CSEC Economics

Glossary of Important Terms

Concept
Economics
Scarcity
Opportunity
cost
Economic
systems
Types of
Business
Organisations
Economies of
Scale
Division of
Labour
Specialisation
Factors of
Production
Fixed cost
Variable cost
Total cost
Average cost
Marginal cost

Definition
A social science that studies the allocation of scarce
resources to satisfy human wants and needs.
The fundamental economic problem, caused by the fact that
all resources are limited in availability, while human wants
are unlimited.
Next best alternative that is foregone when an economic
transaction takes place.
Free Market, Planned, Mixed

Comments

Most countries around the world have

mixed economies now.

Sole trader, partnership, LLC (public or private),

conglomerate, co-operative, Multi-National Corporation.
Benefits that accrue to a firm as it expands its scale of
production, which allow it to achieve lower average costs.

Diseconomies of scale: occur when a

firm expands too much, therefore
increasing AC.

Breaking up of production into smaller tasks, which leads to

increased productivity due to specialisation.
Occurs when a worker builds significant competency at the
task he/she is assigned to, through repetition and continuous
improvement.
Land, Labour, Capital, Enterprise
Cost that does not change when output varies.
Cost that varies when output changes
Sum of all costs for a firm producing a given amount of
output.
Total cost Output
Extra cost incurred by increasing production by one unit

Factor rewards: Rent, Wages, Interest,

profit
Examples: rent, most salaries
Examples: Electricity, sales
commissions, transport costs

Concept

Definition

Short run

Period of time during which at least one factor of production

is fixed. The firm is therefore constrained by the fixed factor.

Long run

Period of time during which all factors of production can be

varied.

Market

Any situation in which buyers and sellers conduct economic

transactions. It is not necessarily a physical place!

All else remaining the same. This assumption allows the

Ceteris paribus economist to isolate one variable, and to analyse its effect on
other economic variables.
Quantity of a product that consumers are willing and able to
Demand
purchase at a given price.
Quantity of a product that firms are willing and able to
Supply
produce and sell at a given price.
Demand and supply in a free market eventually equal, as the
Market
price mechanism works to eliminate shortages (by increasing
equilibrium
prices) and surpluses (by reducing prices).
Responsiveness of an economic variable to changes in other
variables.
PED - Responsiveness of quantity demanded to a change in
price.
YED - Responsiveness of quantity demanded to a change in
Elasticity
income.
XED - Responsiveness of quantity demanded for one good to
a change in price of another.
PES - Responsiveness of quantity supplied to a change in
price.
Market
Defines the nature of industrial organisation in a particular

Comments
Law of Diminishing Returns illustrates
this constraint, and is only applicable
in the short run.
Economies of scale is a long-run
concept.
E.g. online book retailing happens in a
market, even though buyers and
sellers may not even be in the same
country.

Formulas:
PED - % change in QD % change in
Price.
YED - % change in QD % change in
Income.
XED - % change in QD Good A %
change in Price of Good B.
PES - % change in QS % change in
Price.
Market structure types: Perfect

Concept
structure

Definition
industry, as it relates to the number of sellers and buyers,
barriers to entry, and nature of the product
(homogeneous/differentiated).

Comments
competition, Monopolistic competition,
Oligopoly, Monopoly.
Underproducing goods with +ve
externalities; Overproducing goods
with -ve externalities; Missing market
for public goods; Monopoly causes
high prices + low output/quality.

Market failure

Occurs when a free market fails to yield socially optimal

outcomes.
Causes: Externalities, Public Goods, Monopoly

Qualities of
money

Portability, durability, divisibility, acceptability, scarcity.

Functions of
money

Medium of exchange; Unit of Account; Store of Value;

Standard of deferred payment.

Buying and selling (MoE); Pricing and

valuation (UoA); Saving + Investing
(SoV), Credit (SoDP).

Tools of
monetary
policy

Open Market Operations, moral suasion, reserve

requirement, repo rate (rate on short-term emergency
Central Bank loans to commercial banks)

OMOs: buying bonds is expansionary;

selling bonds is contractionary.

GDP

GNP

Sum of all economic transactions that take place *within the

borders of a country* in a year.

Sum of all economic transactions that take place *using a

country's factors of production, regardless of location* in a
year.

Per capita (per person) measures

account for population; Real GDP
accounts for inflation; However, GDP
doesnt account for product quality +
innovation, includes economic
activities with limited benefits (eg.
military spending), and excludes
highly valuable unpaid activities (eg.
parents raising children).
GNP = GDP + net factor income from
abroad. Countries which depend on
foreign investment (eg. T&T, Ireland,
and Singapore) will tend to have lower
GNP than GDP, since multinationals

Concept

Definition

Recession

Negative economic growth, ie. falling national income, over a

sustained period (at least 3 quarters)

Nominal
National
Income
Real National
Income

Market value of national income/output at current prices

Adjusted for inflation; in the case of real GDP, a number
called the deflator, which is based on a relevant price index,
is usually used to convert nominal to real GDP.

Occurs when people are out of work, looking for a job and
cannot find one. Unemployment rate = no. of unemployed
people size of labour force, usually presented as a %. NB:
Unemployment
Unemployment does not use the size of the population in the
denominator.

Inflation
Industrial
Action
National
budget
Disposable
income

Comments
profits are sent back to the home
countries.
Expenditure method: Y = C+I+G+(XM)
Income: Y = Rent + Wages + Interest
+ Profit
Output: Y = Gross Value Added

Sustained increases in the general price level in a country.

Strategy used by trade unions when negotiations with
management or government have failed. A more aggressive
form of collective bargaining.
A statement of all planned taxes and government
expenditure for a fiscal year.
Remainder of income after tax, and other contributions,
disposable income can be used in whichever way the earner

Labour force refers to all able-bodied

people who are above school-leaving
age but below retirement age, usually
16-64.
Types of Unemployment: Frictional;
Cyclical, Structural, Seasonal, Realwage.
Types of inflation: Monetary, Demandpull, Cost-push, Wage push, Imported.
Types: Strike; Picketing; Work-to-rule;
Go-slow; Non-cooperation; Overtime
ban.
Budget Deficits: G > T
Budget Surplus: T > G

Concept

Definition

Comments

chooses.
National Debt

Balance of
Payments

Terms of trade
Balance of
Trade
Current
account
Capital
account
Absolute
Advantage

Comparative
Advantage

Sum of public, private and external debts held in and by a

country.

An account of a country's transactions with the rest of the

world. Includes goods + services exports and imports, as well
as transfers of money between countries, and capital inflows
(FDI) and outflows.
Index of export prices index of import prices. A country's
optimal TOT depends on many things, including the nature of
its export and import products, level of competitiveness, etc.
Difference between a countrys exports and imports of goods
and services (visible + invisible balances).
Balance of Trade + Balance of Factor Income inflows and
outflows + Current transfers (eg. remittances)
Inflows + outflows of Investment FDI + Portfolio +
Balancing Item
A situation in which a country is more efficient at producing a
good or service than another, ie. with the same quantity and
type of resources, the country with absolute advantage will
produce more than the one without.
A situation in which a country has a lower opportunity cost
of producing a good or service than another country. In a
simple 2-country, 2-goods model, each country will have a
comparative advantage in one good/service, even if that
country is at an Absolute Disadvantage in both goods.

Dealing with debt expenditurereducing and expenditure-switching

policies.
BoP must always balance. The
balancing item, in the Capital Account,
shows the change in foreign reserves
required to make this happen.
Balancing item is negative when there
is a BoP deficit (ie. forex reserves
reduced) and positive with a BoP
surplus. (increasing forex reserves).

X-M

See comment on Balance of Payments

for details on the balancing item.
Where absolute advantage exists,
firms or countries can benefit from full
specialisation and trade.
Where comparative advantage exists,
firms or countries can benefit from
partial specialisation and trade.

Concept
Exchange rate
Fixed
Exchange Rate
Regime
Floating ER
Regime
Managed Float
ER
Currency
Appreciation

Devaluation

Features of
Caribbean
economies

Definition
The price of one country's currency in terms of another
country's currency, eg. USD 1 = TTD 6.44.
A countrys currency is pegged to another countrys
currency at a fixed rate indefinitely, eg. Bds $2 : US $1. In
this regime, Government and/or the Central Bank is
responsible for manipulating foreign reserves to offset
changes in the demand and supply of the national currency
on the forex market.
A countrys exchange rate is allowed to fluctuate freely in
accordance with changes in demand and supply for it on the
forex market.
A countrys exchange rate is allowed to float, between predetermined upper and lower thresholds.
In a floating ER regime, appreciation occurs when the
countrys currency becomes more valuable in relation to
some external currency.
In a fixed ER regime, devaluation occurs when the monetary
authorities target a lower the value of the currency, and
adjust their forex management to suit this new target.
Devaluation frequently occurs when countries experience
severe recessions, especially those caused by falling trade
competitiveness.
Small size, no economies of scale, few natural resources,
high degree of poverty, dependence on a small number of
commodities and services, heavy indebtedness.

Comments

The TT dollar operates on a managed

floating basis.
Depreciation occurs when it becomes
less valuable.
Revaluation is somewhat less
common, but refers to an increased
target for the value of the currency, as
decided by the relevant monetary
authorities.

Concept

Types of
Economic
Integration

Definition

Free Trade Area, Customs union, Single market, Economic

Union

Globalisation

Increasing degree of integration among all economies of the

world.

E-commerce

The practice of conducting business transactions over the

internet.

Comments
Also: Currency unions are situations
where 2 or more countries decide to
use a single currency, eg. the euro or
the EC dollar. Countries in a currency
union forfeit their control over
domestic monetary policy to a
centralised monetary authority
(European Central Bank; Eastern
Caribbean Central Bank.
Causes: Radically lower transport
costs, Increased variety, reliability and
access to communications technology,
trade liberalisation
E-Commerce can be business-tobusiness (B2B), business-to-consumer
(B2C), or business-to-government
(B2G).