Land refers to natural resources used in the production process such as crude oil, coal, wood,

cattle etc.

Labor refers to human resources (physical and intellectual input) required in the production
process such as accountant, chef, estate agent etc.

Capital refers to manufactured products used in production process such as machinery, tools,
equipment etc.

Enterprise refers to skills, creativity and risk-taking ability of a businessperson

Scarcity refers to the finite resources (limited in supply) of an economy relative to the unlimited
wants and needs of individuals and society

Opportunity cost are costs of an economic decision measured in terms of the next best choice
forgone

Value added is the process of adding extra features to a product through the production process
aimed at increasing its selling price e.g., changing the packaging of a good.

Planned economy in this economic system, the government (public sector) allocates scarce
resource such as Cuba, North Korea and Venezuela

Market economy this economic system relies on market forces of demand and supply to
allocate resources via the private sector of the economy e.g. Hong Kong, Singapore, New
Zealand etc.

Mixed economy this economic system is a combination of the planned and market economies,
with some resources being owned and controlled by private individuals and firms while others
being owned and controlled by the public sector e.g. Belgium, France, and Pakistan etc.

Public sector the government produces or supplies certain goods and services in the public
sector e.g. the government may provide education and healthcare for general public

Private sector firms and individuals contribute to economic activity in the private sector of the
economy by producing goods and services to meet the needs and wants of customers

Primary sector is a sector of business activity which deals with the extraction of raw materials
e.g., fishing, mining etc.

Secondary sector is a sector of business activity which deals with the manufacturing of goods
e.g., textiles, electronics etc.

Tertiary sector is a sector of business activity which deals with providing direct services to
customers e.g., restaurants, banks etc.

Production possibility curve (PPC) is a graph that represents the different combinations of two
goods or services that an economy can produce efficiently with the available resources.
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Income is a flow concept referring to the money a person receives from the production process
e.g. wages and salaries

The circular flow of income model is used to explain how economic activity and national income
are determined based on the interaction of economic agents

Leakages decrease the flow of income e.g. taxes, spending on imports and savings

Injection increase the flow of income e.g. government spending, exports and investment by
firms

Closed economy is a part of the circular flow of income model comprising domestic economic
decision-makers i.e. households, firms, and the government

Open economy is part of the circular flow of income model comprising domestic and foreign
economic decision-makers i.e. households, firms, the government and the foreign sector

Positive economics is the study of factual statements about the economy or about of “what is”
rather than “what ought to be” e.g. a tax on plastic bags will reduce the volume of plastic waste

Normative economics considers people’s varying opinions and beliefs about what should be e.g.
the government should impose high taxes on wealthier people.

A circular economy describes an economic system in which raw materials, components and
other resources are used sustainably to generate output.

Demand is the willingness and ability of consumers to buy goods and services at given prices.

Supply is the willingness and ability of producers to sell goods and services at a given prices.

Law of diminishing returns when a firm adds more variable inputs (such as labor) to a fixed
resource (such as capital), beyond a certain point, the additional output for each additional unit
of input will decline.

Short run is a period of time in which at least one of the firm’s factors of production is fixed e.g.
capital

Long run is a period of time in which all the firm’s factors of production are variable

The price mechanism refers to the means by which the forces of demand and supply determine
the allocation of scarce resources by competing users

Resource allocation the price mechanism, demand and supply, signify where resources are
required (in markets where prices increase) and where they are not (in markets where prices
fall)

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An incentive function refers to anything that motivates producers or consumers to follow a
particular course of action or to change their behavior

The rationing function deters some consumers from buying a product owing to higher prices,
thereby rationing it.

Excess supply (surplus) occurs when the price is above the market equilibrium price, meaning
quantity supplied exceeds quantity demanded

Excess demand (shortage) occurs when the price is below the market equilibrium price,
meaning quantity demanded exceeds quantity supplied

Market efficiency occurs if maximum amount of goods are being produced with a given level of
resources, and if no additional output is possible without increasing the amount of inputs.

Consumer surplus is the extra benefit consumers receive when they pay a price below what
they are willing to pay

Producer surplus is the extra benefit producers receive when they receive a price above the one
at which they are willing to sell at

Community (total/social) surplus is the sum of consumer and producer surplus at a given
market price and output.
Consumer and producer surplus can be calculated by: ½ x base x height

Allocative efficiency is the socially optimal situation that occurs when resources are distributed
in a way that consumers and producers get maximum benefit i.e. (MC = MB) or (P = MC)

Consumer rationality it is assumed that individuals use rationale considerations to make

sensible choices that align with their best interests

Perfect information to act rationally, economic agents must have access to full information such
as prices, product specifications, and information about alternative products available on the
market

Utility maximization economic theory assumes that people decide on the option that gives
them maximum utility

Availability bias refers to the ease with which an idea or event can be recalled from memory.
This causes people to over-estimate the likelihood of the event or idea happening, thereby
distorting rational decision making e.g. shark attacks or aircraft accidents

Bounded rationality refers to the fact that people’s cognitive decision-making capacity is limited
owing to barriers such as information failure, time and choice

Bounded self-control as people may lack the self-control to think for themselves and to make
rational choices. Instead they conform to social norms, group preferences and pressures

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Biases when making decisions, people’s cognitive responses are influenced by biases including
common sense, intuition, emotions, and social norms
Rule of thumb is a type of bias referring to making decisions in a practical and approximate way
without having to be exact. It is about judging a situation based on experience and sticking to a
default choice

Imperfect information occurs when people have inaccurate, incomplete or unreliable

information, so decision making is not optimal

Anchoring is a cognitive bias that influences how people view a product by comparing it to
something else e.g. a sale with 70% discount may become an anchor for a customer, anything
below this may seem less attractive.

Framing is about presenting information in such a way that it creates a bias in favor of a
particular decision e.g. choices can be presented to highlight the benefits and limitations of a
choice

Bounded selfishness means that people are not necessarily selfish, but often behave in a
manner that benefits others as well

Choice architecture refers to the way choices are presented to people and how different designs
affect the choices made e.g. a restaurant menu may be designed to create nudges for customers
to choose certain items

A Default choice occurs when a person is automatically signed up into a system e.g. employees
being enrolled on a pension scheme to make financial contributions to their retirement saving.
Employees must choose to opt out if they do not intend to seek the pension

Restricted choices limit the choices available to people such as placing healthier food items in
school cafeteria, restricting the consumption of unhealthy food items

Mandated choice is when people are required to make advanced decisions and declare whether
they wish to participate in a particular activity e.g. some governments give a mandated choice to
people who must register to vote in person

Nudge theory is the practice of influencing the choices that people make. Nudges are created by
choice architecture using small prompts or tweaks to alter social behavior, but without taking
away the power for people to choose

Profit maximization occurs when there is the greatest positive difference between total
revenues and total costs or at a level of output where MC = MR

Market share refers to a firm’s portion of the total value of sales revenue in a particular industry
Growth refers to increasing the size and scale of operations of a firm. It can be measured by as
increase in sales revenue, product range, number of employees or value of its assets

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Corporate social responsibility CSR is about businesses considering the impact of their
operations on the society as a whole welfare in a positive and ethical way e.g. actions such as
reducing its carbon footprint

Satisficing aims for a satisfactory or adequate level of profit, rather than profit maximization, to
help the interest of other stakeholders such as employees

Price elasticity of demand measures the change in quantity demanded of a good due to a
change in its price

Income elasticity of demand measures the change in quantity demanded of a good due to
change in the income of buyers (normal and inferior goods)

Normal goods are goods whose demand increases as the income of individuals rises i.e. YED is
positive.

Inferior goods are goods whose demand falls as the income of individuals rises i.e. YED is
negative

Luxury goods have an income elasticity of demand greater than 1 e.g. branded clothes.

The Engel curve shows the positive or negative relationship between quantity demanded for a
product and income. If the Engel curve is upward sloping, the product is classified as a normal
good. If the Engel curve is downward sloping, the product is classified as an inferior good

Price elasticity of supply measures the change in quantity supplied of a good due to a change in
its price.

Governments intervention refers to ways in which a government regulates or interferes with

activities or decisions made by individuals or firms. Governments may intervene to reduce these
inequities through regulations, taxation or subsidies

Tax is a financial charge imposed on individuals or firms payable to government

An indirect tax is levy on the sale of goods and services

Specific tax is charged a fixed amount of tax per unit sold e.g. motor way toll

Ad valorem tax is charged as percentage on the value of the good or service e.g. stamp duty,
GST

A subsidy is a financial payment given by the government to encourage output, to reduce cost
of production or keep down the cost of living for its citizens e.g. loans for students, healthcare,
educations, training public libraries

A price floor occurs when the government sets a minimum price for a good or service above the
market price

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A price ceiling occurs when the government sets a maximum price for a good or service below
the market price

Direct provision of goods and service by government occurs when the government directly
provides or supplies goods/services deemed to be in the best interest of the public e.g. public
healthcare

Command and control regulations and legislation refer to the direct rules and laws governing
an activity or industry, stating what is permitted and what is illegal e.g. minimum age laws for
tobacco

Consumer nudges are the practice of influencing choices that people make though choice
architecture e.g. visible speed cameras may prompt motorists to drive slower

Market failure occurs when the free market (price mechanism) allocates resources in an
inefficient way. There is a divergence between private costs and benefits and social costs and
benefits of production and consumption

Marginal private benefit (MPB) is the additional benefit enjoyed by individuals and firms from
the production or consumption of an extra unit of good/service

Marginal social benefit (MSB) is the total gain to society from an extra unit of production or
consumption of a good/service

Marginal private cost (MPC) is the additional expense of production for firms or extra charge
paid by consumers for the output or consumption of an extra unit of good/service

Marginal social cost (MSC) is the total expense to society from an extra unit of production or
consumption of a good/service

Public goods are non-excludable, meaning once the good has been provided for one consumer,
it is impossible to stop others from benefitting from it, and non-rivalrous, meaning one person’s
consumption will not reduce the benefit to others

Merit goods are demmed soically desirable for soceity owing to their benefits e.g., healthcare,
education and vacination

Demerit goods are considered socially less desirable for consumption e.g., sugary drinks, fast-
food, alcohol etc.

Economic goods are resources and products that are limited in supply and have economic value
to society

Negative production externality is the harmful spillover effect on society due to the production
process of a firm/industry e.g. a factory that disposes its waste by dumping it into the ocean.

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Negative consumption externality is the harmful spillover effect to society due to the
consumption of a good e.g., the health hazards of smoking.

Positive production externality is the positive spillover effect on society due to production of a
firm/industry e.g., when firms invest in R&D and succeeds in developing new technologies
Positive consumption externality s the positive spillover effect on society due to the
consumption of a goods e.g., benefits of education gained by a person may give rise to social
benefit

Common pool resources (CARs) are resources that are non-excludable but rivalrous in
consumption and create a situation of tragedy of the commons resulting in negative
externalities and unsustainable production

Tragedy of the commons refers to the degradation, depletion or destruction of a common pool
resource caused by the problem of rivalry and overuse e.g. over fishing, air pollution due to
over-congested roads, deforestation etc.

Collective self-governance refers to voluntary communal actions to tackle the problems of

negative externalities and exploitation of common pool resources

Tradable permits (cap and trade schemes) are government-regulated emission trading schemes
using a market-based approach to reduce production to a socially efficient level by setting limit
on total amount of emissions in an industry

The Free rider effect occurs when people have access to (or benefit from) a good or service
without having to pay for it

Asymmetric information refers to misusing, unbalanced or incorrect information that exists

when one economic agent has more information than the other in an economic transaction

Adverse selection is a form of opportunistic behavior that refers to the undesired decisions or
results that occur when buyers and sellers have access to asymmetric information e.g. health
insurance, second hand car markets

Moral hazard is a situation where a party protected from the risk (owing to having superior
information) behaves differently than if they were fully exposed to the risk e.g. driving insured
company cars, bank bailouts in 2008 global crisis,

Market power refers to the ability of a firm to manipulate price of a product usually above the
perfectly competitive level

Total Revenue (TR) is the overall amount of money received by a firm from selling its output
TR = price x quantity

Average revenue (AR) refers to the average price received from the sale of a good or service
AR = TR / Q

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Costs are the expenses of a firm in relation to their production

Fixed costs (FC) are expenses that do not change with the level of output e.g. rent, insurance,
management salaries, interest on loans, advertising costs

Variable costs (VC) are expenses that are directly linked to the level of output and rise
continually e.g. wages, raw material costs
TC = TFC + TVC

Average costs (AC) are the per unit cost of production

AC = TC / Q

Total fixed costs (TFC) refers to the sums of production costs that do not change with the level
of output
TFC = AFC x Q

Average fixed costs (AFC) refers to fixed cost per unit of output
AFC = TFC / Q

Total Variable costs (TVC) are production costs incurred directly owing to the output of a good
or service
TVC = AVC x Q

Average Variable costs (AVC) refers to the direct production cost incurred for each unit of
output
AVC = TVC / Q

Profit is calculated by measuring the difference between a firm’s total revenue and total costs
TP = TR - TC

Marginal revenue is the additional revenue received from the sales of an extra unit of output
MR = Change in (TR) / change in (Q)

Marginal cost is the additional cost of producing an extra unit of output

MC = Change in (TC) / change in (Q)

Profit maximization occurs when the marginal cost of production equals the marginal revenue
from selling that unit of output i.e. MR = MC

Abnormal profit (supernormal or economic profit) refers to the profit a firm earns when its
revenue exceeds its cost of production (TR > TC)

Normal profit exists when a firm earns just enough revenue to cover its total costs of production
and remain operational (TR = TC)

Loss occurs when a firm experiences negative economic profit i.e. its cost of production exceeds
its total revenue (TR < TC)

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Perfect competition is a market structure characterised by the presence of intensive
competition, with no firm being large enough to influence market output or price coupled with
no entry barriers

Monopoly is a market structure where there is a single dominant supplier of a particular good or
service, thus having the power to influence market supply and price e.g. Pakistan railway

Economies of scale are cost benefits enjoyed by firms as they grow in size and are able buy in
bulk, acquire expensive technology, reducing the cost of production

Anti-competitive behavior monopolists adopt restrictive practices, legal or illegal, they may to
start a price war by reducing prices to a loss-making level which they may be able to sustain for
a longer period of time than the new firms

Natural monopoly occurs when only one firm can operate in a market profitably
Some industries have extremely high setup costs. This means one provider would need all the
sales volume to achieve such economies of scale e.g. gas pipes, railway tracks.

Monopolistic competition is a market structure in which many firms but with a small degree of
market power and price setting ability e.g. local hair dressers, restaurants

Oligopoly is a market structure where a few large firms dominate the industry. It is generally
assumed that oligopolistic firms do not collude together (non-collusive oligopoly) e.g.
smartphone market, aircraft manufacturers

Collusive oligopoly is an agreement between two or more firms to limit competition through
strategies such as price fixing or limiting output

A cartel is an anti-competitive agreement between firms to collude by fixing prices or reducing

output, thereby effectively acting as a monopoly

Non-collusive oligopoly refers to competing firms with mutual interdependence. This means
they consider the possible actions and reactions of each other when determining pricing and
non-pricing strategies

A concentration ratio measures the degree of market power in an industry by adding the sales
revenue of one or more of the largest firms

National income refers to the value of all goods and services produced in a nation during one
year i.e. representing the level of economic activity and, hence income earnt in the nation.

The output approach measures economic activity by calculating the value of final goods and
services produced by all industries in an economy.

The income approach measures economic activity by calculating the value of factor incomes
earned in the economy i.e. the sum of rent, wages, interest payments and profits.

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The expenditure approach measures economic activity by calculating the value of total
spending in the economy i.e. the sum of consumption, investment, government spending and
net exports.

Gross domestic product GDP is the value of final output of goods and services produced with in
an economy within one year.

Nominal GDP/GNI measures national output by using current market prices.

Gross national income GNI is the value of final output of goods and services produced with in an
economy plus net factor income from abroad.

Real GDP/GNI measures national output by adjusting prices for inflation.

Purchasing power parity PPP refers to the exchange rate that enables residents to purchase a
common basket of goods in different countries.

The business cycle is a model that represents the fluctuations in economic activity over time.

Aggregate demand is the value of all goods and services demanded in an economy over time. It
is calculated as the total spending in the economy usually in one year.

Investment (I) is expenditure of all firms in the economy on capital stock and productive
capacity e.g. machinery, stocks, equipment

The short run aggregate supply (SRAS) is the total output of goods and services that all the firms
in an economy are willing to produce at given price levels, when technology and wages are
assumed to be fixed.

The long run aggregate supply (LRAS) according to the new classical model is the maximum
level of real GDP at full employment of resources i.e. the production potential of the economy.

An inflationary (positive output) gap exists when an economy’s actual real GDP exceeds the
potential output at the full employment level of national output

A deflationary (recessionary or negative output) gap exists when an economy’s actual real GDP
is below its potential output at the full employment level of national output

Economic growth refers to a sustained increase in a nation’s real GDP over time and is
expressed as the annual percentage change in real national output

Actual growth occurs in the short-term when an economy operates below its full-employment
level of national income but moves towards its potential level of GDP by using resource more
efficiently.

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Potential growth is associated with an increase in the quantity and/or quality of factors of
production in the long run i.e. an outward shift of the LRAS (PPC curve).

Unemployment refers to the situation when people are willing and able to work and actively
seeking employment but are unable to find work

The unemployment rate measures the number of people who are officially unemployed as a
percentage of the nation’s workforce

The labor force refers to people of working age who are in employment, self-employment and
the unemployed

The claimant count is a measure of people who are unemployed, actively seeking work and
claiming unemployment benefits

Underemployment exists when people are inadequately employed e.g. part-time workers,
skilled individuals working low-paying jobs

Hidden (disguised) unemployment refers to those who are technically unemployed, but are not
included in the official measurement of unemployment e.g. discouraged or underemployed
workers

Voluntary unemployed people are economically inactive and chose to not to pursue full-time
work e.g. elderly people, parents who chose not to work in order to take care of their kids,
people who have retired early

Frictional unemployment exists when people are temporarily unemployed while in between
jobs or seeking to enter the job market for the first time. Some people may take time off to look
after their family or take a sabbatical

Seasonal unemployment is caused regular and periodic changes in the derived demand for
labor at different times of the year e.g. Ski instructors are less in demand during summers

Structural unemployment arises when labor skills mismatch with the jobs available in a specific
industry e.g. changes in technology

Cyclical (demand-deficient) unemployment is unemployment caused by a lack of aggregate

demand in the economy e.g. the Covid-19 pandemic

The natural rate of unemployment NRU refers to the equilibrium rate of unemployment,
whereby demand for labor equals supply of labor. It is the sum of structural, frictional and
seasonal unemployment in a nation

Inflation is the persistent rise in the general price level of goods and services in an economy
over time.

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The consumer price index is a weighted index of average consumer prices of goods and services
over time

Demand pull inflation is inflation caused by higher price levels of aggregate demand in an
economy which drives up general price levels

Cost push inflation is inflation caused by higher costs of production such as higher labor wages
in an economy which drives up general price levels
Deflation is the persistent fall in the average price levels in an economy over time caused by a
continual decline in aggregate demand or an increase in short run aggregate supply

Disinflation occurs when there is a fall in the rate of inflation i.e. prices are still rising, but at
slower pace

A budget deficit occurs when the value of government spending exceeds government revenue
collections per time period

Government (national) debt refers to the sum of all accumulated budget deficits from previous
years i.e. the total amount the government owes to its domestic and foreign creditors

Austerity measures refers to cutbacks in government spending to repay national debt

The short-run phillips curve shows a potential trade-off between pursuing low unemployment
and low inflation as economic objectives

Equality is the parity in income among individuals i.e. everyone receives the same and no
inequalities exist

Equity means fairness, such as those with higher levels of qualifications, skills and experience
are paid more i.e. the existence of inequalities is justified

The lorenz curve is a representation of the income distribution in a country, based on the
income or wealth accounted for by each quintile of the population

The gini coefficient is a tool that measures the income or wealth inequality

Poverty is the condition of an individual, household, community or nation being extremely poor
i.e. not being able to meet their basic needs

Absolute poverty exists when people are deprived of basic human needs for survival e.g.
malnutrition, lack of clean water, inadequate shelter

Relative poverty is a measure of wealth inequality, describing an individual or group's wealth

relative to another individual or group

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The Multidimensional poverty index (MPI) is a composite measure of poverty that identifies
numerous deficiencies of individual and households based on three indicators, health,
education, standard of living

A progressive tax charges a higher percentage tax as an individual’s income rises

A proportional (flat) tax charges the same percentage rate of tax irrespective of the taxpayer’s
level of income, wealth or profit

A regressive tax applies a uniform tax rate to all tax payers, thereby taking a larger proportion of
income from low-income earners as compared to high-income earners
A transfer payment is a sum of money from the government to another party for which no
goods or services are being paid e.g. unemployment benefits, disability allowance, student
loans, pensions, housing allowance

A universal basic income (UBI) refers to the guaranteed minimum level of income that a
government guarantees to each individual in a country

Current (consumption) expenditures refer to government spending on goods and services

consumed in the current year e.g. wages, healthcare, education, grants and subsidies, interest
repayments on loans

Capital expenditures refer to long term items of government spending that boost the
economy’s productive capacity. It is also known as fixed capital formation e.g. infrastructure,
airports, state schools, public libraries, highways

A government budget is a plan of a country’s revenues and expenditures over a period of time

Expansionary fiscal policy is the use of increased government spending and/or reduced taxes in
order to stimulate economic activity

Contractionary fiscal policy is the use of reduced government spending and/or increased taxes
in order to reduce economic activity

The marginal propensity to consume (MPC) measures the proportion of an increase in

household income that is spent on good and services

The Keynesian multiplier shows the that any increase in the value of injections into the circular
flow of an economy results in a proportionately larger increase in aggregate demand

Automatic stabilizers are aspects of fiscal policy that naturally reduce fluctuation in the
economic activity (business cycle)

Interest rates are the cost of borrowing and the profit of lending money

Credit creation refers to the process by which commercial banks create money from deposits
and use them to loan to borrowers

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The money multiplier is a used to calculate by how much an initial deposit increases the money
supply

Open market operations (OMO) refers to the buying and selling of government securities such
as bonds by the central bank

Minimum reserve requirements is the lowest amount that commercial banks are required to
keep as reserves in the central bank, thereby limiting how much they can lend and how much
credit they can create

The minimum lending rate is the official rate of interest charged by the central bank on loans to
commercial banks. It is also known as base rate, discount rate and refinancing rate

Quantitative easing is a monetary policy tool that injects money directly into the economy via
the central bank purchasing a wide range of securities such as bonds

The liquidity trap exists when MLR cannot be cut any further, as it is close to zero, making
traditional monetary policy ineffective

The real interest rate accounts for the impact of inflation

Expansionary (loose) monetary policy aims to boost economic activity by expanding the money
supply. This is achieved by lowering interest rates to stimulate aggregate demand, thereby
closing a deflationary gap

Contractionary (tight) monetary policy aims to reduce economic activity by limiting the money
supply. This is achieved by raising interest rates to lower aggregate demand, thereby reducing
an inflationary gap

Market based supply-side policies focus on increasing market competition and incentives to
work to increase aggregate supply, thereby improving productivity

Deregulation is the reduction or removal of government rules, directives and barriers to entry in
an industry with the intention to create more competition and greater efficiency

Privatization involves the sale or transfer of state-owned businesses to the private sector to
improve competition, efficiency and productivity

Interventionist supply-side policies are deliberate attempts by a government to influence

aggregate supply and productive capacity of the economy

Factor endowment refers to the quality and quantity of the factors of production available in a
nation e.g. natural resources and human capital.

Absolute advantage occurs when a country can produce more of a good or service than another
country using the same resources.

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Comparative advantage occurs when a country can produce a good or service at a lower
opportunity cost than another country, leading to the possibility of increased trade.

A tariff is a tax on imported goods and services.

Protectionism (trade protection) are barriers to international trade by a government to

safeguard domestic firms from foreign competition.

Quotas are quantitative limits on the importation of a good or services.

Production subsidies are a form of financial assistance given to domestic firms to lower the
production costs so they can compete with foreign imports.

Export subsidies are financial assistances given to domestic export firms to lower the production
costs so they can compete in international markets.

Administrative barriers are bureaucratic standards and regulation imposed on foreign firms in
order to protect local firms e.g. health and safety standards.

Embargos are a form of administrative barrier that involves banning trade with a certain country
due to political and/or economic disputes.

Exchange controls are a form of administrative barrier that involve limiting the amount of
foreign exchange that can be bought and sold.

Dumping is the sale of goods and services by foreign firms at prices lower than the cost of
production to hurt local firms.

Economically lesser developed countries ELDCs are low-income nations facing severe structural
barriers to economic development such as low levels of human capital.

X-inefficiencies occur when forms lack the incentive to control production cost in the absence of
competition.

Economic integration is the process of nations becoming more interdependent and

economically unified.

A preferential trade agreement PTA is a trade treaty between two or more nations giving
favorable terms and conditions of trade to member countries.

A trading bloc is a group of nations that agree to economic integration and freer trade by
reducing or removing trade barriers such as tariffs.

A free trade area FTA is a trading bloc between member nations that agree to trade freely with
each other but can impose separate trade restrictions with non-member countries.

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A custom union is a trading bloc that engages in free trade with each other and impose a
common external tariff on non-member countries.

A common market is a trading bloc that engages in free trade with each other, has a common
external tariff on non-member countries, and allows for the free movement of factors of
production between member nations.

Trade creation occurs when trade shifts from a high-cost producers outside a trading bloc to
lower-cost producers within a bloc due to removal of trade barriers.

Trade creation occurs when trade shifts from a low-cost producers outside a trading bloc to
high-cost producers within a bloc owing to the terms and conditions of the agreement.

Monetary union refers to when a common market converges their monetary policy that is
governed by a common central bank i.e. single currency.

The world trade organization WTO is a global organization that promotes trade liberalization
and oversees trade disputes among member nations.

An exchange rate is the value of one currency expressed in terms of another.

A free-floating exchange rate is where the value of a currency is determined by its demand and
supply in the forex market

Appreciation is the increase in the value of one currency in terms of another currency under s
free-float system

Depreciation is the fall in the value of one currency in terms of another currency under s free-
float system

Devaluation occurs when the price of currency operating in a fixed exchange rate system is
officially and deliberately lowered

Revaluation occurs when the price of currency operating in a fixed exchange rate system is
officially and deliberately raised

Remittances refer to the movement of money when nationals working abroad send money back
home

A fixed exchange rate exists when the central bank buys and sells currencies to ensure the value
of its currency stays at a single, predetermined rate.

A managed float (crawling peg) is a system where the government intervenes periodically in the
forex market to influence the value of a currency

An over-valued currency occurs when the value of a currency is above its equilibrium exchange
rate in the long run

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An under-valued currency occurs when the value of a currency is below its equilibrium exchange
rate in the long run

The balance of payment is a financial record of the transactions of on nation with the rest of the
world over one year

A current account is a record of all the trade flows (x-m), income flows and current flow
between one nation and other nations

The balance of trade is difference between a nation’s export earnings and import expenditure
on both goods and services

A current account deficit occurs when the sum of money flowing out of country exceeds the
money flowing into its current account i.e. balance of trade in goods, balance of trade in
services, income transfers and current transfers

The capital account records different form of inflows and outflows of a country over a given
period of time, namely, capital transfers and transactions in non-produced, non-financial assets.

Capital transfers are different forms of capital inflows and outflows of a nation such as debt
forgiveness, flow of money from emigrants.

Transactions in non-produced, non-financial assets refer to rights to natural resources and

intellectual property rights e.g. fishing licenses, patents etc.

The financial account records transactions that relate to changes in ownership of assets i.e.
foreign direct investment, portfolio investments, reserve assets and official borrowings.

Foreign direct investment FDI is the spending by multinational companies in overseas markets.

Portfolio investment refers to investment in government bonds and company shares within a
country.

Reserves assets are stocks of foreign currencies and liquid assets such as gold reserves held by
central banks used to balance international payments.

Expenditure switching policies are measures intended to cut a current account deficit by
encouraging local consumers to buy domestically produced goods and services over imports by
e.g. imposing tariffs or devaluing their currency.

Expenditure dampening policies are measures intended to cut a current account deficit by
lowering domestic disposable income to limit aggregate demand and import expenditure e.g.
contractionary fiscal policy.

Economic development refers to an improvement in the quality of life in a nation e.g. better
public healthcare facilities, clean drinking water, availability of clean energy.

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The sustainable development goals SDGs of the U.N. consist of 17 international development
targets aimed at achieving prosperity of member countries.

Human development index HDI is a composite measure of economic development comparing

real income, life expectancy and educational attainment.

The gender inequality index GII is a composite measure of economic development by

calculating gender disparities through reproductive health, empowerment and labor market
participations.

The inequality-adjusted Human development index IHDI is a composite measure of economic

development by accounting for inequalities in society.

The savings ratio is the amount of savings expressed as a proportion of total disposable income
in an economy.

Import substitution is an inward-looking strategy of development and growth that encourages

domestic production and the purchase of domestic consumption output through protectionist
policies.

Export substitution is an outward-looking strategy to achieve development and growth that

focuses on greater international trade.

Diversification is an economic growth and development strategy that includes countries

broadening their supply of goods and services in export industries.

A social enterprise is an organization that focuses on meeting specific social objectives e.g.
injustices that cause poverty.

Trade liberalization is the reduction or removal of trade barriers such as tariffs thereby
increasing competition and productivity in international markets.

Foreign aid is financial assistance from donor countries to economically lesser-developed

countries (ELDCs) for the purpose of economic development.

Humanitarian aid is financial assistance from donor countries to help improve development and
living standards in a country.

Debt relief (debt forgiveness) is the partial or total remission of foreign debts especially those
owed by ELDCs.

Official development assistance ODA is financial assistance from donor governments rather
than NGOs for development purposes.

Multilateral development assistance MDA is financial support delivered through international

institutions such as IMF and World Bank for economic development.

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Microfinance refers to small funds borrowed by individuals in ELDCs for self-employment
purposes so they can generate income.

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