroeconomic objectives
A governments aims for the economy as a whole, for
example full employment, control of inflation.
Market economy
Allows market forces (price mechanism) to determine the
allocation of resources.
Market forces
The action of demand and supply on price.
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Teachers guide Edexcel International GCSE in Economics (4EC0) Issue 1 July 2012 Pearson Education Limited 2012
Economic term
Description
Minimum wage rates
A legal minimum hourly wage set by the government of
a country.
Mixed economy
Combination of a market and planned economies. Some
resources are allocated through the price mechanism and
some by the state.
Money
Anything that is generally acceptable in payment for
goods and services.
Money income
Income that does not take account of the rate of inflation.
Money supply
There are several different measures. The most common
is notes and coins in circulation plus credit created.
Monetary policy
Means by which the government controls the level of
spending in an economy by controlling the amount of
credit available and the cost of this credit (interest rates).
Monopoly
Where there is a single producer in an industry. There is
no competition.
Multinationals
Firms which have their headquarters in one country but
have manufacturing plants or outlets in others, for
example Ford.
National income
The sum of all the incomes of the factors of production in
an economy in one year.
Nationalisation
The transfer of firms from the private to the public sector.
Negative externalities
The costs of economic activity that are not paid by the
producer but which affect others in an economy, for
example pollution.
Net income from abroad
The difference between the interest, profit and dividends
earned by firms and individuals of a country and which
enter the country and the interest, profit and dividends
which are earned by foreigners and sent out of the
country. It is part of the balance of payments on current
account.
Non-price competition
Competitive practices not based on price, for example
advertising, branding.
Non-renewable resources
These are fixed in supply and cannot be replaced, for
example oil, minerals.
Non-tariff barriers
Restrictions on trade that do not involve import taxes.
Normal goods
Goods that increase in demand as income increases.
Income elasticity of demand for normal goods is positive.
Occupational immobility
The inability of workers to move from one job to another
in a different industry.
Oligopoly
A market made up of a few sellers. The firms are
interdependent, so they will react to changes in each
others price and quantity changes.
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Economic term
Description
Opportunity cost
The cost of the next best alternative foregone.
Personal savings
Income not spent. A sole trader can use his personal
savings as a source of finance in his business.
Planned economy
The state allocates resources and decides what to
produce, how to produce and for whom to produce.
Price competition
Competitive practices based on price.
Price elasticity of demand
The responsiveness of quantity demanded to a change in
price. Price elasticity of demand equals the percentage
change in quantity demanded, divided by the percentage
change in price.
Primary sector
That part of an economy which consists of farming,
fishing, forestry, mining, ie the extractive industries.
Private good
Goods produced by the private sector for a profit.
Private sector
The part of the economy owned and controlled by
shareholders or individuals.
Privatisation
The sale of state-owned firms to the private sector.
Production
The amount produced by a firm or group of firms.
Productivity
The amount produced per unit. Labour productivity =
amount produced/number of workers.
Progressive taxation
The proportion of income taken in tax increases as a
persons income increases, for example income tax.
Proportional taxation
The proportion of income taken in tax remains the same
as a persons income increases.
Public goods
Goods provided by the state which are not charged
according to their use, for example street lighting. They
are non-exhaustible and non-excludable.
Public limited company
A company with limited liability, owned by shareholders.
The shares can be traded on a stock exchange.
Public sector
The part of the economy owned and controlled by the
government on behalf of the country.
Purchasing power of money
The amount of goods and services an amount of money
can buy.
Quotas
An import control (non-tariff) that limits the amount of
particular imports brought into the country.
Rate of interest
The amount paid by the borrower to the lender for a loan.
Usually calculated over the period of a year.
Real income
Money income adjusted for the rate of inflation.
Regional imbalance
The result of areas in a country having different
employment and income levels.
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Teachers guide Edexcel International GCSE in Economics (4EC0) Issue 1 July 2012 Pearson Education Limited 2012
Economic term
Description
Regional policy
This is the governments attempt to correct regional
imbalances, eg giving firms incentives to move to areas
of high unemployment.
Regressive taxation
The proportion of income taken in tax decreases as a
persons income increases, for example Value Added
Tax.
Retail Price Index
A statistical measure of weighted average prices of a
specified set of goods and services. It is used as a
measure of inflation.
Retained profit
The amount left over after everything has been paid by a
firm including taxes and dividends.
Savings
The amount of consumers income not spent.
Scarcity
This is caused by peoples wants and needs being greater
than the resources available to satisfy them.
Secondary sector
Processing of primary products into manufactured goods.
Seasonal unemployment
Unemployment which rises and falls according to the
time of year, for example hotel workers in tourist resorts.
Social benefits
Social benefit = private benefit + external benefit
(education, health).
Social costs
Social cost = private cost + external cost (pollution,
congestion).
Specialisation
Where one person/country concentrates upon one
job/product,
for example person teacher; Brazil coffee.
Standard of living
The amount of goods and services consumed by
individuals with their incomes.
Structural unemployment
Long-term unemployment caused by the decline in
demand for the products of an industry.
Subsidies
Money paid to a producer by the government. It shifts the
supply curve to the right and reduces the price to the
consumer.
Substitute goods
These have close alternatives, eg butter and margarine. If
the price of one good increases the demand for the other
increases and vice versa. The cross-elasticity of substitute
goods is positive.
Supply curve
The line which shows the relationship between price and
quantity supplied.
Supply side policies
Encourage the free working of the market mechanism to
achieve government objectives, for example reducing the
power of trade unions in the labour market.
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Economic term
Description
Surplus
Revenue is greater than expenditure. When applied to
government revenue and expenditure it is called the
budget surplus. It can also be applied to trade balances in
international trade when exports are greater than imports.
Tariff barriers
Restrictions on trade which involve import taxes.
Taxes
Money taken from individuals and businesses by the
government. Taxes can be direct, eg income tax, or
indirect, for example VAT. Taxes form a major part of
government revenue.
Technological unemployment
Long-term unemployment brought about by the
introduction of machines which replace labour.
Tertiary sector
The sector of the economy which provides services.
Trade cycle
The tendency of economies to go through periods of
boom followed by recession, slump, reflation and then
returning to boom.
Trading blocs
Group of countries that have a free trade agreement
between themselves and may apply a common external
tariff to other countries.
Trade unions
Workers organisations which aim to improve wages and
working conditions of their members.
Unit elasticity
An increase in price results in a proportionate increase in
quantity demanded/supplied. Elasticity is equal to 1.
Visible exports
Goods sold to other countries.
Visible imports
Goods bought from other countries.
Voluntary unemployment
This is caused by workers making the decision not to
work. This may be due to high social security benefits.
World Trade Organization
(WTO)
Regulates international trade. It replaced GATT (General
Agreement on Tariffs and Trade) in 1995. It tries to
reduce trade barriers and settle trade disputes.
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