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Glossary

Combined Dictionary and Glossary of Economics Terminology



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A - B - C - D - E - F - G - H - I - J - K - L - M - N - O - P - Q - R - S - T - U - V - W - X/Y/Z


Each term has a definition included with it. In many cases, that definition will be all that you need to answer your specific question about that term.


Each term is also a link to the page in this site where the term is discussed in the context that it is used in economics.


A

ABSOLUTE ADVANTAGE: When one person or country can produce more total output of a commodity than another person or country. This is based on total resources available and is not related to comparative advantage or opportunity costs.

ACCOUNTING PROFIT: Profit of a firm that is calculated by subtracting explicit costs from total revenue. This is the amount of profit that shows up on a company's income statement. It differs from economic profit in that economic profit also takes into consideration implicit costs, or opportunity costs.

ACTIVIST GOVERNMENT POLICY: Government's use of discretionary fiscal and monetary policies in order to try to create a specific outcome in the economy.

AD: Aggregate demand. Total of all planned expenditures in the economy. This is equal to the sum of consumption spending, gross private domestic investment, government purchases of goods and services, and net exports. In equilibrium, it is equal to real GDP.

AFC: Average fixed cost. Total fixed cost divided by the number of units of output.

AGGREGATE DEMAND: Total of all planned expenditures in the economy. This is equal to the sum of consumption spending, gross private domestic investment, government purchases of goods and services, and net exports. In equilibrium, it is equal to real GDP.

AGGREGATE DEMAND & AGGREGATE SUPPLY EQUILIBRIUM: In the aggregate demand & aggregate supply model, the point where the aggregate demand curve and the aggregate supply curve intersect. In equilibrium, no forces exist for changes in the price level or the level of real output (real GDP).

AGGREGATE DEMAND & AGGREGATE SUPPLY MODEL: A diagram showing the aggregate demand curve and the aggregate supply curve, with the price level on the vertical axis and real GDP on the horizontal axis.

AGGREGATE DEMAND CURVE: A graph of aggregate demand. This would be a downward sloping curve indicating a negative relationship between planned expenditures and the price level.

AGGREGATE SUPPLY: The amount of real GDP that firms are willing to supply at every price level.

AGGREGATE SUPPLY CURVE: A graph of aggregate supply. This would be an upward sloping curve indicating a positive relationship between the amount of real output supplied and the price level.

ALLOCATIVE EFFICIENCY: Producing what the consumers want at a price equal to marginal cost.

ANTICIPATED INFLATION: The inflation rate that is expected to occur in the future. This would be included in the nominal interest rate. Also called expected inflation.

ANTI-COMPETITIVE BEHAVIOR: Actions by firms that are designed to limit the amount of competition in an industry.

ANTI-DUMPING LAWS: A restriction on imports of goods that are sold on the world market at unfairly low prices.

ANTITRUST LAWS: Laws imposed by governments for the purpose of increasing competition.

APP: Average physical product. Total physical product divided by the number of units of a variable input.

AS: Aggregate supply. The amount of real GDP that firms are willing to supply at every price level.

ATC: Average total cost. Total cost divided by the number of units of output.

AUTOMATIC STABILIZERS: Features of the economy or government policy that offset the effects of the business cycle, without any specific government action taken at the time.

AVC: Average variable cost. Total variable cost divided by the total number of units of output.

AVERAGE FIXED COST: Total fixed cost divided by the number of units of output.

AVERAGE PHYSICAL PRODUCT: Total physical product divided by the number of units of a variable input.

AVERAGE TOTAL COST: Total cost divided by the number of units of output.

AVERAGE VARIABLE COST: Total variable cost divided by the total number of units of output.

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BALANCE OF PAYMENTS: A record of a country's trade with the rest of the world. This includes all debit and credit transactions in both the current account and the financial account, and must always equal zero (total debits equal total credits).

BALANCE OF TRADE: The balance in the current account or the merchandise account. A credit balance would be a trade surplus, and a debit balance would be a trade deficit.

BANK: Financial intermediary that accepts deposits and uses deposited funds to make loans.

BANK REGULATION: Laws that govern the operation of banks.

BANK RESERVES: Deposits at a bank that have not been loaned out.

BANKING SYSTEM: Collectively, all banks in an economy, including any central bank.

BAROMETRIC FIRM: Price leadership system in oligopoly in which one firm announces a price change, after which other firms in the industry match the price change.

BARRIERS TO ENTRY: Anything that makes it difficult for new firms to enter into a market. This could include high start up (fixed) costs, government regulations, or anti-competitive behavior of existing firms.

BARTER ECONOMY: An economy in which goods and services are exchanged for other goods and services, without the use of money.

BLACK MARKET: Economic activity that is not reported for tax purposes and is not included in official government statistics. Also called the underground economy, hidden economy, shadow economy, informal economy, and parallel economy.

BOOM PERIOD: The portion of the business cycle that represents economic expansion, or growth in real GDP.

BOUNDED RATIONALITY: The assumption in economics that the choices people make are done rationally, based on the information known at the time, in an attempt to maximize their satisfaction. This is also known as rational self interest.

BREAK EVEN PRICE: The price at which total revenue will equal total cost.

BUDGET: The amount of spending for specific purposes available to individuals, firms, or governments.

BUDGET CONSTRAINT: The maximum amount that can be spent due to a limited budget.

BUDGET LINE: A graph of a budget constraint.

BUNDLE OF GOODS: A set of specific goods and quantities used to compare price changes over time.

BUSINESS: A private organization that produces goods and / or services. The term as used here is interchangeable with firm, business firm, company, enterprise, and producer.

BUSINESS CYCLE: The idea that economic growth is not constant, but has periods of growth and contraction. The four stages of the business cycle are expansion, peak, contraction, and trough. Macroeconomics is largely concerned with the business cycle.

BUSINESS FIRM: A private organization that produces goods and / or services. The term as used here is interchangeable with firm, company, enterprise, business, and producer.

BUSINESS SECTOR: The sector of the economy that offers goods and services for sale. This would include all business firms.

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CAP AND TRADE: A policy of using marketable permits as a means of reducing a negative externality.

CAPACITY: The maximum output of a firm with a given level of fixed inputs.

CAPITAL: In economics, the term capital generally refers to physical capital, which is manufactured products such as machinery and equipment that are used in production. This is different from financial capital, which refers to forms of financing.

CAPITAL CONSUMPTION ALLOWANCE: The replacement cost of worn-out or damaged machinery and equipment. This mostly consists of depreciation, and the terms are often used interchangeably.

CARTEL: An organization of suppliers that agrees formally or informally to restrict competition among themselves in order to maximize the profits of the entire cartel instead of maximizing the profits of individual firms.

CAUSES OF INFLATION: The causes of inflation are categorized as those that relate to aggregate demand, called demand-pull inflation, and those that relate to aggregate supply, called cost-push inflation.

CENTRALIZED DECISION MAKING: Economic decisions that are made by a central government.

CETERIS PARIBUS: Latin for "other things being equal". A basic tool of economic analysis, holding other factors constant in order to focus on the relationship between the factors being considered at any point in time.

CHANGE IN DEMAND: A change in a determinant of demand which would change the quantity demanded at every potential price. A change in demand would shift the entire demand curve. The determinants of demand are: consumer income, consumer tastes, the prices of the number of potential the number of potential buyers.buyers.

CHANGE IN QUANTITY DEMANDED: A change in the quantity of a good or service that consumers would be willing and able to purchase, due to a change in the price of the good or service in question. This would be shown as a movement along an existing demand curve as opposed to a shift in the demand curve.

CHANGE IN QUANTITY SUPPLIED: A change in the quantity of a good or service that producers are willing and able to offer for sale due to a change in the price of the good or service in question. This would be shown as a movement along an existing supply curve as opposed to a shift in the supply curve.

CHANGE IN SUPPLY: A change in a determinant of supply which would change the quantity supplied at every potential price. A change in supply would shift the entire supply curve. The determinants of supply are: the prices of resources, technology and productivity, expectations of producers, the number of suppliers, and the prices of alternative goods and services that a firm could produce.

CIRCULAR FLOW MODEL: A model in economics showing the inter-relationships between different sectors of an economy. These inter-relationships include flows of inputs and output; physical products and financial assets; leakages and injections. The sectors of the economy are: households, firms, the government sector, the international sector, and financial intermediaries.

CLASSICAL ECONOMICS: The traditional economic school of thought associated with zero government activist policies. This school of thought involves the assumption that the business cycle and economy are self-correcting.

COINCIDENT INDICATORS: Variables that tend to change at the same time that the business cycle changes stages.

COLA: Cost of Living Adjustment. An automatic adjustment to wages or prices based on the rate of inflation.

COLLUSION: Cooperation among firms in an oligopoly industry based on secret agreements.

COMMAND ECONOMY: An economic system in which economic decisions are made by a central authority.

COMMUNISM: A political philosophy in which utopia can be reached through a series of stages in the economy. First, a market economy is replaced by a command economy. Eventually the government sector will disappear, leaving the people to make economic decisions for the common good, without the aid of market forces. Since the last stage only exists in theory, and all governments that are based on the communist philosophy have succeeded in only advancing as far as the command economy, communism is closely associated with socialism.

COMPANY: A private organization that produces goods and / or services. The term as used here is interchangeable with firm, business firm, enterprise, business, and producer.

COMPARATIVE ADVANTAGE: The advantage one person or country has because of a lower opportunity cost in one specific activity, such as production of a specific good.

COMPLEMENTS: Goods that tend to be purchased together, as if the combination was one unit. A change in the price of one good would cause the demand for a complement to change in the opposite direction.

CONSUMER: The purchaser of a final good or service. Collectively, consumers comprise the household sector of the economy.

CONSUMER EQUILIBRIUM: When a consumer has maximized utility, which is the point where the marginal utility per cost for every consumption choice is equal. Also known as the Equimarginal Principle.

CONSUMER PRICE INDEX: A measurement of price changes for a "typical" bundle of goods purchased by consumers.

CONSUMER SECTOR: The sector of the economy that purchases final goods and services.

CONSUMER SURPLUS: The difference between what consumers are willing to pay and the amount that they actually pay. On a supply & demand diagram, consumer surplus would be the area that lies below the demand curve and above the market price.

CONSUMPTION: Overall spending in the economy by the household sector.

CONTRACTION: The portion of the business cycle in which real GDP is falling. This would be associated with a recession and high unemployment.

COST OF LIVING ADJUSTMENT: An automatic adjustment to wages or prices based on the rate of inflation. Commonly referred to as COLA.

COST-PUSH INFLATION: Inflation caused by a decrease in aggregate supply. A decrease in aggregate supply is also associated with an increase in unemployment. The combination of an increase in inflation and an increase in unemployment is called stagflation. If the cause of the decrease in aggregate supply is a sudden increase in the price of a key product or resource in the economy, it is called a supply shock.

CPI: Consumer Price Index: A measurement of price changes for a "typical" bundle of goods purchased by consumers.

CROSS ELASTICITY OF DEMAND: A measure of the amount that the demand for one good changes due to a change in the price of another good. A cross elasticity of demand that is not equal to zero will indicate that the goods are related. A positive elasticity indicates substitutes. A negative elasticity indicates complements. Same as cross-price elasticity of demand.

CROSS-PRICE ELASTICITY OF DEMAND: A measure of the amount that the demand for one good changes due to a change in the price of another good. A cross elasticity of demand that is not equal to zero will indicate that the goods are related. A positive elasticity indicates substitutes. A negative elasticity indicates complements. Same as cross elasticity of demand.

CROWDING OUT: A reduction in consumption or investment spending caused by an increase in government borrowing.

CURRENT ACCOUNT: The combination of the merchandise account, services account, income account, and unilateral transfers account. Associated with net exports and a trade deficit / surplus.

CYCLICAL UNEMPLOYMENT: The portion of unemployment associated with a downturn in the economy, which would be the contraction stage of the business cycle.

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DECENTRALIZED DECISION MAKING: Economic activity in which the cumulative effect of decisions of individuals in the economy determine prices and output.

DECREASE IN DEMAND: A change in demand in which the quantity demanded decreases at every potential price. The demand curve shifts to the left.

DECREASE IN SUPPLY: A change in supply in which the quantity supplied decreases at every potential price. The supply curve shifts to the left.

DEBT: The balance of all outstanding government obligations arising from deficit spending.

DEFICIT: The amount by which government expenditures exceeds tax revenue in a given year.

DEFLATION: A period of time in which the general price level decreases. Alternatively, a period of time in which the purchasing power of the currency increases.

DEMAND: The quantities that consumers would be willing and able to purchase at every potential price. When shown on a graph, it becomes a demand curve.

DEMAND CURVE: A graph of the demand schedule. The demand curve is a downward sloping curve, indicating a negative relationship between price and quantity demanded.

DEMAND FOR MONEY: The quantity of money that people want to hold at each potential interest rate. An inverse relationship exists between the interest rate and the quantity of money demanded.

DEMAND SCHEDULE: A table of demand.

DEMAND SIDE ECONOMICS: Discretionary government policies designed to influence the level of aggregate demand in the economy.

DEMAND-PULL INFLATION: Inflation caused by an increase in aggregate demand.

DEPOSIT EXPANSION MULTIPLIER: The maximum amount by which a deposit in a bank can increase the money supply throughout the banking system. It is the reciprocal of the reserve requirement. Also called the money multiplier.

DEPRECIATION: The replacement cost of worn-out machinery and equipment.

DETERMINANTS OF DEMAND: Factors that determine the quantity demanded at every potential price. Determinants of demand are consumer income, consumer tastes, the prices of complements, the prices of substitutes, consumer expectations, and the number of potential buyers.

DETERMINANTS OF SUPPLY: Factors that determine the quantity supplied at every potential price. Determinants of supply are the prices of resources, technology and productivity, expectations of producers, the number of suppliers, and the prices of alternative goods and services that the firm could produce.

DI: Disposable income. The amount of personal income available for spending or saving after personal income taxes.

DIFFERENTIATED PRODUCTS: Products of competing firms that consumers consider to be close substitutes, but not identical.

DIMINISHING MARGINAL RETURNS: The concept that after some output level, output per unit of input will decrease.

DISCOURAGED WORKERS: People without jobs who have given up looking for work, and are no longer active in their job searches. These people are not counted as being part of the total labor force, and are not counted as unemployed. They are not part of the unemployment statistics.

DISCOUNT RATE: The rate that the Fed charges banks for loans directly from the Fed.

DISCRETIONARY FISCAL POLICY: Government fiscal policies designed to achieve specific economic outcomes.

DISECONOMIES OF SCALE: Production levels above the minimum point on the long run average cost curve.

DISEQUILIBRIUM: A situation in which equilibrium does not exist. Disequilibrium means that incentives for change exist.

DISPOSABLE INCOME: The amount of personal income available for spending or saving after personal income taxes.

DOMINANT FIRM: A firm in an oligopoly market that has a much larger market share than any of its competitors.

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EARNINGS: Income received by the factors of production.

ECONOMIC APPROACH: The methodology, including the thinking process, or logic, used by economists. Also called economic thinking.

ECONOMIC EFFICIENCY: A situation in which both productive efficiency and allocative efficiency exist.

ECONOMIC GOOD: Something that wouldn't exist in sufficient quantities if it were free.

ECONOMIC GROWTH: An increase in real GDP.

ECONOMIC INDICATORS: Variables that tend to move along with the business cycle. They include leading indicators, coincident indicators, and lagging indicators.

ECONOMIC PROBLEM: Scarcity. The fact that resources are finite, but human wants are infinite.

ECONOMIC PROFIT: Profit above the level required to keep a firm operating at its current output level. It is profit that is left over after deducting implicit (opportunity) costs. The existence of positive economic profits means that a business is more profitable than alternatives, and in a competitive environment will attract new competition.

ECONOMIC SCHOOLS OF THOUGHT: Advocacy of different economic policies based on competing economic theories.

ECONOMIC SYSTEM: The method used by a country to control the production, distribution, and consumption of goods and services.

ECONOMIC THINKING: The methodology, including the thinking process, or logic, used by economists. Also called the economic approach.

ECONOMICS: The study of how people choose to use their scarce resources in an attempt to satisfy their unlimited wants. Economics deals with the questions of what to produce, how to produce it, and who to distribute it to.

ECONOMIES OF SCALE: A situation where increasing the size of a firm in the long run will decrease unit costs. This occurs on the downward sloping portion of the long run average cost curve.

ECONOMIST: A person who specializes in economics.

ECONOMY: All activities involving production, distribution, and consumption within a specified area, such as a geographic area (local, national, global, etc.).

EFFICIENCY: Having the maximum benefit at the lowest cost.

ELASTICITY: A measure of the responsiveness of one variable to a change in another variable. This measurement is found by dividing the percentage change in one variable by the percentage change in the other variable. The absolute value of the result will necessarily center around the number one: if the result is greater than one, it means that the result is elastic; if the result is less than one, it means that the result is inelastic; and if the result is equal to one, it means that the result is unit elastic. An elasticity value is simply a number with no units attached to it.

ELASTICITY OF DEMAND: A measure of the responsiveness of quantity demanded to a change in price. Also known as the price elasticity of demand.

ELASTICITY OF SUPPLY: A measure of the responsiveness of quantity supplied to a change in price.

EMBARGO: Government trade restriction that forbids the import of a specific good or the import of goods from a specific nation. Also known as a trade embargo.

ENTERPRISE: A private organization that produces goods and / or services. The term as used here is interchangeable with firm, business firm, company, business, and producer.

ENTREPRENEURSHIP: A resource of production that involves the contribution of organizational skills and / or the supply of financial capital in the hopes of earning a profit.

EQUILIBRIUM: A situation in which no incentives for changes exist.

EQUIMARGINAL PRINCIPLE: When a consumer has maximized utility, which is the point where the marginal utility per cost for every consumption choice is equal. Also known as consumer equilibrium.

EXCESS CAPACITY: The ability of a firm to increase production in the short run, without having to change any fixed inputs.

EXCESS RESERVES: The amount of reserves held by a bank that is available for loans.

EXCHANGE RATE: The ratio of the value of one currency to another, used to conduct transactions involving different currencies.

EXCISE TAX: A tax on the consumption per unit on specific goods. Often called a sin tax.

EXPANSION: The phase of the business cycle in which real GDP is increasing.

EXPECTATIONS OF CONSUMERS: The expectations that consumers have that the price of a good or service will change in the future.

EXPECTATIONS OF PRODUCERS: The expectations that producers have that the price of a good or service will change in the future.

EXPECTED INFLATION: The inflation rate that is expected to occur in the future. This rate would be included in the nominal interest rate. Also called anticipated inflation.

EXPENDITURES APPROACH: The method of calculating GDP by adding up all the expenditures in the economy. The formula is
GDP = C + I + G + (X - M).

EXPLICIT COST: A cost that involves actual payment being made. This would be every cost except implicit cost, which in economics generally refers to opportunity cost.

EXPORTS: Goods produced domestically but sold to consumers in foreign countries.

EXTERNAL BENEFIT: A benefit received by someone who doesn't pay for it. A positive externality.

EXTERNAL COST: A cost that is not paid for by those imposing the cost or those receiving the benefit. A negative externality.

EXTERNALITY: A cost or benefit that does not go to those involved in the activity that produces the cost or benefit. A form of market failure.

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FACTOR MARKETS: Supply and demand for factors of production.

FACTORS OF DEMAND: The price of the good in question, plus other things that determine the level of demand, called determinants of demand: consumer income, consumer tastes, the prices of complements, the prices of substitutes, consumer expectations, and the number of potential buyers. The price of the good in question is plotted on the supply & demand diagram, so any change in price would involve a movement along the demand curve. The determinants of demand are not plotted on the supply & demand diagram, so any changes in any of them would involve the demand curve being shifted.

FACTORS OF PRODUCTION: Resources used in the production of goods and services: land, labor, and capital. Some economists classify entrepreneurship as a fourth factor of production while other economists classify entrepreneurship as a special class of labor.

FACTORS OF SUPPLY: The price of the good in question, plus other things that determine the level of supply, called determinants of supply: the prices of resources, technology and productivity, expectations of producers, the number of suppliers, and the prices of alternative goods and services that the firm can produce (opportunity costs). The price of the good in question is plotted on the supply & demand diagram, so any change in price would involve a movement along the supply curve. The determinants of supply are not plotted on the supply & demand diagram, so any changes in any of them would involve the supply curve being shifted.

FALLACY OF COMPOSITION: The fallacy of logic that involves saying that what applies to one will also apply to many.

FED: The Federal Reserve System. The central bank of the United States.

FEDERAL FUNDS RATE: The interest rate charged for overnight borrowing between banks in the United States.

FEDERAL RESERVE SYSTEM: The central bank of the United States.

FIAT MONEY: Currency that is not backed by any commodities, but rather is only backed by the faith and credit of the issuing government. Also called fiduciary money.

FIDUCIARY MONEY: Currency that is not backed by any commodities, but rather is only backed by the faith and credit of the issuing government. Also called fiat money.

FINAL GOODS & SERVICES: Goods and services available to the ultimate consumer.

FINANCIAL ACCOUNT: The balance of payments account representing the flow of money between nations.

FINANCIAL CAPITAL: Financial backing in the form of personal savings, stocks, bonds, bank loans, etc., used for the costs of a business.

FINANCIAL INTERMEDIARY: An organization, such as a bank, that accepts deposits and makes loans.

FIRM: A private organization that produces goods and/or services. The term as used here is interchangeable with business firm, company, enterprise, business, and producer.

FISCAL POLICY: Government policy regarding government spending and taxing decisions. Often discussed in terms of discretionary fiscal policy, or policy designed to produce a specific economic outcome.

FIXED COST: A cost that does not change with the level of output. Fixed costs only exist in the short run, when one or more of the factors of production cannot be changed.

FIXED INCOME: Personal income that is set at a specified amount, and can only be changed if it is indexed for inflation. Includes such income types as pension payments and Social Security payments.

FLOW CONCEPT: A flow is something that is measured over a period of time rather than at one specific point in time, which would be a stock concept. For example, standard accounting statements include an income statement, which is a flow concept, and a balance sheet, which is a stock concept.

FOREIGN EXCHANGE: Economic activity between people in different countries.

FOREIGN EXCHANGE MARKET: A global market in which people trade one currency for another.

FRACTIONAL RESERVE SYSTEM: A system in banking in which banks are allowed to loan out an amount equal to a fraction of its reserves.

FREE GOOD: Something that there would be enough of if it were free. A good that is not scarce.

FREE MARKET: A market where transactions occur voluntarily, without government interference.

FRICTIONAL UNEMPLOYMENT: Unemployment caused by a time lag between the time a person begins searching for a job and the time that the person is hired for a job.

FRIEDMAN, MILTON: Economist who is considered to be the father of the monetarist economic school of thought.

FULL EMPLOYMENT: Old term, still used in some economics textbooks, for the natural rate of unemployment.

FUNCTIONS OF MONEY: What characterizes a money economy as opposed to a barter economy: medium of exchange, unit of account, and store of value.

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GAME THEORY: A branch of mathematics often used in economics to explain strategic behavior.

GDP: Gross domestic product. The market value of all final goods and services produced in a year within a country's borders.

GDP DEFLATOR: A price index used in the calculations for real GDP. Also known as a GDP price index.

GDP GAP: The amount by which actual GDP is below potential GDP. Also known as a GDP output gap or an output gap.

GDP OUTPUT GAP: The amount by which actual GDP is below potential GDP. Also known as a GDP gap or an output gap.

GDP PRICE INDEX: A price index used in the calculation for real GDP. Also known as a GDP deflator.

GDPPI: GDP price index. A price index used in the calculation for real GDP.

GLOBAL ECONOMY: The concept that economies around the world are increasingly interdependent. Globalization.

GLOBALIZATION: The concept that economies around the world are increasingly interdependent. Global economy.

GNP: Gross National Product. The total value of all goods and services produced by a nation's citizens, regardless of which nation the production takes place in.

GOLD STANDARD: An economy in which the value of the currency is tied to the value of gold. The currency can be exchanged for an equal value of gold upon demand.

GOODS: Something that people prefer more of to less.

GOODS AND SERVICES: A term used in economics meaning the output of firms. Often the term goods is used interchangeably with goods and services in order to avoid repetition in a discussion.

GOVERNMENT INTERVENTION: Any government involvement in economic activity.

GOVERNMENT BONDS: A method that governments use to finance expenditures. The government issues bonds to the public in order to finance deficit spending. Outstanding bonds represent the government's debt.

GOVERNMENT PURCHASES: Government spending for the purchase of goods and services. Not all government spending is included: transfer payments are excluded.

GOVERNMENT SECTOR: The role that the government plays in the economic activity of a country.

GOVERNMENT TRANSFER PAYMENTS: Payments that governments make to one group of people by taxing a different group of people.

GREAT DEPRESSION: The deep worldwide economic downturn that lasted from the late 1920s through much of the 1930s. The Great Depression could not be explained by classical economic theory, so new economic schools of thought were developed, starting with Keynesian Economics.

GROSS DOMESTIC PRODUCT: The market value of all final goods and services produced in a year within a country's borders.

GROSS INVESTMENT: Total spending by businesses on the factors of production. The difference between gross investment and net investment is depreciation. Gross investment is considered to be interest-sensitive. Also called gross private domestic investment.

GROSS NATIONAL PRODUCT: The total value of all goods and services produced by a nation's citizens, regardless of which nation the production takes place in.

GROSS PRIVATE DOMESTIC INVESTMENT: Total spending by businesses on the factors of production. The difference between gross investment and net investment is depreciation. Gross investment is considered to be interest-sensitive. Also called gross investment.

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HIDDEN ECONOMY: Economic activity that is not reported for tax purposes and is not included in official government statistics. Also known as the black market, underground economy, shadow economy, informal economy, and parallel economy.

HIDDEN EMPLOYED: Workers in the underground economy. This employment does not show up in the official employment statistics.

HIDDEN UNEMPLOYED: Discouraged workers and underemployed workers. They are not counted as unemployed in the unemployment statistics.

HOMOGENEOUS PRODUCTS: Products of different firms that have no differences in the minds of consumers. Consumers do not prefer the products of one firm over another. The products are considered to be perfect substitutes. Also known as identical products and standardized products.

HOUSEHOLD SECTOR: The sector of the economy that represents the final consumers of goods and services, and also provides the factors of production to the business sector.

HYPERINFLATION: A situation in which the rate of inflation accelerates to the point where the entire economy breaks down.

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IDENTICAL PRODUCTS: Products of different firms that have no differences in the minds of consumers. Consumers do not prefer the products of one firm over another. The products are considered to be perfect substitutes. Also known as homogeneous products and standardized products.

IMPLICIT COSTS: Costs for which no actual payment takes place. In economics, implicit costs generally refer to opportunity costs.

IMPORT QUOTA: A trade restriction in which the government limits the amount of a good, or the amount of goods from a specific country, that can be imported.

IMPORTS: Transactions in which the products purchased have been produced in another country.

INCREASE IN DEMAND: A change in a determinant of demand which causes the quantity demanded to increase at every potential price. This is represented on a supply & demand diagram as a rightward shift in the demand curve.

INCREASE IN SUPPLY: A change in a determinant of supply which causes the quantity supplied to increase at every potential price. This is represented on a supply & demand diagram as a rightward shift in the supply curve.

INCREASING OPPORTUNITY COSTS: The concept that as more and more resources are devoted to a particular activity, the marginal cost becomes increasingly higher. This concept explains the bowed-out (convex) shape of the PPC.

INCOME: Payments received (earnings) by the factors of production.

INCOME ACCOUNT: The portion of the current account in the balance of payments that includes transactions involving income between countries. Investment income and wages earned in another country is a positive (credit). Investment income and wages earned from domestic activity by foreigners is a negative (debit).

INCOME APPROACH: A method of calculating GDP by adding up the income received by the factors of production. The formula is:
GDP = compensation of employees + net interest + rent + profits (proprietors' income + corporate profits) + indirect business taxes + capital consumption allowance (or depreciation) - net factor income from abroad.

INCOME ELASTICITY OF DEMAND: A measurement of the responsiveness of quantity demanded to a change in income.

INDICATORS: Variables that tend to change as the phase of the business cycle changes. Also known as economic indicators. Indicators can be leading indicators, coincident indicators, or lagging indicators.

INDIFFERENCE CURVE: A graph plotting all combinations of the quantities of two goods for which a consumer has no preference.

INDIFFERENCE ANALYSIS: A simplified, graphical economic model that helps to explain consumer choices.

INDIFFERENCE MAP: A graph showing various indifference curves as well as a budget line.

INDIRECT BUSINESS TAXES: Taxes collected through businesses that are not related to the amount of income. Sales tax plus excise tax.

INDUSTRY: A sector of the economy in which firms use similar resources to produce similar products. Often used in this site and in economics textbooks interchangeably with the term market.

INELASTIC: A variable that is relatively unresponsive to changes in another variable. Indicated by an absolute value of less than one.

INFANT INDUSTRY: An industry that currently cannot compete with more efficient foreign competition, but is believed to be capable of becoming competitive if the government imposes trade restrictions to protect the industry while it grows.

INFERIOR GOOD: A good for which demand changes in the opposite direction as income.

INFLATION: A sustained rise in the average level of prices. Alternatively, a sustained decline in the purchasing power of the currency.

INFLATION RATE: The percentage change in the average price level from one year to the next.

INFORMAL ECONOMY: Economic activity that is not reported for tax purposes and is not included in official government statistics. Also known as the black market, underground economy, hidden economy, shadow economy, and parallel economy.

INFRASTRUCTURE: Basic public institutions and facilities including an education system and a system of roads and bridges.

INPUTS: The use of factors of production. Used interchangeably with the term resources.

INTEREST: Payment made for the use of somebody else's money.

INTEREST RATE: The amount of interest, as an annualized percentage of the principle amount of a loan.

INTEREST RATE EFFECT: A price factor of aggregate demand. As the price level increases, more money is needed for purchases. This increases the transaction demand for money, and lowers the demand for other financial assets such as bonds. A lower demand for bonds will decrease the price of bonds, increasing interest rates. Higher interest rates will create a decrease in aggregate investment spending.

INTERMEDIATE GOODS: Goods that are produced for use in producing other goods.

INTERMEDIATE TARGET: A goal for which another goal is the real aim. For example, the Fed uses a target level of the money supply in order to achieve another goal, which is a desired level of real output and prices.

INTERNATIONAL CARTEL: A cartel composed of firms from different countries.

INTERNATIONAL SECTOR: The sector of the economy that involves other countries. This would be the import / export component of the economy.

INTERNATIONAL TRADE EFFECT: A price factor of aggregate demand. Changes in the relative prices of foreign and domestic goods will cause changes in net exports. These changes will change the overall price level, creating a movement along the aggregate demand curve.

INTERSECTION: On a graph, the point where two curves cross, usually indicating a point of equilibrium.

INVENTORY: Goods that have been produced but not yet sold.

INVESTMENT: Spending by firms, or the business sector of the economy. Another definition used in this site is spending by people on financial assets for the purpose of earning a profit.

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KEY RESOURCE: A scarce resource for which there are no close substitutes.

KEYNES, JOHN MAYNARD: Economist who developed Keynesian Economics, which challenged classical economic thinking during the Great Depression by advocating for targeted government activism.

KEYNESIAN ECONOMICS: The economic school of thought that developed as a result of the theories of John Maynard Keynes. This school of thought has evolved over time and is not identical to the actual theories of Keynes.

KINKED DEMAND CURVE: In oligopoly theory, a demand curve composed of different segments of two demand curves with different elasticities and slopes, thus forming a kink at the point where the two curves are joined.

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LABOR: The input that involves the physical and intellectual services of people, including training, education, and peoples' abilities.

LABOR FORCE: The number of employed persons plus the number of persons counted as unemployed. Also known as the total labor force.

LABOR FORCE PARTICIPATION RATE: The percentage of the working age population that is counted in the total labor force.

LABOR MARKET: The supply & demand for workers.

LAGGING INDICATORS: Variables that tend to change after a change in the phase of the business cycle.

LAISSEZ-FAIRE: The economic concept that efficiency in the economy is best achieved through government non-intervention, when people are left alone to pursue their own self interests.

LAND: The factor of production that includes minerals, timber, and water, as well as the actual land itself.

LAW OF DEMAND: The quantity of a specific good or service that people are willing and able to purchase decreases as the price increases, and increases as the price decreases, as long as the price is the only thing that changes.

LAW OF SUPPLY: The quantity of a specific good or service that producers are willing and able to offer for sale increases as the price increases, and decreases as the price decreases, as long as the price is the only thing that changes.

LEADING INDICATORS: Variables that tend to change prior to a change in the phase of the business cycle.

LIMITED RESOURCES: The part of the scarcity concept of economics that says that resources are not infinite.

LIQUIDITY TRAP: A theory that a certain nominal interest rate exists where expansionary monetary policy would be ineffective in lowering interest rates any further.

LONG RUN: A time frame long enough to make all inputs variable. No fixed inputs or fixed costs exist in the long run. Also called the planning horizon.

LONG RUN AGGREGATE SUPPLY CURVE: With the theory that in the long run all costs and prices have time to adjust, higher prices will not increase profits and therefore will not lead to an increase in real GDP. This makes the long run aggregate supply curve a vertical line. Many economists believe that the level of output associated with the vertical long run aggregate supply curve is at the level of potential GDP (the natural rate of unemployment).

LONG RUN AVERAGE TOTAL COST: In the long run, all costs are variable, and all short run situations are possible. The long run average total cost curve connects all possible short run average total cost curves. This can take different shapes, but a downward sloping portion would indicate economies of scale while an upward sloping portion would indicate diseconomies of scale.

LONG RUN PHILLIPS CURVE: Many economists believe that in the long run the actual unemployment rate will equal the natural rate of unemployment. In this case, the long run Phillips Curve is a vertical line at the natural rate of unemployment. This would indicate that no trade-off exists between inflation and unemployment in the long run.

LOWEST COST FIRM: A form of price leadership in oligopoly in which the firm with the lowest costs is the price leader.

LRATC: Long run average total cost. In the long run, all costs are variable, and all short run situations are possible. The long run average total cost curve connects all possible short run average total cost curves. This can take different shapes, but a downward sloping portion would indicate economies of scale while an upward sloping portion would indicate diseconomies of scale.

LUXURY GOOD: A good with a high income elasticity of demand.

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MACROECONOMICS: The study of economics at the level of the economy as a whole, or an entire industry or sector of the economy as a whole.

MARGINAL BENEFIT: Additional benefit received as a result of the last choice made.

MARGINAL COST: The addition to total cost associated with the last unit of output.

MARGINAL PHYSICAL PRODUCT: The addition to total physical product when one more unit of a variable input is added.

MARGINAL PROPENSITY TO CONSUME: The percentage of additional disposable income spent instead of saved.

MARGINAL PROPENSITY TO IMPORT: The percentage of additional disposable income spent on imported goods.

MARGINAL PROPENSITY TO SAVE: The percentage of additional disposable income saved instead of spent.

MARGINAL REVENUE: The addition to total revenue resulting from one more unit of output sold.

MARGINAL REVENUE PRODUCT: The addition to total revenue resulting from one more unit of a variable input.

MARGINAL UTILITY: The addition to total utility resulting from consuming one more unit of a specific good.

MARKET: A sector of the economy in which firms use similar resources to produce similar products. Often used in this site and in economics textbooks interchangeably with the term industry.

MARKET DEMAND CURVE: The demand curve for an entire market, as opposed to the demand curve for an individual firm or consumer. Equal to the sum of all individual demand curves.

MARKET ECONOMY: An economic system in which market forces are free to determine economic outcomes.

MARKET FAILURE: A situation in which the free market does not allocate resources to their most efficient uses.

MARKET POWER: The ability of one firm to influence market prices.

MARKET SHARE: The percentage of a market controlled by a specific firm.

MARKET STRUCTURE: Refers to a classification economists use to describe firms with similar behavioral characteristics, based on the number of firms in an industry, the similarity of products, ease of entry into the market, and market power.

MARKET SUPPLY CURVE: The supply curve in an entire market, as opposed to the supply curve for one firm. Equal to the sum of all individual firms' supply curves.

MARKETABLE PERMITS: Permits issued by the government to control the amount of negative externalities.

MC: Marginal cost. The addition to total cost associated with the last unit of output.

MEDIUM OF EXCHANGE: The function of money meaning that money serves as a means of payment.

MERCHANDISE ACCOUNT: The part of the current account in the balance of payments that refers to the movement of merchandise between nations. Represents exports and imports.

MICROECONOMICS: The study of economics on the individual level: The individual firm, the individual consumer, or the individual worker.

MIDPOINT FORMULA: A method for calculating elasticity that eliminates the discrepancy created by naming one starting point as opposed to another starting point in the calculation.

MINIMUM EFFICIENT SCALE: The lowest point on the long run average total cost curve.

MINIMUM WAGE LAWS: Laws that set a price floor for wages.

MIXED ECONOMY: An economic system that has features of both a market economy and a command economy.

MODEL: An approach used in the study of economics that simplifies reality in order to focus attention on a specific relationship between variables.

MONETARISTS: Economic school of thought developed in the 1940s to oppose the theories of Keynesian Economics.

MONETARY POLICY: Economic policy of the government or central bank relating to the money supply and interest rates.

MONETARY POLICY TOOLS: Tools used by the government or central bank in implementing monetary policy.

MONEY: Anything that is widely accepted as payment in exchange for goods and services. This definition can be somewhat arbitrary in real world situations, so economists have separated the definition into four different definitions: M-1, M-2, M-3, and L.
Money is also defined by its functions: medium of exchange, unit of account, and store of value.

MONEY DEMAND: In macroeconomics, the amount of money that people want to hold instead of investing in financial instruments. Divided into the transaction demand for money, the precautionary demand for money, and the speculative demand for money.

MONEY SUPPLY: The total amount of money in the economy. The money supply can be controlled by the government or central bank through monetary policy. Since this means the money supply is not based on market forces, the money supply curve is a vertical line.

MONEY SUPPLY TARGETS: Intermediate goal of monetary policy aimed at a specific level of money in the economy.

MONOPOLISTIC COMPETITION: A market structure characterized by having many competing firms, each small compared to the overall size of the market, selling differentiated products, with easy entry into the market.

MONEY MULTIPLIER: Another name for the deposit expansion multiplier in banking. The maximum amount by which a single deposit in a bank can increase the money supply throughout the banking system. It is the reciprocal of the reserve requirement.

MONOPOLIST: A firm in a monopoly market structure.

MONOPOLY: A market structure in which one firm supplies the entire market.

MPC: Marginal propensity to consume. The percentage of additional disposable income spent instead of saved.

MPI: Marginal propensity to import. The percentage of additional disposable income spent on imported goods.

MPP: Marginal physical product. The addition to total physical product when one more unit of a variable input is added.

MPS: Marginal propensity to save. The percentage of additional disposable income saved instead of spent.

MR: Marginal revenue. The addition to total revenue resulting from one more unit of output sold.

MR=MC: The profit maximizing output level for all firms regardless of market structure. Only in perfect competition will this also be the profit maximizing price.

MRP: Marginal revenue product. The addition to total revenue resulting from one more unit of a variable input.

MULTIPLIER EFFECT: The idea that a change can have an overall effect larger than the initial change. For example, an increase in discretionary government spending can create income for others to spend, resulting in an increase in real GDP larger than the amount of the increase in government spending.

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NAIRU: Non-accelerating inflation rate of unemployment. Also known as the natural rate of unemployment. The lowest unemployment rate consistent with not putting upward pressure on prices and wages.

NATIONAL DEBT: Total balance of outstanding government obligations, usually from government bonds issued to the public.

NATIONAL INCOME: Total income received by the factors of production. Employee compensation plus net interest plus rent plus proprietors' income plus corporate profits.

NATIONAL INCOME ACCOUNTING: A system of measurements allowing for comparison of the sizes of different economies, as well as measurements of one economy's performance over time.

NATURAL BARRIERS TO ENTRY: A reason for a monopoly to exist: one firm can supply the entire market demand more efficiently that two or more competing firms can. Economies of scale.

NATURAL MONOPOLY: A monopoly created by natural barriers to entry.

NATURAL RATE OF UNEMPLOYMENT: The lowest unemployment rate consistent with not putting upward pressure on prices and wages.

NDP: Net domestic product. Gross domestic product minus depreciation.

NECESSITY: A normal good with a low income elasticity of demand.

NEGATIVE CORRELATION: A relationship between variables such that when one variable increases, the other variable decreases.

NEGATIVE EXTERNALITIES: Costs accruing to people who are not parties to private transactions.

NET BENEFIT: Excess of benefits over costs.

NET CREDITOR NATION: A nation that loans more to all other nations than it borrows. A nation that exports more than it imports.

NET DEBTOR NATION: A nation that borrows more from all other nations than it loans. A nation that imports more than it exports.

NET DOMESTIC PRODUCT: Gross domestic product minus depreciation.

NET EXPORTS: Total exports minus total imports. The international sector of an economy.

NET FACTOR INCOME FROM ABROAD: Income received by citizens outside the nation's borders minus income received by foreigners within the nation's borders. Also known as net foreign factor income.

NET FOREIGN FACTOR INCOME: Income received by citizens outside the nation's borders minus income received by foreigners within the nation's borders. Also known as net factor income from abroad.

NET INVESTMENT: Gross private domestic investment minus capital consumption allowance (or depreciation).

NET NATIONAL PRODUCT: National income plus indirect business taxes.

NI: National income. Total income received by the factors of production: Employee compensation plus net interest plus rent plus proprietors' income plus corporate profits.

NNP: Net national product. National income plus indirect business taxes.

NOMINAL GDP: Total value of GDP in current prices.

NOMINAL INTEREST RATE: Actual stated interest rate, equal to the real interest rate plus the anticipated inflation rate.

NOMINAL VALUE: Value in current prices.

NON-ACCELERATING INFLATION RATE OF UNEMPLOYMENT: Also known as the natural rate of unemployment. The lowest unemployment rate consistent with not putting upward pressure on prices and wages. Abbreviated NAIRU.

NORMAL GOOD: A good with a positive income elasticity of demand. A good that people buy more of as income rises.

NORMAL PROFITS: Profits sufficient to cover opportunity costs and not provide an incentive to change output levels, or cause entry or exit in an industry.

NORMATIVE STATEMENT: A statement of opinion, not facts. Including value judgments in statements. Stating "what ought to be". The opposite of a positive statement.

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OLIGOPOLY: A market structure characterized by few firms, each relatively large compared to the overall market size, with relatively difficult entry into the market and at least some control over the prices it sells its product for.

OPEN MARKET OPERATIONS: Monetary policy involving the sales and purchases of government bonds.

OPPORTUNITY COST: The value of the next best (forgone) choice.

OPTIMAL BUNDLE: In demand analysis, the point on the budget line that touches the outermost indifference curve, indicating a maximum benefit to the consumer.

OUTPUT GAP: The amount by which actual GDP is below potential GDP. Also known as a GDP gap or a GDP output gap.

OVERNIGHT FUNDS: Money borrowed by a bank from another bank, or the central bank, to cover an unexpected shortage of reserves.

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PARADOX OF SAVING: Another name for Paradox of Thrift.

PARADOX OF THRIFT: A theory stating that during a recession, a planned increase in savings can cause actual savings to decrease. Also known as Paradox of Saving.

PARALLEL ECONOMY: Economic activity that is not reported for tax purposes and is not included in official government statistics. Also known as the black market, underground economy, hidden economy, shadow economy, and informal economy.

PATENT LAWS: Laws granting monopoly power to creators of new products or processes for a period of time, currently 17 years in the United States.

PEAK: The point in the business cycle where expansion ends, and the level of real GDP is maximized for that business cycle.

PER CAPITA: A value divided by the total population, to calculate an average per person.

PERFECT COMPETITION: A market structure characterized by many firms, each too small to influence the market price, producing identical products, with ease of entry into the market. Considered to be the most efficient market structure, although real life examples are difficult to find.

PERFECT SUBSTITUTES: Products of different firms for which no differences exist in the view of consumers. Identical products.

PERFECTLY ELASTIC: An elasticity value equal to infinity.

PERFECTLY INELASTIC: An elasticity value equal to zero.

PERSONAL INCOME: National income minus income earned but not received plus income received but not earned.

PHILLIPS CURVE: A downward sloping curve indicating a trade-off between inflation and unemployment.

PHYSICAL CAPITAL: Manufactured products such as machinery and equipment that are used in the production of other products. Also known in economics simply as capital.

PI: Personal income. National income minus income earned but not received plus income received but not earned.

PLANNING HORIZON: Another name for the long run.

POSITIVE CORRELATION: A relationship between variables such that both variables change in the same direction.

POSITIVE EXTERNALITIES: Benefits accruing to people who are not parties to private transactions.

POSITIVE STATEMENT: A statement of facts, without including opinions or value judgments. The opposite of a normative statement.

PPC: Production possibilities curve. An economic model that shows graphically the various combinations of two goods that can be produced using a given level of resources.

PPI: Producer Price Index. A measurement of changes in the prices received by producers. A leading economic indicator for inflation. Formerly known as the Wholesale Price Index.

PRECAUTIONARY DEMAND FOR MONEY: The amount of money that the public prefers to hold for spending in emergency situations.

PRICE CEILING: A price control that sets a maximum price that is allowed to be charged. A common example would be rent control.

PRICE CONTROLS: Government restrictions on the prices that can be charged on specific goods and services.

PRICE DISCRIMINATION: The practice of charging different prices to different groups of consumers based on different demand elasticities.

PRICE ELASTICITY OF DEMAND: A measurement of the responsiveness of quantity demanded to a change in price. Also known as elasticity of demand.

PRICE FLOOR: A price control that sets a minimum price that is allowed to be charged. A common example would be a minimum wage.

PRICE INDEX: A number assigned to represent the average price level at a specific point in time in order to measure the rate of inflation.

PRICE LEADERSHIP: A method for firms in oligopoly to cooperate with one another. One firm, called a price leader, changes its price and other firms follow suit.

PRICE MAKER: A firm with significant market power to set its own price.

PRICE TAKER: A firm with no market power; it has to accept the price that is established by the market.

PRIVATE BENEFIT: A benefit received by a party to a transaction.

PRIVATE COST: A cost paid by a party to a transaction.

PRIVATE SECTOR: The portion of the economy that does not included the government.

PRISONER'S DILEMMA: Game theory model used to explain the behavior of firms in oligopoly.

PRODUCER: A private organization that produces goods and / or services. The term as used here is interchangeable with firm, business firm, company, enterprise, and business.

PRODUCER PRICE INDEX: A measurement of changes in the prices received by producers. A leading economic indicator for inflation. Formerly known as the Wholesale Price Index.

PRODUCER SURPLUS: The difference between the price the sellers are willing to sell the product for and the price that the sellers actually receive.

PRODUCER'S TAX: A tax levied on sellers.

PRODUCTION BOTTLENECKS: The inability of firms to increase output in the short run due to a lack of excess capacity.

PRODUCTION POSSIBILITIES CURVE: An economic model that shows graphically the various combinations of two goods that can be produced using a given level of resources.

PRODUCTIVE EFFICIENCY: Using the least cost combination of resources to produce a specific level of output.

PRODUCTIVITY: The amount of output per unit of input.

PROFIT: The excess of total revenue over total cost.

PROHIBITIVE BARRIERS TO ENTRY: Barriers to entry in an industry that are high enough to effectively prevent any entry.

PUBLIC SECTOR: The portion of the economy represented by the government.

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QUANTITY DEMANDED: The amount of a specific good or service that people are willing and able to purchase at one specific price.

QUANTITY SUPPLIED: The amount of a specific good or service that producers are willing and able to offer for sale at one specific price.

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RATE OF INFLATION: The percentage change in the average level of prices from one year to the next.

RATIONAL SELF INTEREST: The assumption in economics that the choices people make are done rationally, based on the information known at the time, in an attempt to maximize their satisfaction. Also known as bounded rationality.

REAL GDP: Total output of an economy measured in constant prices.

REAL GDP PER CAPITA: Total output of an economy measured in constant prices, divided by total population.

REAL INTEREST RATE: The nominal (stated) interest rate minus the anticipated rate of inflation.

REAL VALUE: A value that has been adjusted for changes in the average level of prices.

RECESSION: A period of significant decline in total output, income, employment, and trade, usually lasting from six months to a year, and marked by widespread contractions in many sectors of the economy.

RECESSIONARY GAP: A situation in which a GDP gap exists, or when equilibrium real GDP is below potential real GDP.

REDISTRIBUTION OF WEALTH: Anything that changes the wealth distribution between different groups of people.

RENT: The earnings of land, with land being a factor of production.

REQUIRED RESERVE RATIO: The percentage of deposits that banks have to keep on hand, and not make available for loans.

REQUIRED RESERVES: The amount of deposits that a bank has that cannot be loaned out, in order to meet the required reserve ratio.

RESERVE RATIO: The percentage of deposits at a bank that have not been loaned out.

RESERVE REQUIREMENT: The required reserve ratio.

RESERVES: In banking, the deposits at a bank that have not been loaned out. Same as bank reserves.

RESOURCE PRICES: The prices that producers pay for the use of resources.

RESOURCES: The use of factors of production. Used interchangeably with the term inputs.

RESPONSIVENESS: The amount that one variable will change in response to a change in another variable.

REVENUE: Proceeds from sales. Same as total revenue. Equal to price times quantity.

RICARDIAN EQUIVALENCE: The theory that consumers reduce current consumption because of the future tax increases that they believe will occur to pay for the government debt.

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SCARCITY: When something is not available in sufficient quantities to satisfy every human want, regardless of price.

SEASONAL UNEMPLOYMENT: Unemployment that is caused by the slow season in an industry.

SECTOR: Classification of different portions of the economy: the household sector, the business sector, the government sector, the international sector.

SERVICES: The output of a firm that is not comprised of physical merchandise.

SERVICES ACCOUNT: The portion of the current account of the balance of payments that includes transactions between countries involving services, such as tourism and transportation.

SHADOW ECONOMY: Economic activity that is not reported for tax purposes and is not included in official government statistics. Also known as the black market, underground economy, hidden economy, informal economy, and parallel economy.

SHORT RUN: A time frame sufficiently short enough so that at least one input is fixed.

SHORT RUN AGGREGATE SUPPLY CURVE: The aggregate supply curve in the short run. It would be upward sloping.

SHORT RUN AVERAGE TOTAL COST: The sum of average variable cost and average fixed cost in the short run.

SHORTAGE: The amount by which demand exceeds supply.

SHUT DOWN PRICE: The price below which a profit-maximizing firm will shut down in the short run.

SHUT DOWN RULE: A competitive firm should shut down in the short run if it cannot find an output level that will allow it to cover total variable costs. Otherwise, it should continue to produce.

SILVER STANDARD: An economy in which the value of the currency is tied to the value of silver. The currency can be exchanged for an equal value of silver upon demand.

SOCIAL BENEFIT: Total benefit of a transaction - private benefit plus external benefit.

SOCIAL COST: Total cost of a transaction - private cost plus external cost.

SOCIALISM: An economic system in which the government owns the means of production.

SPECIALIZATION & TRADE: The concept that individuals or nations should specialize in the production of things for which they have comparative advantage, and trade for the things that they do not have comparative advantage.

SPECULATIVE DEMAND FOR MONEY: The amount of money that the public prefers to hold as a hedge against price changes in other financial assets.

SPENDING MULTIPLIER: The amount by which an increase in spending will increase real GDP. Equal to the reciprocal of leakages:
(1 / (MPS + MPI)).

SPILLOVER: The effect that actions of producers or consumers have on people who are not parties to private transactions.

SRATC: Short run average total cost. The sum of average variable cost and average fixed cost in the short run.

STAGFLATION: A situation in which inflation and unemployment are both rising at the same time.

STANDARDIZED PRODUCTS: Products of different firms that have no differences in the minds of consumers. Consumers do not prefer the products of one firm over another firm. The products are considered to be perfect substitutes. Also known as identical products and homogeneous products.

STOCK CONCEPT: A stock is something that is measured at a specific point in time rather than over a period of time, which would be a flow concept. For example, standard accounting statements include an income statement, which is a flow concept, and a balance sheet, which is a stock concept.

STORE OF VALUE: The function of money that allows people to make purchases at times that do not coincide with the time that income is received.

STRATEGIC BEHAVIOR: Actions taken by one that depend on actions taken by another.

STRUCTURAL UNEMPLOYMENT: The type of unemployment caused by a difference between the job skills required to fill the openings available, and the job skills that applicants possess.

SUBSIDY: A payment made by the government to a domestic producer, effectively decreasing the production costs for domestic production.

SUBSTITUTES: Goods that consumers consider to be similar enough so that if the price of one increases, consumers will purchase more of another good instead of the one with the price increase.

SUPPLY: The quantities that producers are willing and able to offer for sale at every potential price. When shown on a graph, it becomes a supply curve.

SUPPLY & DEMAND: An economic model that explains market price and quantity outcomes.

SUPPLY & DEMAND EQUILIBRIUM: The price where the quantity supplied is equal to the quantity demanded. In equilibrium, no market forces for changes exist.

SUPPLY CURVE: A graph of the supply schedule. The supply curve is an upward sloping curve, indicating a positive relationship between price and quantity supplied.

SUPPLY OF MONEY: The quantity of money in the economy. Since the money supply is controlled by the government or the central bank, it is not determined by market forces, and therefore does not change as the price level changes. The money supply curve is a vertical line.

SUPPLY SCHEDULE: A table of supply.

SUPPLY SHOCK: Inflation caused by a sudden increase in the price of a key product or resource in the economy.

SUPPLY SIDE ECONOMICS: Discretionary government policies designed to influence the level of aggregate supply in the economy.

SURPLUS: In supply & demand analysis, the amount by which supply exceeds demand. In market structure analysis, the benefit received when the market price is different from the price that consumers are willing to pay (consumer surplus), or the price that producers are willing to sell for (producer surplus).

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TARIFF: A tax on goods imported from another country.

TAX INCIDENCE: The degree to which a consumer pays a tax on the sale of a good, and the degree to which the seller pays the tax, based on the price elasticities of demand and supply.

TECHNOLOGY: The processes and knowledge that go into production.

TC: Total cost. The sum of total variable cost and total fixed cost.

TFC: Total fixed cost. The total cost associated with fixed inputs.

TOTAL COST: The sum of total variable cost and total fixed cost.

TOTAL FIXED COST: The total cost associated with fixed inputs.

TOTAL LABOR FORCE: The number of employed persons plus the number of persons counted as unemployed. Also known simply as the labor force.

TOTAL PHYSICAL PRODUCT: The total number of units of output for a given quantity of a variable input. Same as total product.

TOTAL POPULATION: The total number of persons living within a nation's borders.

TOTAL PRODUCT: The total number of units of output for a given quantity of a variable input. Same as total physical product.

TOTAL REVENUE: Proceeds from sales. Equal to price times quantity.

TOTAL REVENUE MAXIMIZATION: Total revenue is maximized at the quantity where the demand curve is unit elastic.

TOTAL SURPLUS: The sum of consumer surplus and producer surplus.

TOTAL VARIABLE COST: The variable costs associated with a given level of output. Equal to quantity times average variable cost.

TPP: Total physical product. The total number of units of output for a given quantity of a variable input. Same as total product.

TR: Total revenue. Proceeds from sales. Equal to price times quantity.

TRADE DEFICIT: The amount by which imports exceeds exports.

TRADE EMBARGO: A trade restriction in which the imports of a specific good, or imports from a specific country, are forbidden.

TRADE RESTRICTIONS: Anything that limits free trade between nations.

TRADE SUBSIDY: A payment made by the government to a domestic producer, effectively decreasing the production costs for domestic production.

TRADE SURPLUS: The amount by which exports exceeds imports.

TRANSACTION DEMAND FOR MONEY: The amount of money that the public prefers to hold in order to pay for transactions.

TRANSFER PAYMENTS: Money that the government collects from one group of people in the form of taxes, and pays to another group of people in the form of benefits. This portion of government spending does not represent new production in the economy, and therefore is not included in GDP.

TROUGH: The point in the business cycle when the contraction stage ends.

TVC: Total variable cost. The variable costs associated with a given level of output. Equal to quantity times average variable cost.

TYPES OF UNEMPLOYMENT: Unemployment is classified into four categories: cyclical, frictional, structural, and seasonal.

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UNDEREMPLOYMENT: People who are employed but not fully utilizing their abilities. Often refers to part time workers who would prefer to be working full time.

UNDERGROUND ECONOMY: Economic activity that is not reported for tax purposes and is not included in official government statistics. Also known as the black market, hidden economy, shadow economy, informal economy, and parallel economy.

UNEMPLOYED PERSONS: People without jobs who are actively searching for work.

UNEMPLOYMENT: Wanting a job, and actively looking for a job, but not having a job.

UNEMPLOYMENT RATE: The percentage of the labor force that is classified as unemployed.

UNEMPLOYMENT STATISTICS: Various statistics relating to the labor market, especially the unemployment rate.

UNILATERAL TRANSFERS ACCOUNT: The portion of the current account in the balance of payments that represents transactions between countries in which only one country actually receives something.

UNIT ELASTIC: An elasticity in which a change in one variable will result in an equal change in another variable. The elasticity value is equal to one.

UNIT OF ACCOUNT: The function of money in which the values of different items can be compared based on their prices as measured by the currency.

UNLIMITED WANTS: The concept that somebody will always want more of something.

UPWARD BIAS: The idea that the official inflation rate is probably higher than the actual inflation rate, due to problems with measurements. One source of upward bias is holding the bundle of goods used in the measurements constant even after the relative prices of the goods involved change. Another source of upward bias is that the price changes are not adjusted for improvements in the quality of the goods over time.

US TREASURY BILLS: Short term securities issued by the United States government to finance deficit spending. Treasury Bills have a maturity of less than one year from the issue date. They are sold at a discount from par value, and instead of paying a stated interest they simply pay the full par value at maturity. The effective interest rate is determined by the amount of discount in the purchase price.

US TREASURY BONDS: Bonds issued by the United States government to finance deficit spending. The maturity date is generally20 to 30 years from the issue date. Treasury Bonds pay semi-annual interest based on a stated percentage of par value.

US TREASURY NOTES: Bonds issued by the United States government to finance deficit spending. The maturity date is generally 1 to 10 years from the issue date. Treasury Notes pay semi-annual interest based on a stated percentage of par value.

UTILITY: A measure of the satisfaction, or happiness, that something gives to an individual.

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VARIABLE COST:The cost associated with a factor of production that changes as the level of output changes.

VELOCITY OF MONEY:The average number of times that a given money supply is spent in an economy in one year.

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WAGES:The price paid to labor.

WEALTH EFFECT:A price factor of aggregate demand. Financial assets (money, stocks, changes in the price level. With any given amount of financial assets, the higher the price level, the lower the purchasing power, and therefore the lower the real wealth.

WHOLESALE PRICE INDEX:Former name for the Producer Price Index.

WPI:Wholesale Price Index. Former name for the Producer Price Index.

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