Glossary

Absolute poverty is an extreme form of poverty; Business cycle describes the fluctuations in
it indicates the number of people who cannot the economic activity of a country over time,
afford minimal standards of basic human thus creating a long-term trend of economic
needs (food, clothing, health care and shelter). growth in the economy.
Appreciation of a currency occurs when there Capital refers to manufactured resources used
is an increase in its value relative to another to further the production process, e.g. tools,
currency operating in a floating exchange rate machinery and buildings.
system. Capital-intensive production happens when a
Average costs are calculated by dividing total firm spends proportionately more money on
costs by the number of units produced. capital costs than any other factor of production.
Backward vertical integration occurs when Central bank is the term used to describe the
a firm from the secondary sector of industry monetary authority that oversees and manages
merges with a firm from the primary sector the supply of money and the banking system
of industry or a firm from the tertiary sector of the nation.
of industry merges with a firm from the Chain of production describes how businesses
secondary sector of industry. from the primary, secondary and tertiary
Bad debts occur when people or businesses sectors work interdependently to make a
cannot repay a loan. product and sell it to the final customer.
Balance of payments is a financial record of Collateral means security for a loan, e.g.
a country’s transactions with the rest of the property in the case of a mortgage, or the car
world for a given time period, per time period. purchased in the case of a car loan.
Balance of trade (or simply the trade balance) Collective bargaining occurs when a trade
is the difference between a country’s union representative negotiates on behalf of
total export earnings and its total import its members with the employer to reach an
expenditure. agreement which both sides find acceptable.
Barriers to entry are the obstacles that prevent Commercial banks are retail banks that provide
other firms from effectively entering the financial services to their customers, such
market. Examples include the existence of as accepting savings account deposits and
intellectual property rights, large advertising approving bank loans.
budgets of existing firms and legal constraints Complements are products that are demanded
to prevent wasteful competition. (for their use) together with other products.
Barriers to trade are obstructions to For example, tea and milk or the cinema and
free trade, imposed by a government to popcorn are jointly demanded.
safeguard national interests by reducing the Conglomerate integration/lateral
competitiveness of foreign firms. integration/diversification occurs when a
Bartering is the act of swapping items in merger or takeover occurs between two firms
exchange for other items through a process of from unrelated areas of business.
bargaining and negotiation. Conspicuous consumption occurs when
Base year refers to the starting year when people purchase highly expensive goods and
calculating a price index. services due to status or a desired image.
Basic economic problem is how to allocate Consumer prices index (CPI) is a weighted
scarce resources to satisfy unlimited needs and index of consumer prices in the economy over
wants. time. It is used to measure the cost of living
Birth rate measures the number of live births for an average household.
per thousand of the population in a year. Consumer spending refers to the amount of
Borrowing occurs when an individual, firm household expenditure per time period.
or the government takes out a loan from a Consumption is the value of all private
financial institution, paying back the debt with household consumption within a country.
interest over a period of time. Co-operatives are business organisations set up,
Business is an organisation that sells goods and/ owned and run by their members, who may be
or services. employees and/or customers.
Cambridge IGCSE ® and O Level Economics © Hodder & Stoughton 2013 1
Glossary
Cost-push inflation is a cause of inflation, Deregulation is a supply-side policy of making
triggered by higher costs of production, which markets more competitive by removing barriers
force up prices. to entry and other market imperfections.
Costs are the payments made by firms during Derived demand means that the demand for
the production process, e.g. the cost of land, factors of production occurs not for their own
labour, capital and enterprise. sake but for the goods and services that they
Current account is a component of the balance are used to produce.
of payments that records all exports and Devaluation occurs when the price of a currency
imports of goods and services between a operating in a fixed exchange rate system is
country and the rest of the world. officially and deliberately lowered.
Current account deficit occurs when a Direct taxes are government charges imposed
country’s financial outflows are greater than on income and wealth, such as income tax and
its financial inflows. inheritance tax.
Current account surplus exists if a country’s Diseconomies of scale occur when average
financial inflows are greater than its financial costs of production start to increase as the size
outflows. of a firm increases.
Death rate measures the number of deaths per Disinflation occurs when the rate of inflation
thousand of the population in a year. falls, but is above zero, i.e. prices are generally
Deflation is the sustained fall in the general still rising, only at a slower rate.
price level in an economy over time, i.e. the Disposable income refers to the earnings of an
inflation rate is negative. individual after income tax and other charges
Demand refers to the willingness and the ability have been deducted.
of customers to pay a given price to buy a Dissaving occurs when people spend their savings.
good or service. The higher the price of a Diversification is when a merger or takeover
product, the lower its demand tends to be. occurs between firms from different sectors
Demand for labour is the number of workers of industry that operate in unrelated areas of
firms are willing and able to employ at a given business.
wage rate. Division of labour is the specialisation of
Demand-pull inflation is a cause of inflation, labour by getting workers to focus on one
triggered by higher levels of aggregate demand aspect of the production process.
in the economy, which drive up the general Dumping is the act of selling exports at
price level. artificially low prices, below those charged by
Demerger occurs when two previously merged domestic firms, and often less than the costs
firms decide to break up and become two of production.
separate firms. Economic agents are households (private
Demerit goods are goods or services which individuals in society), firms that operate
when consumed cause negative spillover effects in the private sector of an economy and the
in an economy, e.g. cigarettes, alcohol and government (the public sector of an economy).
gambling. Demerit goods are over-consumed Economic goods are those which are limited in
due to imperfect consumer information about supply.
such goods. Economic growth is the increase in the level
Demographics is the study of population of national output, i.e. the annual percentage
distribution and trends. change in GDP.
Dependency ratio is a comparison of the Economic system describes the way in which an
number of people who are not in the labour economy is organised and run, including how
force with the number of people in active paid to best allocate society’s scarce resources.
employment. Economies of scale occur when average costs of
Depreciation of a currency occurs when there is production fall as the size of a firm increases.
a fall in its value relative to another currency Embargo is a type of protection by placing a
operating in a floating exchange rate system. ban on the trade of a certain good or with a
particular country.
Cambridge IGCSE ® and O Level Economics © Hodder & Stoughton 2013 2
Glossary
Employer refers to a person or a firm that hires Fixed exchange rate system exists when the
other workers to an organisation. central bank (or monetary authority) buys and
Employment refers to the use of factors of sells foreign currencies to ensure the value of
production in the economy, such as labour. its currency stays at the pegged value.
Equilibrium occurs when the quantity Floating exchange rate system means that the
demanded for a product is equal to the currency is allowed to fluctuate against other
quantity supplied of the product, i.e. there are currencies according to the market forces
no shortages or surpluses. without any government intervention.
Equilibrium wage rate is determined when the Foreign aid is a form of financial assistance for
wage rate workers are willing to work for equals economic development from other countries
the wage rate that firms are prepared to pay. or non-government organisations such as
Excess demand occurs when the demand for Oxfam and Unicef.
a product exceeds the supply of the product Foreign exchange market is the marketplace
at certain price levels. This happens when where foreign currencies can be bought and sold.
the price is set below the equilibrium price, Forward vertical integration occurs when
resulting in shortages. a firm from the primary sector of industry
Excess supply occurs when the supply of merges with a firm from the secondary sector
a product exceeds the demand at certain of industry or a firm from the secondary
price levels. This results in a surplus because sector of industry merges with a firm from the
the price is too high, i.e. above the market tertiary sector of industry.
equilibrium price. Free goods are goods which are unlimited in
Exchange rate refers to the price of one currency supply, such as air or seawater.
measured in terms of other currencies. Free riders are people who take advantage of the
Exports are goods and services sold to overseas goods or services provided by the government
buyers. but have not contributed to government
External benefits are the positive side effects of revenue through taxation.
production or consumption incurred by third Free trade refers to international trade without
parties for which no money is paid by the any protectionist barriers between countries.
beneficiary. Functions of money describe the role that
External costs are the negative side effects of money plays in the economy: money is a
production or consumption incurred by third medium of exchange, a store of value and a
parties for which no compensation is paid. measure of value (or unit of account).
External economies of scale are economies of Fundamental economic questions are the key
scale that arise from factors outside of the firm, questions that all economic systems strive to
for example, the location of the firm, proximity answer: what, how and for whom production
to transport, availability of skilled workers. should take place.
Externalities (or spillover effects) occur where GDP per head (or GDP per capita) measures the
the actions of firms and individuals have either gross domestic product of a country divided
a positive or negative effect on third parties. by the population size. It is a key measure of a
Fertility rate measures the average number of country’s standards of living.
births per woman. It is used as a component Geographical mobility occurs when a person is
to measure population growth. prepared to relocate to another area for a job.
Financial economies of scale occur as large Go-slow occurs when workers decide to complete
firms are able to borrow money from banks their work leisurely and therefore productivity
more easily than small firms because they falls.
are perceived to be less risky to the financial Goods are physical items such as tables, cars,
institutions. toothpaste and pencils.
Fiscal policy is the use of taxes and government Government expenditure is the total value of
spending to affect macroeconomic objectives a government’s consumption and investment
such as economic growth and employment. spending and transfer payments, such as
unemployment benefits and state pension schemes.
Cambridge IGCSE ® and O Level Economics © Hodder & Stoughton 2013 3
Glossary
Gross domestic product (GDP) measures Investment expenditure is the sum of capital
the monetary value of goods and services spending by all businesses within a country.
produced within a country for a given period Investments are goods that are purchased not to
of time, usually one year. be consumed but to create wealth.
Horizontal integration occurs when two Invisible exports refer to the earnings from
firms in the same sector of industry and same selling services to foreign customers.
industry merge together. Invisible imports refer to the spending
Human Development Index (HDI) is the on services provided by firms in overseas
UN’s measure of wellbeing which uses countries.
three criteria: life expectancy, educational Invisible trade balance is a record of the
attainment and income per capita. trade in services, such as transportation and
Hyperinflation refers to very high rates of financial services.
inflation that are out of control, causing Labour force participation rate is the
average prices in the economy to rise very percentage of the working-age population that
rapidly. is working.
Imported inflation is a cause of inflation Labour-intensive production occurs when
triggered by higher import prices, forcing up labour costs account for proportionately
costs of production and thus causing domestic more of a firm’s costs than any other cost of
inflation. production.
Imports are foreign goods and services bought Labour supply consists of people who are of
by domestic households and firms. working age and are willing and able to work
Income is the total amount of earnings an at prevailing wage rates.
individual receives in a period of time. It may Less economically developed countries
consist of wages, interest, dividends, profits (LEDCs) are developing countries, with low
and rental income. GDP per capita, so standards of living are
Indirect taxes are taxes imposed on expenditure, generally poor.
i.e. sales taxes such as value added tax (VAT). Life expectancy measures the number of years
Industrial action is any deliberate act to disrupt an average person in the country is expected
the operations of a firm in order to force the to live.
management to negotiate better terms and Limited company is a company owned by
conditions of employment, e.g. strike action. shareholders who have limited liability.
Inflation is the sustained rise in the general level Limited liability means that in the event of a
of prices of goods and services over time, as company going bankrupt, the owners would
measured by a consumer price index. not lose more than the amount they invested
Innovation is the commercialisation of new ideas in the company.
and products. It is a vital source of productivity. Managerial economies of scale occur as large
Interdependence means that the three sectors firms have the resources to employ specialists
of industry are dependent upon each other to undertake functions within the firm, e.g.
and cannot operate independently to produce accountants, engineers, human resources
goods and services. specialists.
Internal economies of scale are economies of Managers are responsible for controlling all or
scale that arise from the internal organisation part of a company.
of the business, for example, financial, bulk- Market economy is a type of economic system
buying and technological economies of scale. that relies on the market forces of demand
International specialisation occurs when certain and supply to allocate resources with minimal
countries concentrate on the production of government intervention.
certain goods or services due to cost advantages, Market failure occurs when the market forces
perhaps due to their abundant resources. of demand and supply fail to allocate resources
International trade refers to the exchange of efficiently and cause external costs or external
goods and services beyond national borders. benefits.

Cambridge IGCSE ® and O Level Economics © Hodder & Stoughton 2013 4

Glossary
Market structure refers to the key organisation is also known as a public-sector
characteristics of a particular market, such as organisation.
the number and size of firms in the market, Needs are goods that are essential for survival.
the degree and intensity of price and non- Net exports refers to the monetary value of the
price competition, and the nature of barriers difference between a nation’s export earnings
to entry. and its import expenditure.
Marketing economies of scale occur as big Net income flows are a record of a country’s
firms tend to have a large advertising budget net income earned from capital flows.
and therefore can spend large amounts of Net migration rate measures the difference
money on promoting their products. between immigration and emigration rates
Merger occurs when two firms join together to for a country, and thus indicates the physical
make one firm. movement of people in and out of a country.
Merit goods are goods or services which when Occupational mobility is when a person can
consumed create positive spillover effects in easily move from one type of job to another.
an economy, e.g. education, training and Opportunity cost is the cost of the next
health care. Merit goods are under-consumed best opportunity foregone when making a
so government intervention is often needed. decision.
Mixed economy is a type of economic Optimum population exists when the
system that combines elements of both the output of goods and services per head of the
planned and market economic systems, with population is maximised.
some resources being owned and controlled Overspecialisation occurs when an individual,
by private individuals and firms whilst firm, region or country concentrates too much
others are owned and controlled by the on producing a very limited number of goods
government. and services. This exposes the economic agent
Monetary policy refers to the use of interest to a far higher degree of risk.
rates, exchange rates and the money supply Owners have a legal right to the possession of
to control macroeconomic objectives and to something.
affect the level of economic activity. Partnerships are businesses owned by between
Money is anything that is widely accepted as a two and twenty owners, who pool funds and
means of exchange (and acts as a measure and take risks together, but have to share profits
store of value). between themselves.
Money supply refers to the amount of money in Perfect competition describes a market where
the economy at a particular point in time. there is immense competition due to the
Monopoly is a market structure where there is absence of barriers to entry. This means there
only one supplier of a good or service, with are many small firms competing in the market,
the power to affect market supply or prices. none of which have any power to influence
More economically developed countries market supply or price.
(MEDCs) are developed countries, with high Planned economy is a type of economic system
GDP per capita, so standards of living are that relies on the government allocating
generally good. scarce resources. It is often associated with
Mortgage is a secured loan for the purchase of a communist political system that strives for
property. social equality. Also referred to as the socialist
Multinationals are businesses that operate in or command system.
two or more countries. Examples include Population refers to the total number of
Apple, BMW, HSBC, Marks & Spencer, Nike inhabitants of a particular country.
and Sony. Population growth refers to the rate of change
National minimum wage is the lowest amount in the size of a country’s population.
a firm can pay its workers and is set by the Population pyramids are a graphical
government. representation of the age and gender
Nationalisation is the process of taking distribution of a country’s population.
assets into state ownership. A nationalised
Cambridge IGCSE ® and O Level Economics © Hodder & Stoughton 2013 5
Glossary
Poverty is a condition that exists when people Production possibility curve (PPC) represents
lack adequate income and wealth to sustain a the maximum amount of goods and services
basic standard of living. which can be produced in an economy, i.e. the
Price is the amount of money expected or given productive capacity of the economy.
in payment for something. Productivity is a measure of efficiency arrived at
Price discrimination is the practice of charging by calculating the amount of output per unit
different prices to different customers for of a factor input (such as output per worker or
essentially the same product. It occurs because output per machine hour).
of the customers’ differences in PED. Profit is the positive numerical difference
Price elastic demand describes demand for between revenues and costs. It is the reward
a product that is responsive to changes for risk-taking in business.
in price, usually due to substitutes being Progressive taxation is a tax system that
available. deducts a greater proportion of tax as a
Price elasticity of demand (PED) measures person’s income level increases, e.g. income tax
the extent to which demand for a product and capital gains tax.
changes due to a change in its price. Proportional taxation is a tax system that
Price elasticity of supply (PES) measures the deducts the same proportion of tax at all
degree of responsiveness of quantity supplied income levels.
of a product following a change in its price. Protection is the use of trade barriers
Price inelastic demand describes demand for to safeguard a country from excessive
a product that is unresponsive to changes in international trade and foreign competition.
price, mainly because of the lack of substitutes Public company is a firm that can sell its shares
for the product. on a stock exchange, e.g. Microsoft, HSBC
Price setter (or maker) describes a firm with and Samsung.
significant market power so it can control Public corporations (public sector
enough of the market supply in order to affect organisations) are organisations that are
the price level. wholly owned and funded by a government,
Price stability means that inflation is under such as the postal office.
control so that price movements are Purchasing or bulk buying economies of
predictable. scale occur when the cost of raw materials
Price takers are firms that set their price falls when bought in large quantities thus
according to the market forces of demand and reducing the average costs.
supply, rather than determining their own Quota is a type of protection that sets a numerical
prices. limit on the number of imports allowed into a
Private benefits are the benefits of production country over a specified time period.
and consumption enjoyed by a firm, individual Real GDP refers to the value of national income
or government. (GDP) adjusted for inflation to reflect the
Private costs of production and consumption true value of goods and services produced in a
are the actual costs of a firm, individual or given year.
government such as wages and raw material Recession occurs in the business cycle when
costs. there is a fall in GDP for two consecutive
Private limited company has limited liability quarters.
and can sell shares to raise finance but not to Regional specialisation occurs when certain
the general public. areas concentrate on the production of certain
Privatisation is a supply-side policy of selling off goods or services, e.g. Hollywood, in Los
state-owned assets to the private sector. Angeles, is famous for its motion pictures
Producer refers to any firm that deals in the industry.
production and/or provision of goods and Regressive taxation is a tax system that deducts
services. a smaller proportion of tax as a person’s
Production refers to the total output of goods income increases, e.g. sales taxes and stamp
and services in the production process. duties.
Cambridge IGCSE ® and O Level Economics © Hodder & Stoughton 2013 6
Glossary
Regulation refers to the rules and laws that Social costs are the true (or full) costs of
govern business behaviour in the economy, consumption or production, i.e. the sum of
e.g. employment laws, consumer protection private costs and external costs.
legislation and environmental protection Sole trader is a person who owns and runs a
laws. business as single proprietor. S/he takes all the
Relative poverty is a comparative measure of risks but keeps any profit made by the business.
poverty. Those in relative poverty have a lower Specialisation occurs when individuals, firms,
standard of living in comparison with the regions or countries concentrate on the
average member of society. production of a particular good or service.
Replacement fertility rate is the number of Specialisation of labour occurs when a worker
children that the average woman must have becomes an expert in a particular profession or
to replace the existing population in order to in a part of a production process.
maintain a stable population size. Stakeholders are any economic agents with a
Research and development economies of vested interest in the operations of a business,
scale occur as large firms may be able to fund e.g. shareholders, employees and customers.
research and development and therefore can Standards of living refer to the social and
be innovative and create products that enable economic wellbeing of individuals in a country
them to be leaders in their area of business. at a point in time.
Retail prices index (RPI) is used to calculate Stock exchange is the term used to describe an
the rate of inflation. Unlike the CPI, the institutional marketplace for trading the shares
RPI includes the cost of housing, including of public limited companies.
mortgage interest payments and other housing Stocks (or inventories) are the raw materials,
costs but excludes low-income pensioners and components and finished goods (ready for
high-income households. sale) used in the production process.
Revaluation occurs when the price of a currency Strike occurs when union members withdraw
operating in a fixed exchange rate system is their labour services by refusing to work.
officially and deliberately increased. Subsidies are a form of financial support from
Revenue refers to the money a firm earns from the government to lower the production
its sales, before deducting costs of production. costs of domestic firms, thereby raising their
Risk-bearing economies of scale occur competitiveness.
as large firms tend to produce a range of Subsidy is a sum of money given by the
products and operate in many locations. government to a producer to reduce the costs
Salary is a fixed monthly payment in return for of production or to a consumer to reduce the
labour services. price of consumption.
Saving occurs when a person puts aside some of Substitutes are products that are in competitive
their current income for future spending. demand as they can be used in place of
Savings ratio refers to the proportion of each other. For example, tea and coffee or
household income which is saved instead of McDonald’s and Burger King meals are
consumed in an economy. substitute products.
Services are non-physical items such as haircuts, Supply is the willingness and the ability of firms
bus journeys, telephone calls and internet to provide a good or service at given prices.
access. The higher the price of a product, the higher
Shareholders are the part-owners of a limited its supply tends to be.
liability company. Supply-side policies are the long-term strategies
Sit-in is when union members go to their place aimed at increasing the productive capacity of
of work, occupy the premises but do not the economy by improving the quality and/or
undertake their normal work. quantity of factors of production.
Social benefits are the true (or full) benefits of Takeover occurs when a firm is taken over by
consumption or production, i.e. the sum of another firm. A takeover may be hostile or the
private benefits and external benefits. two firms may have agreed to the takeover.

Cambridge IGCSE ® and O Level Economics © Hodder & Stoughton 2013 7

Glossary
Tariffs are import taxes that are imposed on Unlimited liability means that if a business
foreign goods. goes bankrupt, the owner(s) is/are personally
Tax avoidance is the legal act of minimising liable for the debts, even if it means personal
payment of taxes, such as by avoiding spending belongings have to be sold.
on items with a large sales tax. Vertical integration occurs when a takeover or
Tax burden is the amount of tax that merger takes place between two firms from a
households and firms have to pay. different sector of industry.
Tax evasion is the illegal act of not paying the Visible exports are goods which are sold to
correct amount of tax, perhaps due to a firm foreign customers.
under-declaring its profits. Visible imports are goods bought by domestic
Taxes are government levies on income and customers from foreign sellers.
expenditure, used to fund government Visible trade balance is a record of the export
expenditure to affect economic activity. and import of physical goods.
Technical economies of scale occur as large Wage-price spiral occurs when trade unions
firms can afford to purchase expensive pieces negotiate higher wages to keep income in line
of machinery and automated equipment for with inflation but this simply causes more
the manufacturing process. inflation as firms raise prices to maintain their
Trade protection is the use of trade barriers profit margins.
to safeguard a country against excessive Wage is the return for labour services, paid hourly
international trade and foreign competition. or weekly. Payment depends on the amount of
Trade union is an organisation which aims time worked.
to protect the interests of its members, Wants are goods and services that are not
namely the terms of pay and conditions of necessary for survival but are demanded by
employment. economic agents.
Transfers are money flows from one country to Wealth is measured by the value of assets a
another, e.g. income sent by a foreign worker person owns minus their liabilities (the
to their home country, or a gift of money from amount they owe to others).
one government to another. Work-to-rule means that workers literally work
Unemployment occurs when people of working to fulfil the minimum requirements of their
age who are both willing and able to work job and do nothing outside what is written in
cannot find employment. their contract of employment.
Unemployment rate is a measure of the Working population (or labour force) is the
percentage of a country’s workforce that is out number of people in an economy who are of
of employment. working age and are willing and able to work.
Unitary price elasticity occurs when the
percentage change in the quantity demanded
(or supplied) is proportional to the change in
the price, so there is no change in the sales
revenue.

Cambridge IGCSE ® and O Level Economics © Hodder & Stoughton 2013 8