Glossary of Economic Terms
Absolute Advantage	Refers to international trade where one country has an absolute advantage in producing a good. The country that has the absolute advantage is able to produce the good more efficiently than another country.See also "comparative advantage".
Accelerator	Is an economic theory that suggest that the level of net investment will be determined by the rate of change of national income.If national income is falling then net investment will fall.
Ad Valorem Taxees	Taxes that are computed as a percentage of the sales price of a good or service.
Aggregate Demand (Curve)	Aggregate demand is the total level of demand in the economy. The aggregate demand curve shows the demand at every price level.It is always a downward sloping curve since there will be less demand at higher price levels.
Aggregate Supply (Curve)	It is the total quantity supplied at every price level.The aggregate supply curve shows the amount that will be supplied by all the firms in the economy at each price level. There is considerable debate amongst economists about the shape of the aggregate supply curve. Most of the argument is centered around whether the shape is different in the short-run as opposed to the long-run curve.Most economists believe, however, that in the short-run there may be some increase in output if demand increases, but in the long-run any increases in demand will be inflationary.
Automatic Stabilizer	This refers to government spending programs which respond to changes in the level of national income in such a way as to offset those changes. A commonly cited example is unemployment insurance benefits.
Average Fixed	These are costs (for a firm) that are fixed no matter what the level of production is.
Costs	Average fixed costs are total fixed costs divided by the number of units of output.
Average Rate	The average rate of tax is the total amount of income tax paid expressed as a percentage of a person's income.
Balanced Budget	This refers to government expenditures and arises when a government spends as much money as they take in from taxation.
Balance of Payments Accounts	Is a record of a country's exports and imports of goods and services.
Balance of Trade	Is a record of a country's exports and imports of goods and services.
Base Year	This is used extensively in calculating price indexes.The values in a current year are compared to some arbitrarily chosen earlier or base year.
Birth Rate	The number of live births per 1,000 of the population.
Capital	In an economic sense this refers to produced goods for use in further production (real capital).This differs from financial capital which refers to funds that are available to finance the production or acquisition of real capital.
Capital Account	The part of the balance of payments which records a country's lending and borrowing transactions.
Capital Consumption	The using up of real capital (factories, machinery etc.) by not maintaining or replacing it as it wears out.
Capital Goods	Goods used to produce other goods.Machinery in a factory would be an example of capital goods.
Central Bank	This is an agency empowered by the federal government which is empowered to manage a country's monetary and financial institutions, issue and maintain the domestic currency and handle the official reserves of foreign exchange.
Change in Demand	An increase or decrease in the quantities demanded over a range of prices. This is graphically depicted by a shift in the demand curve.
Comparative Advantage	The ability for one nation or firm to produce a tradable good or service at a lower opportunity cost than it could be produced in another nation or firm.
Competition	A contest amongst sellers or buyers for control over the use of productive resources.
Competitive Firm	A term used to describe a firm operating under perfect competition. Perfect competition is a market condition in which no individual buyer or seller has any significant influence over price.
Constant Dollars	Also referred to as "real dollars", it refers to price data which have been adjusted to remove the effect of changes in the general level of prices (inflation).
Consumer Price Index (CPI)	A measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation.
Consumption Function	A term used to describe a relationship between consumer expenditures and all the influences that determine them.
Consumption Spending	Spending on consumer goods and services
Cost-push Inflation	Rises in costs necessitate price increases.
Current	The portion of a country's balance of payments accounts which records the value of goods
Account	and services exported minus the value of goods and services imported.
Current Dollar	See constant dollar.
Deflation	A fall in the general level of all prices.It is the opposite of inflation.
Demand-pull inflation	If there is an excess level of demand in the economy this will, in general, cause prices to rise. Keynesians (economists who follow the John Maynard Keynes school of economic thought) have argued that this is one of the main causes of inflation.
Depreciation	The using up or wearing out of capital goods.
Deregulation	A process whereby government intervention which controls a particular market activity is reduced or eliminated.
Diminishing Returns	Is a situation where a firm is trying to expand by using more of its variable factors, but finds that the extra output they get each time they add a unit of production is progressively less and less.
Direct Taxes	Taxes on income.
Disposable Income	The income that is left over after income taxes have been deducted from personal income.
Durable Goods Orders	This represents the new orders placed with domestic manufacturers for immediate and future delivery of factory goods.
Economic Rent	A return in excess of its opportunity cost for a factor of production.
Economies of Scale	This is the situation whereby larger firms are able to lower their unit costs below the level of smaller firms in the same industry.
Elasticity	Usually refers to price elasticity which is the percentage change in quantity demanded of a good or service divided by the percentage change in its own price.
Employment Cost Index	A measure of the total employee compensation costs, including wages and benefits. This is the broadest measure of labor costs.
Equilibrium Condition	Is a condition which must be satisfied for equilibrium to exist.Equilibrium is defined as a situation in which there is no tendency for change.
Exchange Rate	The price of one country's currency expressed in terms of another's.
Factors of Production	These are the resources that are needed for production.They are usually classified as follows: 1) land, 2) labor (human resources), 3) capital (machinery etc.) and 4) enterprise (human effort or entrepreneurial ability).
The Federal Reserve (The Fed)	The Federal Reserve (the Fed) is the central bank of the United States and was founded by Congress in 1913 to provide the nation with a safer more flexible, and more stable monetary and financial policy. The Fed is responsible for: 1) conducting monetary policy, 2) supervising and regulating banking institutions, 3) maintaining the stability of the financial system and 4) providing certain financial services to the U.S. government and the public.
Fiscal Drag	This refers to the effect that inflation has on average tax rates.
Fiscal Policy	A policy used by government to achieve desired outcomes. The use of governmental expenditures on goods and services and/or tax collection to influence the level of national income.
Frictional Unemployment	Unemployment caused by the loss of jobs due to technological change, the entry of new participants into a labor market or other normal adjustments of the labor market.
Friedman, Milton	Economist from New York.Credited with establishing the monetarist school of economic thought (as opposed to Keynesian School) which advocated that monetary explanations were the cause of economic events.
Full-Employment Equilibrium	Is the level of National Income at which everyone who wants to work is able to.
Government Spending	The total outlays by government on goods and services during some accounting period usually assumed to be one year.
GDP (Gross Domestic Product)	Is a measure of national income.It is the total value of goods and services produced over a given time period (most often one year) excluding net property income from abroad.
GDP Deflator	Is the nominal GDP divided by the real GDP (constant dollar GDP) multiplied by 100. The nominal GDP is the GDP as measured by the prevailing prices at the time of measurement. Real GDP, by contrast, is the output measured in terms of the prices prevailing in some base period.
Human Capital	The stock of knowledge and skills embodied in individuals.
Imperfect Competition	A market situation in which one or more buyers or sellers have an influence on prices.
Income Effect	The effect that a change in income has on the quantity of a good or service consumed.
Index of Industrial Production	Is a measure of the output of the nation's factories, mines and utilities.
Indifference Curve	A curve which illustrates all possible combinations of two goods among which the consumer is indifferent.
Indifference Theory	A theory used to demonstrate that there is an inverse relationship between price and quantity demanded. This is an alternative theory to the older marginal utility explanation of thisphenomenon.
Indirect Taxes	These are taxes on expenditures.
Inflation	The general rise in the average level of all prices.
Interest	The cost of borrowing money.
Inventories	The stocks of goods in the hands of producers.
Investment	Is the purchase of capital equipment such as machines, equipment and factories.
Invisible Hand	Is an expression that is derived from the work of economist Adam Smith.He argued that the "invisible hand" would organize markets and ensure that they were optimized. This would happen by individuals and firms pursuing their self-interest, yet despite this apparent selfishness, the invisible hand of markets still ensured the best outcome for all concerned.
Jobless Claims	A weekly number that lists the number of individuals who filed for unemployment insurance for the first time.
Keynesian Macroeconomics	Is an economic theory that shows how government spending may be used to raise a market's based economy from an equilibrium condition of large scale unemployment to a equilibrium condition with full employment.
Laffer Curve	Named after Professor Art Laffer who suggested that as taxes increased from fairly low levels, tax revenue would also increase. But as taxes increased there would come a point where individuals would decide to stop working and hence overall tax revenues would start to fall.
Long Run Costs	Production costs when the firm is using its economically most efficient size of plant.
Lorenz Curve	A curve showing the cumulative percentage of income plotted against the cumulative percentage of population.
M1	Is a definition used by the Fed to describe the money supply. M1 includes currency in circulation plus the checkable deposits in banks and thrifts.As well, it includes the currency in bank vaults and bank deposits at the Fed.
M2	Is a broader definition of the money supply.It is M1 plus retail non-transaction deposits.
M3	Is M2 plus wholesale non-transaction deposits.
Macroeconomics	The branch of economic theory that is concerned with the economy as a whole.
Marginal Benefit	The increase in total benefit that is the result of a one unit increase in the production of a good.
Marginal Cost	The increase in total cost that is the result of a one unit increase in the production of a good.
Marginal Propensity to Consume	Is the part of the last dollar of disposable income that would be spent on additional consumption.
Marginal Revenue	The addition to total revenue that results from the sale of one additional unit of output.
Markets	Any coming together of buyers and sellers of goods and services.
Monetarism	A view that markets are inherently self-stabilizing and that variations in the quantity of money is the main cause of fluctuations in the level of aggregate demand.
Monetary Policy	Are the policies (used by the Fed) that use the level of the money supply and interest rates to influence the level of economic activity.
Money	Anything that is acceptable in an exchange.It serves a number of functions including: as a medium of exchange, as a unit of account and as a store of value.
Monopolistic Competition	Is the same as imperfect competition.Is a situation in a market in which one or more firms is able to influence the price of a product.
Monopoly	A market situation in which there is only a single supplier of a good or service.It is a term that is also used to describe a situation in which a firm has considerable power over market price.
Motor Vehicle Sales	Is a measure of the unit sales of domestically produced cars and light-duty trucks.This is an important economic index in that it gives a good indication of trends in consumer spending.
Multiplier	Is a concept that was originally developed by Keynes. It stated that any increase in injections into the economy (investment, government expenditure or exports) would lead to a proportionally bigger increase in National Income.
Natural Monopoly	A situation in a marketplace that arises in which the economies of scale are such that a single firm is of such an efficient size that it is able to supply the entire market demand.
Natural Rate of Unemployment	The rate of unemployment that would exist when the economy is operating at full capacity. This will usually be equivalent to the level of voluntary unemployment as at equilibrium everyone who wants a job has got one.
Net Investment	Total investment during an accounting period (often one year) less the amount of depreciation in the same period.
Normal Good	Any good for which the demand increases as income increases.
Open-market Operations	Refers to the buying and selling of government securities on the financial markets. This is done by central bank (the Fed) purchases or sales of securities in the markets.
Pareto Optimality	Is a condition that exists in which it is impossible to make any individual better off without making any other individual worse off.
Per Capita Income	Total income of a country divided by the size of the population.
Perfect Competition	A market situation in which there are so many sellers (and buyers) that no one seller (or buyer) can exert any influence on the price.
Personal Income	Is an index which measure the dollar value of income received from all sources by individuals.
Personal Outlays	Is an index which measures the consumer purchases of goods, nondurable goods and services.
Phillips Curve	Is a relationship between unemployment and inflation that was discovered by Professor A.W. Phillips. He found that there was a trade-off between unemployment and inflation such that any attempt by governments to reduce unemployment was likely to lead to increased inflation.
Price Discrimination	The percentage change in the quantity of a good demanded by the percentage change in its own price.
Price Elasticity of Demand	Is a measure of the responsiveness of demand to a change in price. If the demand changes by more than the price has changed, we describe the good as price-elastic. If, on the other hand, the demand changes by less than the price had changed, we describe it as price-inelastic.
Private Goods	A good which cannot be consumed with paying for it and the supply of which is reduced when it is consumed by a particular user of it.
Privatization	The selling off of enterprises that are publicly owned to private owners.
Producer Price index (PPI)	Is an index which measures the average price level for a fixed basket of capita and consumer goods paid by producers.
Product Differentiation	Making a product appear different and superior to a similar product being offered by competitors.
Profit Margin	Is the profit as a percentage of sales.
Progressive Tax	A tax that takes an increasing proportion of income as income rises. Income tax is a very common example of a progressive tax.
Public Goods	These are products or services that would not be produced in a pure free-market system. An example of a public good would be national defense.
Public Interest	The notion that there is some kind of general interest by the community as a whole which can be affected by the actions of governments or private agents.
Quantity Theory of Money	The concept that there is a direct link between the quantity of money in the economy and the price level.
Quota	A limitation on a good that can be produced or imported.
Rational Behavior	Behavior that is consistent with acting in one's own best interest.
Real Terms	If a variable is expressed in real terms, this means that the effect of inflation has been removed.
Redistribution Policy	Is a term used to describe measures taken by government to transfer income from some individuals to others.
Reflate	Used in the context of reflating the economy, which means to boost the level of economic activity.
Regressive Tax	Is a tax that takes a smaller proportion of income as income rises.
Rent-Seeking	Is used to describe the activities of individuals or firms to obtain special privileges which will enable them to increase their incomes.
Return on Capital Employed	Measures the profit as a percentage of the capital employed to produce that profit (the total capital invested in the business). It is a measure of how well the money invested in a business is doing in providing a return to the providers of that capital.
Savings	Any income that is not spent.
Scarcity	Human want exceeds the means of satisfying these wants.
Seasonal Unemployment	Is unemployment which occurs regularly because of the seasonal changes in the demand for certain kinds of labor.
Secular Change	These are changes that occur over long periods of time and are distinguished from cyclical changes which occur in shorter periods of time (a year or less).
Smith, Adam	Generally regarded as the founder of modern economics.
Stagflation	This is a term that was coined in the 1970s for the twin economic problems of stagnation and inflation.
Stagnation	This is a term that refers to a negative level of economic growth or a shrinking economy.
Substitute Goods	Goods which may be used in place of other goods or services.
Supply-Side Policies	Are policies that try and improve the workings of markets. They improve the capacity of markets to produce. Supply-side policies are usually advocated by classical and Monetarist economists who believe that free markets are the most important factor determining economic growth.
Sustainable Growth	Is the growth that can be sustained in the economy in the long-term without using up non-renewable resources.
Tariff	A tax imposed on an imported good.
Total Factor Output	The growth of real output beyond what can be attributed to increases in the quantities of labor and capital employed.
Trade Balance	Is an economic number which measures the difference between exports and imports of both tangible goods and services.
Transfer Payments	Are social benefits paid to individuals or households by government.
Treasury Bills	Are a form of short-term borrowing by government. When the government is a little short of funds on a temporary basis, it will make a treasury bill issue.
Unemployment	Non-utilized labor resources.
Voluntary Export	A restriction placed by an exporting country on the volume of exports that it sends to another country