Glossary

Every term, in one place

The same 86 definitions the lessons link to inline, wherever a sentence uses them — gathered here so a definition is never more than one page away.

A

absolute poverty: Being unable to meet the basic necessities of life — food, clean water, shelter — measured against a threshold fixed in real terms, so it doesn't move as the rest of the income distribution changes.
aggregate demandAD, aggregate demand curve: Total planned spending on an economy's output at a given price level: AD = C + I + G + (X − M) — consumption, investment, government expenditure and net trade. Slopes downward for reasons genuinely different from a single market's demand curve: the real balance, interest rate and international trade effects of a change in the price level, not diminishing marginal utility for one good.
allocative efficiencyallocatively efficient: Producing at the output where price equals marginal cost (P = MC) — resources go where consumers value them most, since the price paid for the last unit matches what it cost to produce. A price taker (perfect competition) achieves this at every output; a price maker facing a downward-sloping demand curve (monopolistic competition, oligopoly, monopoly) generally doesn't.

B

balance of paymentsBoP: A record of every transaction between a country's residents and the rest of the world over a period, split into the current account, capital account and financial account (plus a small balancing item). By construction the whole balance of payments sums to zero — a deficit on one account is mechanically matched by a surplus elsewhere.

C

capital account: The smallest of the balance of payments' three accounts — capital transfers (such as debt forgiveness) and the sale or purchase of non-produced, non-financial assets (patents, trademarks). Not to be confused with the much larger financial account.
capital expenditure: Government spending that creates or buys an asset delivering value over several years — a new hospital, road or school building — as opposed to spending used up as soon as it happens.
capital flight: Domestic savers or firms moving deposits or assets out of a country's own banking system into foreign banks or foreign assets, typically in response to political or economic instability — worsening the savings gap (less domestic deposit base to lend from) and the foreign currency gap (an outflow on the financial account) simultaneously, from the same single decision.
central bank: The institution responsible for a country's monetary policy, with four named roles: implementing monetary policy day to day; targeting a specific rate of inflation; acting as banker to the government; and lender of last resort — guaranteeing to lend to a commercial bank facing a genuine liquidity crisis so its funding problem doesn't cascade through the banking system.
comparative advantage: The ability to produce a good at a lower opportunity cost — giving up less of another good — than another producer. Unlike absolute advantage, a country can only hold the comparative advantage in ONE of two goods at a time (the two opportunity costs are reciprocals), which is exactly why comparative, not absolute, advantage determines what a country should specialise in and trade.
credit constraintcredit constrained, credit-constrained: Being unable to borrow against future earnings to cover a cost now — e.g. a household that can't take out a loan against a child's future higher wages can't afford to keep that child in school today, even though the future return would easily cover the loan. Distinct from a preference for less education: the household is blocked from acting on a choice it would otherwise make, not choosing not to.
crowding out: Government borrowing competing with private firms for the same pool of loanable funds, pushing up the interest rate and raising the cost of private borrowing enough that some private investment that would otherwise have happened doesn't — weaker when the economy has spare capacity and savings aren't already fully lent out.
currency appreciationappreciation: A rise in a currency's value against other currencies under a floating exchange-rate regime, caused by market forces rather than a government decision — the floating-regime counterpart to revaluation.
currency depreciationdepreciation: A fall in a currency's value against other currencies under a floating exchange-rate regime, caused by market forces rather than a government decision — the floating-regime counterpart to devaluation.
current account: The balance-of-payments component covering trade in goods, trade in services, primary income (investment income) and secondary income (transfers) — in surplus when the value of these exports exceeds the value of the corresponding imports. A genuinely separate account from the government's own budget balance, and larger than the trade balance alone.
current expenditure: Government spending on the day-to-day running of public services, used up as soon as it's spent — public-sector salaries, medicines, stationery — as opposed to capital expenditure, which buys a lasting asset.
customs union: A trading bloc combining free trade between members with a common external tariff applied to non-members — the two-part definition the mark scheme credits in full; naming only the free-trade half earns half the marks. More integrated than a free-trade area (each member sets its own external tariff), less integrated than a common market (also free factor movement) or an economic and monetary union (also a shared currency and macroeconomic policy).

D

devaluation: A deliberate, government- or central-bank-announced weakening of a currency's value under a fixed or managed exchange-rate regime — the fixed/managed-regime counterpart to currency depreciation.
diminishing marginal utilityDMU, law of diminishing marginal utility: The point at which each additional unit of a good starts adding less extra satisfaction than the unit before it — marginal utility is still positive and total utility is still rising, just more slowly. Not the same as total utility falling (marginal utility has turned negative by then), and not the same as decreasing marginal RETURNS (a production, not consumption, concept) — both are among the most commonly confused pairs on this paper, confirmed across four separate examiner series.
direct tax: A tax charged directly on the income, profit or wealth of the person or firm legally liable for it, which cannot be passed on to someone else — income tax, corporation tax and inheritance tax are the standard examples.
dynamic efficiency: A firm investing over time to cut future costs or improve its product — efficiency measured across periods, not a snapshot of one moment's output or price. Distinct from productive efficiency, which is about the current AC curve, not whether that curve is shifting down over time.

E

economic developmentdevelopment: A broad, qualitative rise in a population's living standards, health, education and genuine range of choice — of which rising real GDP (economic growth) is necessary but not sufficient. A country can grow for years while the gains concentrate narrowly (an export sector, a resource windfall, an elite) and leave most of the population no healthier, better educated, or freer than before; confusing growth with development is a confirmed, examiner-reported error on this exact spec point.
economies of scaleeconomy of scale, internal economies of scale: A long-run fall in long-run average cost as output increases, because there is no fixed factor being shared more efficiently — there is no fixed factor at all in the long run. A genuinely different mechanism from diminishing returns, even though both are commonly (and wrongly) described as "efficiency going up."
exchange rate: The price of one currency expressed in terms of another — how much foreign currency a unit of the domestic currency buys, or vice versa.
expenditure-reducing policy: A measure to reduce a current-account deficit by cutting total domestic spending — deflationary fiscal or monetary policy — so that spending on imports falls along with everything else, at the cost of slower growth or higher unemployment.
expenditure-switching policy: A measure to reduce a current-account deficit by shifting spending from imports toward domestically-produced goods — a depreciation/devaluation or protectionism (tariffs, quotas) are the two main tools.

F

financial account: The balance-of-payments component recording cross-border ownership of assets: foreign direct investment, portfolio investment, and changes in reserve assets. Moves far faster than the current account — a change in interest-rate expectations can shift portfolio flows within hours, while trade volumes take months to respond to a price change.
fiscal policyreflationary fiscal policy, deflationary fiscal policy: The government's own demand-side policy lever, working through government spending (G) and taxation (which changes disposable income and therefore C). Reflationary fiscal policy raises G and/or cuts tax to raise AD; deflationary fiscal policy does the reverse. Decided by the elected government, not the central bank.
fixed exchange ratepegged exchange rate, currency peg: An exchange rate set and defended by the government or central bank at a specific value against another currency, maintained through direct intervention rather than left to market forces. A deliberate change to the peg itself is a revaluation (stronger) or devaluation (weaker), not an appreciation or depreciation.
floating exchange ratefree-floating exchange rate, floating rate: An exchange rate determined purely by market demand and supply for the currency, with no government-defended target rate. A change in a genuinely floating rate is called appreciation (stronger) or currency depreciation (weaker), never revaluation or devaluation.
foreign currency gap: The shortfall between the foreign currency a country earns (chiefly from exporting primary products) and the foreign currency it needs to spend (chiefly on imported manufactured/capital goods) — a constraint distinct from the savings gap, though both are widened by the same underlying dependence on primary-product export earnings and by capital flight.
foreign direct investmentFDI: Investment by a firm or individual from one country in productive assets (factories, machinery, a controlling stake in a business) in another country — a spec-named cause of potential growth alongside domestic investment, because it adds directly to the host economy's capital stock regardless of where the funding originated.
free market economy: An economic system in which the price mechanism, not a central authority, decides what, how, and for whom to produce, with resources privately owned and the state's role kept minimal. Contrasted with a command economy, and rarely found in pure form — nearly every real economy is a mixed economy.

G

gains from trade: The extra output, or extra consumption possibilities, two countries can reach by specialising according to comparative advantage and trading, beyond what either could produce alone — real only if the agreed trade price sits strictly between the two countries' own domestic opportunity costs, and eroded or erased by transport costs and trade barriers.
Gini coefficient: A single number summarising inequality, defined as the area between the Lorenz curve and the line of perfect equality divided by the total area under the line of perfect equality — 0 is perfect equality, 1 is the theoretical maximum of perfect inequality.
globalisationglobalization: The growing interdependence and integration of the world's economies, evidenced by three spec-named characteristics: a rising share of world trade in world GDP, the growth of TNCs and FDI, and rising international migration. These are what globalisation looks like, not what causes it or what it produces — a distinction the mark scheme tests directly.

H

Harrod-Domar modelHarrod-Domar growth model: A growth model stating that an economy's sustainable growth rate g equals its savings ratio s divided by its capital-output ratio k (g = s/k): more saving converted into investment, or the same saving used more efficiently (a lower k), raises the growth rate a country can sustain. The shortfall between the saving an economy actually generates and the saving its growth target requires under this formula is the savings gap.
Human Development Index (HDI)HDI: A composite 0–1 measure of development combining normalised dimension indices for education (mean + expected years of schooling), health (life expectancy at birth) and income (GNI per capita at PPP, log-transformed), combined via their geometric mean rather than a simple average so a very low score in any one dimension can't be masked by strength in the other two. Built to capture more than GDP per capita alone, but it says nothing about within-country distribution, environmental sustainability, or political freedom — real, spec-tested limitations, not omissions to gloss over.

I

income inequality: Unequal distribution of the flow of earnings people receive over a period (wages, profit, rent, interest) — distinct from wealth inequality, which measures an accumulated stock rather than a period flow.
indirect tax: A tax charged on spending rather than income, collected by the seller but typically passed forward, in whole or in part, into the price the buyer pays — VAT and excise duties are the standard examples. Tax incidence determines how much of it the buyer actually ends up bearing.
international competitiveness: How effectively a country's firms can sell in world markets against foreign rivals, measured by relative productivity, relative unit labour costs, and relative export prices — driven by both cost factors and non-price factors (quality, branding, reliability, innovation).
interventionist strategies: Development strategies (human capital investment, protectionism, managed exchange rates, infrastructure spending, joint ventures with TNCs, buffer stock schemes) in which the state directly supplies, funds or protects something, on the premise that a genuine market failure — not a government-made distortion — is withholding growth capacity the private sector will not build on its own.

K

Kuznets curve: Beyond-spec: Simon Kuznets's 1955 hypothesis that inequality rises then falls as an economy develops — an inverted U, driven early on by uneven movement into a higher-paid modern sector. Contested: several developed economies have seen inequality rise again well past where the curve predicts it should keep falling.

L

Lewis dual-sector modelLewis structural dual-sector model, Lewis model: A model of industrialisation-led growth in which a developing economy has two sectors: a low-productivity traditional/agricultural sector with surplus labour available at a roughly constant subsistence wage, and a modern/industrial sector that hires this labour at that wage and reinvests the resulting profit in more capital — until the surplus labour is exhausted (the Lewis turning point), after which the wage must rise to draw in further workers. Frequently confused with the Harrod-Domar model in both directions on real WEC14 MCQs; the test is whether the question involves a savings/capital-output ratio (Harrod-Domar) or two sectors and a subsistence wage (Lewis).
long-run aggregate supplyLRAS: The economy's output once every cost, including wages, has had time to fully adjust. Vertical at potential output in the classical model (full wage/price flexibility means output always returns there regardless of the price level); flat, then upward-sloping, then vertical at the same potential output in the Keynesian model (sticky wages let the economy sit below potential with genuine spare capacity for a time).
Lorenz curve: A graph plotting the cumulative % of a population, ordered poorest to richest, against the cumulative % of income or wealth they hold — the further it bows away from the line of perfect equality, the more unequal the distribution.

M

managed exchange ratemanaged float, dirty float: An exchange rate that floats day to day like a market rate but which the central bank periodically intervenes to influence, without committing to defend a specific fixed value the way a true peg does.
marginal propensity to saveMPS: The fraction of an extra pound of income a household saves rather than spends — ΔS/ΔY — one of the three components of the marginal propensity to withdraw, alongside MPT and MPM.
marginal revenue productMRP, MRP_L, marginal revenue product of labour: The extra revenue a firm earns from employing one more unit of labour — marginal product multiplied by the extra revenue each unit of the resulting output earns. A profit-maximising firm hires labour until MRP_L falls to the wage rate, which is exactly why the MRP_L curve IS the firm's demand curve for labour.
market-orientated strategiesmarket-based strategies: Development strategies (trade liberalisation, FDI promotion, subsidy removal, privatisation, floating exchange rates, microfinance) that remove a government-imposed constraint on prices or ownership, on the premise that growth capacity already exists in the economy and is being suppressed by the distortion — not that the market itself has failed. Naming an interventionist strategy inside an answer that asks specifically for this category scores zero for that content, a confirmed, repeated examiner-reported error.
monetary policyreflationary monetary policy, deflationary monetary policy: The central bank's demand-side policy lever — interest rates, quantitative easing, lending criteria, and reserve-asset/liquidity requirements — working mainly through consumption and investment rather than government spending directly. In most modern economies, set independently of the elected government specifically so it isn't driven by short-term political incentive.
monopsonymonopsony power, monopsonist, monopsony employer: A market with only one buyer, or one dominant buyer — of labour, or of any other input, not only labour. Because the monopsonist faces the whole market supply curve, its marginal cost of buying (MCL in a labour-market context) lies above the price or wage it actually pays (ACL) — hiring one more unit means raising the price paid on every existing unit too — so profit-maximising behaviour restricts both the price/wage paid and the quantity bought below the competitive level.
multiplierthe multiplier, multiplier effect, multiplier process: The factor by which a change in national income exceeds the initial change in injections or withdrawals that caused it, because the first round of new spending becomes someone else's income, part of which is re-spent in a further round, and so on. Multiplier = 1/(1−MPC) = 1/MPW — the same result derived two ways, not two competing formulas.

N

net migration: Immigration minus emigration over a period — commonly stated backwards by candidates (emigration minus immigration) or dropped to just 'migration' without the 'net'. Positive net migration raises the labour force directly (a cause of potential growth) and affects employment/unemployment in both directions at once, since migrants are also consumers who add to aggregate demand and often fill specific skill gaps — which effect dominates depends on whether incoming workers substitute for or complement the existing workforce's skills.

O

opportunity cost: The value of the next-best alternative given up by a choice. Baked directly into how economic cost is defined here: total cost already includes the opportunity cost of the owner's capital and effort, which is exactly why breaking even on the accounting numbers (AR = AC) still counts as an acceptable outcome rather than a warning sign.

P

poverty line: The income threshold used to classify a household as being in poverty — fixed in real terms for absolute poverty, set as a fraction of the current median for relative poverty.
Prebisch-Singer hypothesisPrebisch-Singer thesis: The hypothesis that countries dependent on exporting primary commodities face a long-run tendency for their terms of trade to worsen relative to manufactured-goods exporters, because demand for primary products grows more slowly with rising world income (a low income elasticity of demand) than demand for manufactures, which keeps pace — meaning primary product dependency is a structural, worsening constraint on export earnings, not just short-run commodity-price volatility. Named in Pearson's own mark-scheme indicative content as a reference point for explaining a persistently declining terms of trade.
primary product dependency: An economy earning most of its export revenue from unprocessed commodities (agricultural goods, minerals, fuels) rather than manufactured goods or services — linked to both volatile export earnings (commodity-price volatility) and a long-run declining terms of trade (the Prebisch-Singer hypothesis).
production possibility frontierPPF, production possibility curve, PPC: A diagram showing the maximum combinations of two goods (or categories of goods) an economy can produce using all its current resources at full technical efficiency. A point on the curve is efficient, a point inside it is attainable but inefficient, and a point outside it is unobtainable given the current resource base and technology.
progressive tax: A tax whose average rate (tax paid ÷ income) rises as income rises — which happens exactly when the marginal rate charged on the next pound of income is higher than the average rate paid so far.
proportional tax: A tax whose average rate stays constant as income rises — the marginal rate charged on every extra pound equals the average rate already being paid, with no threshold or banding.
protectionismprotectionist policy, trade restriction: Government action to shield domestic producers from foreign competition — tariffs, quotas, non-tariff barriers (e.g. safety/quality standards) and export subsidies are the spec-named types. Raises prices for domestic consumers and invites retaliation, even when a specific justification (infant-industry protection, anti-dumping, national security) is genuine.
Purchasing Power ParityPPP, purchasing power parities: An exchange rate calculated so that an identical basket of goods costs the same amount in two currencies, correcting for non-traded goods and services being systematically cheaper in lower-income countries than the market exchange rate implies. The 'parity' — equal purchasing power across currencies — is the entire content of the term; a definition describing only 'buying power' without the cross-currency comparison is incomplete.

Q

quantitative easingQE: A monetary-policy instrument in which a central bank buys financial assets, principally government bonds, from commercial banks, directly increasing the money supply — confirmed as the correct mechanism in an examiner report (October 2022). Intended to lower long-term borrowing costs and encourage more lending, though banks aren't legally obliged to lend the new reserves out, a genuine limitation.
quintilequintiles: One-fifth of a population, ranked from poorest to richest and split into five equal-sized groups — the standard grouping a Lorenz curve or Gini coefficient is computed from when individual-level income data isn't used directly.
quotaimport quota: A direct limit on the physical quantity of a good that may be imported, letting the domestic price rise to whatever clears the market at that fixed quantity. Unlike a tariff, a quota does not automatically generate government revenue — the gap between the world price and the domestic price becomes a windfall 'quota rent' for whoever holds the import licence, unless the government auctions the licences itself.

R

regressive tax: A tax whose average rate falls as income rises — the marginal rate on additional income is lower than the average rate already paid. Many indirect taxes are regressive relative to income even when their rate is technically proportional to spending, because lower-income households spend a larger share of their income.
relative poverty: Having an income below a set fraction of the current median income (60% is the most common convention) — a threshold that rises and falls with the whole income distribution, unlike absolute poverty's fixed line.
relative unit labour costsunit labour costs, RULC, ULC: Labour cost per unit of output, compared with trading partners — wage cost divided by output per worker, not the wage level alone. A country with lower wages can still have higher unit labour costs than a rival if its productivity is low enough.
revaluation: A deliberate, government- or central-bank-announced strengthening of a currency's value under a fixed or managed exchange-rate regime — the fixed/managed-regime counterpart to currency appreciation.

S

savings gap: The shortfall between the domestic saving/investment an economy actually generates and the saving the Harrod-Domar model implies is needed to sustain a target growth rate — widened by low incomes, debt repayments, capital flight, or the absence of a banking/credit sector able to convert saving into investment.
structural change: A shift in the sectoral composition of an economy (e.g. agriculture toward manufacturing or services) that changes which skills and sectors are rewarded — can raise average income economy-wide while pushing workers whose skills no longer match demand into poverty.
structural unemployment: Unemployment caused by a mismatch between the specific skills workers have and the specific skills currently-available vacancies require — not simply 'unemployment in a declining industry.' Doesn't resolve with time the way frictional unemployment does, because waiting longer doesn't create the missing skill; retraining does.
subsidygovernment subsidy, producer subsidy: A per-unit payment from government to producers, lowering the effective cost of supplying each unit — the mirror image of a specific tax, shifting supply down/right and splitting its benefit between consumers and producers by the identical elasticity rule that governs tax incidence.
supply-side policyfree-market supply-side policy, interventionist supply-side policy, supply-side policies: Any policy aimed at raising an economy's potential output (shifting AS/LRAS) via productivity, competition or incentives, rather than shifting AD. Splits into free-market policy (removes a government-imposed constraint so an already-aligned private incentive can act — deregulation, privatisation, tax cuts) and interventionist policy (government directly supplies or funds something a private market under-provides due to a genuine market failure — training, infrastructure, start-up finance).

T

tariffimport tariff, import tax: A tax on imported goods, raising their domestic price and generating government revenue on every unit still imported after the tax. Unlike a quota, a tariff sets a price wedge and lets the resulting import quantity adjust to demand, rather than fixing the quantity directly.
tax avoidance: Legally structuring income, profit or transactions to minimise tax owed — distinct from tax evasion, which breaks the law to do the same thing. Transfer pricing sits on the avoidance side unless internal prices are set so far from a genuine market price that regulators treat it as evasion.
tax incidenceincidence of a tax, incidence: The question of how the burden of an indirect tax actually splits between consumers (a higher price paid) and producers (a lower price received), regardless of which side the tax is legally collected from. The side with the lower price elasticity — demand or supply, whichever responds less — bears the larger share.
terms of tradeToT, terms of trade index: The ratio of a country's average export price index to its average import price index, ×100: (average export price index ÷ average import price index) × 100. A rise means each unit exported now exchanges for more imports than before — but says nothing on its own about export revenue, volumes, or the trade balance, which depend on what actually moved the ratio.
trade liberalisation: The reduction or removal of barriers to international trade — tariffs, quotas, non-tariff barriers. Spec-named as a cause of globalisation; works via the same mechanism as falling transport costs — it narrows the wedge a foreign producer's price has to clear to undercut a domestic one, so more goods cross the threshold into being traded.
trading blocregional trading bloc: A group of countries granting each other preferential trade terms not extended to outsiders — in increasing order of integration: a free-trade area, a customs union, a common market, then an economic and monetary union. Spec-named as a cause of globalisation, since it multiplies the trade-liberalisation effect across every member country at once. Costs and benefits of membership include trade creation and diversion, economies of scale from a larger market, lower transaction costs, and freer factor movement, weighed against a loss of independent trade policy.
transfer payment: A government payment made with no good or service received in return — the state pension, unemployment benefit, child benefit — which redistributes existing income rather than buying new output, and is therefore excluded from GDP.
transfer pricing: The internal price a transnational corporation's subsidiary in one country charges its own subsidiary in another for the same goods or services, which can be set to shift reported profit toward a lower-tax jurisdiction without the underlying economic activity moving at all — the main mechanism behind corporate tax avoidance by TNCs.
transnational corporationTNC, multinational corporation, MNC: A firm that owns or controls productive assets — via FDI — in more than one country, coordinating production, supply chains or sales across borders. Spec-named both as a characteristic of globalisation (their growth) and, via the FDI they undertake, as one of its causes and effects.

W

wealth inequality: Unequal distribution of the stock of assets people own (property, savings, shares, pensions, minus debts) at a point in time — typically larger than income inequality, because wealth compounds via returns on existing assets and inheritance.
World Trade OrganizationWTO: The multilateral body overseeing global trade rules and settling disputes between members, built on a principle of non-discrimination between trading partners (most-favoured-nation treatment) — a principle trading blocs formally depart from by design, the structural source of tension between the bloc system and the WTO's own multilateral approach.

X

X-inefficiencyx inefficiency, x-inefficient: A firm allowing average costs to drift above the minimum it could actually achieve — not a form of efficiency itself but its absence, usually because weak competitive pressure or diluted ownership incentives let slack persist. The same principal-agent mechanism behind diseconomies of scale, seen as a single-firm cost problem rather than an organisation-size one.