iGCSE Economics 0455
Vocabulary Glossary
Aligned to the Cambridge IGCSE Economics 0455 syllabus
2027–2029 examination window · Full syllabus content: Topics 1.1–6.4
Six chapters, one per syllabus topic. Each chapter begins on a new page
so any single chapter can be printed on its own.
Contents
Topic 1 —The Basic Economic Problem
Topic 2 —The Allocation of Resources
Topic 3 —Microeconomic Decision-Makers
Topic 4 —Government and the Macroeconomy
Topic 5 —Economic Development
Topic 6 —International Trade and Globalisation
Tip for printing: each topic starts on its own page, so you can print just the pages for the chapter you need (use your PDF viewer's page-range print
option).
TOPIC 1 — THE BASIC ECONOMIC PROBLEM
Syllabus sections 1.1-1.4
Scarcity
The condition where there are insufficient resources to satisfy all human wants, forcing choices to be
made.
Basic economic problem
The problem of unlimited wants and scarce resources, which means choices have to be made about
what to produce and how to allocate resources.
Needs
Things that are essential for survival, such as food, water, shelter and clothing.
Wants
Things that people would like to have but which are not essential for survival.
Factors of production
The economic resources used to produce goods and services: land, labour, capital and enterprise.
Land
All natural resources used in production, such as fields, forests, water and minerals; the reward is rent.
Labour
The physical and mental effort of people used in production; the reward is wages.
Capital
Man-made resources used to produce other goods and services, such as machinery, tools and
factories; the reward is interest.
Enterprise
The skill and willingness of entrepreneurs to take risks and organise the other factors of production;
the reward is profit.
Entrepreneur
A person who takes the risk of starting and running a business, organising the other factors of
production.
Rent
The reward paid to the owners of land for its use in production.
Wages
The reward paid to labour for its work in production.
Interest
The reward paid to the owners of capital for its use in production.
Profit
The reward paid to enterprise for organising production and taking risks.
Opportunity cost
The next best alternative given up when a choice is made.
Choice
The act of deciding between alternative uses of scarce resources.
Renewable resource
A natural resource that can be replaced or replenished over time, such as timber or fish stocks.
Non-renewable resource
A natural resource that is finite and cannot be replaced once it has been used up, such as oil or coal.
Production possibility curve (PPC)
A diagram showing the maximum combinations of two goods or services that an economy can produce
with its existing resources and technology.
Attainable combination
A combination of output on or inside the production possibility curve, which is possible with current
resources.
Unattainable combination
A combination of output beyond the production possibility curve, which is not possible with current
resources.
Productive efficiency
A situation where an economy is producing on its production possibility curve, making full use of its
resources.
Economic growth (shift of the PPC)
An increase in an economy's productive potential, shown by an outward shift of the production
possibility curve.
Capital goods
Goods used to produce other goods and services, such as machinery and equipment, rather than for
immediate consumption.
Consumer goods
Goods bought by households for the immediate satisfaction of wants, such as food and clothing.
Free goods
Goods that are not scarce and have no opportunity cost, such as air.
Economic goods
Goods that are scarce relative to demand and therefore have an opportunity cost.
TOPIC 2 — THE ALLOCATION OF RESOURCES
Syllabus sections 2.1-2.10
Market
Any arrangement where buyers and sellers come together to exchange goods, services or resources.
Resource allocation
The way in which factors of production are distributed between different uses in an economy.
Price mechanism
The system by which the interaction of demand and supply determines prices, which in turn allocates
resources in a market economy.
Demand
The quantity of a good or service that consumers are willing and able to buy at a given price over a
given period of time.
Effective demand
Demand that is backed up by the ability to pay, as distinct from a want that is not supported by
purchasing power.
Law of demand
The principle that, other things being equal, as the price of a good falls the quantity demanded rises,
and vice versa.
Demand curve
A graph showing the relationship between the price of a good and the quantity demanded of it.
Movement along the demand curve
A change in quantity demanded caused solely by a change in the price of the good itself.
Shift in the demand curve
A change in demand at every price, caused by a change in a factor other than price, such as income or
tastes.
Substitute goods
Goods that can be used in place of one another, so that a rise in the price of one increases demand for
the other.
Complementary goods
Goods that are used together, so that a rise in the price of one reduces demand for the other.
Normal good
A good for which demand rises as income rises.
Inferior good
A good for which demand falls as income rises.
Supply
The quantity of a good or service that producers are willing and able to sell at a given price over a
given period of time.
Law of supply
The principle that, other things being equal, as the price of a good rises the quantity supplied rises,
and vice versa.
Supply curve
A graph showing the relationship between the price of a good and the quantity supplied of it.
Movement along the supply curve
A change in quantity supplied caused solely by a change in the price of the good itself.
Shift in the supply curve
A change in supply at every price, caused by a change in a factor other than price, such as production
costs.
Equilibrium price
The price at which quantity demanded equals quantity supplied, so that there is no tendency for the
price to change.
Disequilibrium
A situation in a market where quantity demanded and quantity supplied are not equal.
Excess demand (shortage)
A situation where, at a given price, quantity demanded is greater than quantity supplied.
Excess supply (surplus)
A situation where, at a given price, quantity supplied is greater than quantity demanded.
Price elasticity of demand (PED)
A measure of the responsiveness of quantity demanded of a good to a change in its own price.
Elastic demand
Demand where a change in price causes a proportionately larger change in quantity demanded (PED
greater than 1).
Inelastic demand
Demand where a change in price causes a proportionately smaller change in quantity demanded (PED
less than 1).
Price elasticity of supply (PES)
A measure of the responsiveness of quantity supplied of a good to a change in its own price.
Elastic supply
Supply where a change in price causes a proportionately larger change in quantity supplied (PES
greater than 1).
Inelastic supply
Supply where a change in price causes a proportionately smaller change in quantity supplied (PES less
than 1).
Market economic system
An economic system in which resource allocation decisions are made through the price mechanism,
with little or no government intervention.
Planned (command) economic
system
An economic system in which resource allocation decisions are made by the government or a central
authority.
Mixed economic system
An economic system that combines elements of the market and planned economies, with resources
allocated partly by the price mechanism and partly by government.
Private sector
The part of the economy owned and run by private individuals and firms, aiming to make a profit.
Public sector
The part of the economy owned and run by the government, often providing goods and services
without aiming to make a profit.
Market failure
A situation in which the free market fails to allocate resources efficiently, leading to an over- or underprovision of a good or service.
Externality
A cost or benefit resulting from an economic transaction that affects a third party not directly involved
in that transaction.
Positive externality
A benefit received by a third party from an economic transaction for which they do not pay.
Negative externality
A cost imposed on a third party by an economic transaction for which they are not compensated.
Public good
A good that is non-excludable and non-rival, so that the free market would fail to provide it, e.g. street
lighting.
Merit good
A good that would be under-consumed if left to the free market, often because consumers
underestimate its benefits, e.g. education.
Demerit good
A good that would be over-consumed if left to the free market, often because consumers
underestimate its costs, e.g. tobacco.
TOPIC 3 — MICROECONOMIC DECISION-MAKERS
Syllabus sections 3.1-3.7
Barter
The direct exchange of goods and services for other goods and services without the use of money.
Money
Anything that is generally accepted as a medium of exchange for goods and services.
Medium of exchange
A function of money whereby it is accepted in payment for goods and services, removing the need for
a double coincidence of wants.
Store of value
A function of money whereby it keeps its value over time, allowing people to save.
Unit of account
A function of money whereby it allows the value of goods and services to be measured and compared.
Measure of deferred payment
A function of money whereby it allows debts to be settled at a future date.
Commercial bank
A financial institution that accepts deposits and provides loans to households and firms.
Central bank
The institution responsible for a country's monetary policy, issuing currency and regulating the
banking system.
Household
An individual or group of people living together who make joint decisions about spending, saving and
working.
Income
Money received by a household, mainly in the form of wages, over a period of time.
Wealth
The stock of assets owned by a household or individual at a point in time.
Saving
The part of income that is not spent on consumption.
Consumer sovereignty
The idea that consumers, through their spending decisions, determine what is produced in a market
economy.
Worker
A person who supplies labour in return for a wage.
Wage differential
A difference in the wage rates paid to different workers or in different occupations.
Division of labour
The separation of a production process into a number of different tasks, with each worker specialising
in one task.
Specialisation
The concentration by a worker, firm, region or country on producing a narrow range of goods or
services in which they have an advantage.
Occupational mobility of labour
The ease with which workers can move between different types of jobs.
Geographical mobility of labour
The ease with which workers can move between different locations to find work.
Trade union
An organisation of workers that negotiates with employers over pay and working conditions on behalf
of its members.
Firm
A business organisation that employs factors of production to produce goods and services.
Industry
A group of firms producing similar goods or services.
Sole trader
A business owned and run by one person, who has unlimited liability for its debts.
Partnership
A business owned by two or more people who share the profits, risks and responsibilities.
Limited company
A business owned by shareholders, who have limited liability, meaning they can only lose the amount
they invested.
Public sector enterprise
A firm owned and controlled by the government, such as a nationalised industry.
Multinational company (MNC)
A firm that owns or controls production in more than one country.
Economies of scale
The reduction in average costs of production that occurs as a firm increases its scale of output.
Diseconomies of scale
The increase in average costs of production that can occur when a firm grows too large.
Labour-intensive production
A method of production that uses a high proportion of labour relative to capital.
Capital-intensive production
A method of production that uses a high proportion of capital relative to labour.
Productivity
The output produced per unit of input, such as output per worker.
Fixed costs
Costs of production that do not change with the level of output, such as rent.
Variable costs
Costs of production that change directly with the level of output, such as raw materials.
Total cost
The sum of a firm's fixed costs and variable costs.
Average cost
Total cost divided by the number of units produced.
Revenue
The income a firm receives from selling its goods or services.
Total revenue
The total income received from selling a given quantity of output, calculated as price multiplied by
quantity sold.
Average revenue
Total revenue divided by the number of units sold; equal to the price of the good.
Profit
The difference between a firm's total revenue and its total costs.
Profit maximisation
The main objective of most firms, where a firm aims to make the largest possible profit.
Market structure
The characteristics of a market that determine the behaviour of firms within it, such as the number of
firms and the degree of competition.
Perfect competition
A market structure with a very large number of small firms selling an identical product, with no
barriers to entry.
Monopoly
A market structure in which a single firm supplies the whole of a market.
Competition
Rivalry between firms in a market as they try to attract customers.
TOPIC 4 — GOVERNMENT AND THE MACROECONOMY
Syllabus sections 4.1-4.7
Macroeconomic policy objectives
The main goals of government economic policy, typically economic growth, low unemployment, low
and stable inflation, and balance of payments equilibrium.
Fiscal policy
The use of government spending and taxation to influence the level of economic activity.
Government expenditure
Total spending by the government on goods, services and transfer payments.
Taxation
Compulsory payments made by households and firms to the government.
Direct tax
A tax levied directly on income or wealth, paid straight to the government by the taxpayer, e.g.
income tax.
Indirect tax
A tax imposed on spending on goods and services, which is paid to the government via the seller.
Progressive tax
A tax where the proportion of income paid in tax rises as income rises.
Regressive tax
A tax where the proportion of income paid in tax falls as income rises.
Proportional tax
A tax where the proportion of income paid in tax stays the same regardless of income level.
Budget deficit
A situation where government expenditure exceeds government revenue in a given period.
Budget surplus
A situation where government revenue exceeds government expenditure in a given period.
Balanced budget
A situation where government expenditure equals government revenue in a given period.
National debt
The total amount of money owed by a government, built up from past budget deficits.
Monetary policy
The use of interest rates and the money supply by a central bank to influence economic activity.
Interest rate
The cost of borrowing money or the reward for saving, expressed as a percentage.
Money supply
The total stock of money circulating in an economy at a given time.
Supply-side policy
Government policy aimed at increasing the productive capacity of the economy and improving the
efficiency of markets.
Privatisation
The transfer of ownership of assets or firms from the public sector to the private sector.
Deregulation
The removal or reduction of government rules and regulations affecting a market, intended to increase
competition.
Gross Domestic Product (GDP)
The total value of goods and services produced within a country's borders in a given period of time.
Economic growth
An increase in the real output of an economy over time, usually measured as the percentage change
in real GDP.
Economic (trade/business) cycle
The fluctuation of economic activity, including periods of growth and recession, over time.
Boom
A stage of the economic cycle where economic activity is growing rapidly and above its long-run trend.
Recession
A period in which the level of economic activity is falling, often defined as at least two consecutive
quarters of negative economic growth.
Employment
The state of having paid work.
Unemployment
The state of being without a job while being available for and actively seeking work.
Unemployment rate
The percentage of a country's labour force that is unemployed.
Labour force
The number of people who are employed or unemployed but actively seeking work.
Frictional unemployment
Short-term unemployment that occurs when workers are between jobs or searching for their first job.
Structural unemployment
Unemployment caused by a long-term decline in a particular industry or a mismatch between workers'
skills and available jobs.
Seasonal unemployment
Unemployment that occurs at particular times of the year because demand for certain types of labour
is not constant.
Cyclical unemployment
Unemployment caused by a fall in aggregate demand during a downturn in the economic cycle.
Full employment
A situation where everyone who wants to work and is able to work can find a job.
Inflation
A sustained rise in the general (average) price level of goods and services in an economy over time.
Deflation
A sustained fall in the general price level of goods and services in an economy over time.
Consumer Price Index (CPI)
A measure of inflation calculated from the change in price of a representative basket of goods and
services.
Demand-pull inflation
Inflation caused by aggregate demand rising faster than aggregate supply.
Cost-push inflation
Inflation caused by rising costs of production, which are passed on to consumers as higher prices.
Hyperinflation
An extremely rapid and out-of-control rise in the general price level.
TOPIC 5 — ECONOMIC DEVELOPMENT
Syllabus sections 5.1-5.4
Standard of living
The level of welfare and material wellbeing of an individual or population, encompassing both
economic and non-economic factors.
Real income
Income adjusted for the effects of inflation, showing the actual purchasing power of income.
Purchasing power
The quantity of goods and services that a given amount of money can buy.
Gross National Income (GNI) per
capita
The total income earned by a country's residents, both at home and abroad, divided by the population;
often used to measure average living standards.
Human Development Index (HDI)
A composite measure of development combining indicators of income, education and life expectancy.
Poverty
A state in which a person or household lacks the resources to meet a minimum acceptable standard of
living.
Absolute poverty
A state where a person's income is insufficient to meet their basic needs for survival, such as food,
water and shelter.
Relative poverty
A state where a person's income is significantly below the average income in the country in which they
live.
Poverty line
An income level below which a person or household is considered to be in poverty.
Income distribution
The way in which total national income is shared out between individuals or households in an
economy.
Redistribution of income
Government policies, such as progressive taxation and benefits, aimed at reducing inequality in the
distribution of income.
Population growth
An increase in the number of people living in a country over time.
Birth rate
The number of live births per thousand of the population per year.
Death rate
The number of deaths per thousand of the population per year.
Net migration
The difference between the number of people immigrating into and emigrating out of a country.
Ageing population
A population structure in which the proportion of older people is increasing relative to the rest of the
population.
Dependency ratio
The ratio of the number of dependants (those too young or too old to work) to the number of people of
working age.
Optimum population
The size of population that, with a given quantity of resources and technology, produces the highest
output per capita.
Overpopulation
A situation where the population of a country is too large relative to its resources, reducing output per
capita.
Underpopulation
A situation where the population of a country is too small to make full use of its resources.
Developed country
A country with a high level of industrialisation, income per capita and standard of living.
Developing country
A country with a lower level of industrialisation, income per capita and standard of living, often still
building its economy.
Economic development
A broad measure of wellbeing in a country, including improvements in living standards, health,
education and economic structure, not just income.
Sustainable development
Development that meets the needs of the present without compromising the ability of future
generations to meet their own needs.
TOPIC 6 — INTERNATIONAL TRADE AND GLOBALISATION
Syllabus sections 6.1-6.4
International trade
The exchange of goods and services across national borders.
Specialisation (international)
A situation where a country concentrates on producing the goods and services in which it is relatively
most efficient.
Absolute advantage
The ability of a country to produce a good using fewer resources than another country.
Comparative advantage
The ability of a country to produce a good at a lower opportunity cost than another country, forming
the basis for beneficial trade.
Free trade
International trade that takes place without any barriers or restrictions imposed by governments.
Terms of trade
The ratio of a country's average export prices to its average import prices.
Globalisation
The increasing integration and interdependence of the world's economies, for example through trade,
investment and the movement of labour.
Protectionism
Government policy that restricts international trade in order to protect domestic industries from
foreign competition.
Tariff
A tax imposed on imported goods, raising their price to consumers and protecting domestic producers.
Import quota
A physical limit set by the government on the quantity of a good that can be imported over a given
period.
Embargo
A complete government ban on trade with a particular country or in a particular good.
Trade bloc
A group of countries that agree to reduce or remove trade barriers between themselves.
Exchange rate
The price of one currency expressed in terms of another currency.
Floating exchange rate
An exchange rate system in which the value of a currency is determined by the market forces of
demand and supply.
Fixed exchange rate
An exchange rate system in which the value of a currency is set and maintained by the government or
central bank.
Appreciation
A rise in the value of a currency under a floating exchange rate system relative to other currencies.
Depreciation
A fall in the value of a currency under a floating exchange rate system relative to other currencies.
Revaluation
A deliberate increase in the value of a currency under a fixed exchange rate system by the
government or central bank.
Devaluation
A deliberate reduction in the value of a currency under a fixed exchange rate system by the
government or central bank.
Balance of payments
A record of all financial transactions between a country's residents and the rest of the world over a
given period.
Current account
The section of the balance of payments that records trade in goods and services, income and current
transfers.
Visible trade
Trade in physical, tangible goods, such as cars or food, that can be seen crossing a border.
Invisible trade
Trade in services, such as banking, tourism and insurance, that cannot be physically seen crossing a
border.
Current account surplus
A situation where the value of a country's exports of goods, services, income and transfers exceeds
the value of its imports.
Current account deficit
A situation where the value of a country's imports of goods, services, income and transfers exceeds
the value of its exports.