BCS Written Economics key terms

A measure of how strongly the quantity of a good that buyers want changes when its price changes, calculated as the percentage change in quantity demanded divided by the percentage change in price.

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good; a positive value signals substitutes and a negative value signals complements.

The gap between the total amount buyers are willing to pay for a quantity of a good and the amount they actually pay, equal to the area below the demand curve and above the market price.

The loss of total welfare, measured as surplus that neither buyers nor sellers capture, that arises when a market produces a quantity different from the efficient level, for example because of a tax or monopoly.

A cost or benefit that a transaction imposes on people who are not part of it, such as pollution from a factory or vaccination protecting others, and which markets do not price automatically.

A good that is both non-rival, meaning one person's use does not reduce what others can consume, and non-excludable, meaning non-payers cannot easily be kept out, such as national defence.

The tendency of people to avoid paying for a good they can consume anyway once it is provided, which makes voluntary private supply of public goods fall short of the efficient level.

The practice of a seller charging different buyers different prices for the same good, or different prices for different quantities, in order to capture more of each buyer's willingness to pay.

A market with a single seller of a product that has no close substitutes and where entry by rivals is blocked, giving the firm power to set price above marginal cost.

The extra total cost a firm incurs to produce one additional unit of output, calculated as the change in total cost divided by the change in quantity produced.

The principle that adding more of one input while holding others fixed eventually yields smaller and smaller increases in output, so marginal product falls as usage rises.

The market value of all final goods and services produced within a country's borders during a given period, usually a year or a quarter, counted once to avoid double counting.

Nominal GDP is valued at current prices, while real GDP is valued at the prices of a chosen base year, so real GDP changes only when quantities change and is used to measure growth.

A price index covering all domestically produced output, computed as nominal GDP divided by real GDP and multiplied by 100, used to convert nominal values into real ones.

A sustained rise in the general level of prices across the economy, which reduces the purchasing power of money and is usually measured by the annual percentage change in a price index.

A weighted average of the prices of a fixed basket of household consumption goods and services, expressed relative to a base period, and widely used to track the cost of living.

The ratio of the change in equilibrium national income to the change in government spending or taxes that caused it, showing how an initial demand shock is amplified through further rounds of spending.

A feature of the budget, such as progressive income tax or unemployment benefits, that raises spending and cuts revenue during downturns, and does the reverse in booms, without new legislation.

The reduction in private investment or consumption that occurs when government borrowing to finance a deficit pushes up interest rates or absorbs scarce loanable funds.

The amount by which a government's total expenditure exceeds its total revenue in a given year, which must be financed by borrowing or by drawing down reserves.

The accumulated stock of money a government owes to domestic and foreign creditors, built up from past deficits, usually expressed as a percentage of GDP to judge sustainability.

The regular payments a borrower must make on a debt, comprising interest and scheduled repayment of principal, which competes with other spending in a government budget.

A tax under which the proportion of income paid rises as income rises, so higher earners contribute a larger share of their income than lower earners.

The ratio of the percentage change in tax revenue to the percentage change in nominal GDP, indicating whether tax collection is growing faster or slower than the economy.

A consumption tax charged at each stage of production on the value a business adds to its inputs, with registered firms claiming credit for tax already paid on purchases.

The ratio of the money supply to the monetary base, showing how much broad money the banking system can create from each unit of central bank money, given reserve and currency behaviour.

The minimum fraction of customer deposits that commercial banks must hold as cash or balances with the central bank, which limits how much credit they can create.

The buying and selling of government securities by a central bank in order to add or drain liquidity from the banking system and steer short-term interest rates.

The interest rate a central bank sets or targets to signal its monetary stance, which then influences deposit and lending rates throughout the financial system.

A monetary framework in which the central bank publicly commits to a numerical inflation goal and uses interest rate decisions and communication to keep inflation near that target.

The ability of a country to produce a good at a lower opportunity cost than another country, which is the basis for mutually beneficial specialisation and trade even when one country is more efficient at everything.

The ratio of a country's export prices to its import prices, showing how many units of imports one unit of exports can buy; a rise means the country gains more from trade.

A tax levied on imported goods, usually as a percentage of their value, which raises the domestic price, protects local producers and can invite retaliation from trading partners.

The part of the balance of payments recording trade in goods and services, income flows and transfers; a deficit means a country is a net borrower from the rest of the world.

Money sent home by citizens working abroad, recorded in the current account as a transfer and an important source of foreign exchange and household income for many developing economies.

The state in which households and firms can access affordable, usable financial services such as savings accounts, credit, insurance and payments, rather than relying only on cash.

Small loans, often unsecured and provided to low-income borrowers who lack collateral, frequently through group lending arrangements that use peer pressure in place of conventional security.

The distortion in an estimated effect that occurs when a relevant determinant of the dependent variable is left out of a regression and is correlated with an included explanatory variable.

The situation in which an explanatory variable is correlated with the error term, for example because of omitted factors, measurement error or reverse causation, so ordinary least squares estimates are biased.

A variable used to isolate the part of an endogenous explanatory variable that is unrelated to the error term; it must affect the regressor but influence the outcome only through that regressor.

Strong linear correlation among explanatory variables in a regression, which does not bias coefficients but inflates their standard errors and makes individual effects hard to pin down.