Economics Online Tutor
Glossary and Dictionary of
Economics Terms

Page 4
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.

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.

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.

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.
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