Economics Flashcards
Study supply and demand analysis, market structures, economic growth, business cycles, monetary and fiscal policy, international trade, and currency exchange rates.
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Absolute advantage
A country’s ability to produce a good or service at a lower absolute cost than its trading partner.
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Aggregate demand
The total quantity of goods and services demanded within an economy.
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Aggregate demand curve
Shows the relationship between the total quantity of goods and services demanded in an economy and the overall price level. It represents the total spending or demand for all goods and services in an economy at different price levels.
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Aggregate income
The value of all the payments earned by the suppliers of factors used in the production of goods and services.
Aggregate outcome and aggregate income must be equal
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Aggregate output
The value of all the goods and services produced in a period of time.
Aggregate outcome and aggregate income must be equal
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Aggregate supply
The quantity of goods and services produced at any given level of price.
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Aggregate supply curve
The level of domestic output produced at each price level.
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Balance of payments
Summarizes a country’s economic transactions with the rest of the world over a period of time.
Double-entry bookkeeping
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Balance of trade deficit
When an economy is spending more on foreign goods and services than foreign economies are spending on the domestic country’s goods and services.
It is like the domestic country is “spending more than it’s making”
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Balanced Budget
Government budget where spending = revenue
Revenue primarily from taxation
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Capital account
The capital account is one of the major components of a country’s balance of payments, alongside the current account and financial account. It tracks the flow of capital* between a country and the rest of the world.
*includes debt forgiveness, migrant transfers and assets, and the sale of non produced/non financial assets like natural resources or intangible assets.
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Capital market expectations
Expectations regarding the risk and return prospects of asset classes.
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Capital restrictions
Controls placed on movement of capital in or out of a coutry. May impact foreigners’ ability to own domestic assets and/or domestic residents’ ability to own foreign assets.
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Closed economy
An economy that is self sufficient and does not trade with other countries.
aka autarkic economy
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Comparative advantage
A country’s ability to produce a good or service at a lower relative cost (opportunity cost) than its trading partner.
as opposed to an absolute advantage
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Complements
Goods that tend to be used together.
Ttwo goods whose cross-price elasticity of demand is negative.
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Contraction
The downswing of a business cycle after the peak and before the trough
Recession or depression
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Contractionary fiscal policy
Fiscal policy with the objective being a contraction of the real economy. Government spending may be reduced and taxes raised.
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Core inflation
The inflation rate based on a price index of goods and services except food and energy.
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Cost-push
Inflation caused by rising costs (wages).
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Cross-price elasticity of demand
% Change in Quantity Demanded / % Change in the Price of a different good
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Customs union
Extends the free trade area (allowing free movement of goods and services among members) by creating a common trade policy against nonmembers (common external tariffs).
Level of economic integration
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Decreasing returns to scale
When increases in output are proportionately smaller than the increase in inputs.
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Demand curve
A graph showing the relationship between quantity demanded and price paid.
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Demand-pull
Type of inflation where increasing demand raises prices generally (demand outpaces supply).
Workers demand wage hikes to catch up to cost of living.
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Demand function
A mathematical representation that describes the relationship between the quantity demanded of a particular good or service and the factors that influence that demand.
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Demand shock
An unexpected disruption to demand.
Can be caused by things like transportation disruption, trade disputes, etc. (ex. Ever Given suez canal disruption of 2021 + port backlogs)
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Diminishing marginal productivity
When each additional unit of input produces less output than previously.
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Discouraged worker
A person who has given up seeking employment.
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Diseconomies of scale
When the cost per unit of production increases as a result of the growth of the company and overall production.
Typically results in declining profit margins
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Domestic content provisions
When a percentage of the value added (or components used) in production should be of domestic origin.
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Economic costs
Total accounting costs + implicit opportunity costs
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Economies of scale
Reduction in cost per unit resulting from increased production.
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Economic indicator
Variable providing insight into the state of the overall economy.
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Economic union
A common market + common economic institutions and coordination of economic policies among members.
Common fiscal and monetary policy
Level of economic integration
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Elasticity
General measure of how sensitive one variable is to a change in another variable.
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Elasticity of supply
Sensitivity of quantity supplied / change in price.
%∆QSupplied/%∆P
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Elasticity of demand
Sensitivity of quantity demanded / change in a product’s own price.
%∆QDemanded/%∆P
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Expansion
Upward swing of a business cycle after the trough and before the peak.
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Expansionary
Causing the real economy to grow/expand.
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Exports
Goods and services an economy sells to other countries.
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Externality
Effect of a market transaction that is borne by parties other than those who transacted.
Cost or benefit caused by a producer but which does not financially impact that producer.
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Fed funds rate
US interbank lending rate on overnight reserves.
A central bank policy rate
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Fiat money
Money that is not backed by (convertible into) a commodity.
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Financial account
One of the major components of a country’s balance of payments, alongside the current account and capital account. It tracks the investment flows* between a country and the rest of the world.
*financial assets abroad + foreign-owned financial assets within
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First-degree price discrimination
Monopolist can charge each customer the highest price that customer is willing to pay.
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Fiscal multiplier
Change in national income / Change in government spending
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Fisher effect
The thesis that the real rate of interest in an economy is stable over time, therefore changes in nominal interest rates are due to changes in expected inflation.
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Fiscal policy
The use of taxes and government spending to influence the economy.
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Foreign currency reserves
When a central bank holds non-domestic currency deposits and non-domestic bonds in reserve.
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Foreign exchange gains or losses
Specifically when changes in the exchange rate between an investor’s currency and the local currency of the security results in a gain or loss in value.
when the relative strength of the currencies involved changes
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Foreign direct investment
Direct investment by a firm (in the source country) in productive assets in a foreign country (the host country).
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Free trade
No government restrictions on a country’s ability to trade.
ex. no tariffs or quotas
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Free trade areas
FTA
When barriers to the flow of goods and services among members have been reduced or eliminated. Trade between members is treaded very favourably.
for ex. reducing tariffs.
Level of economic integration
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Bilateralism
Cooperation between two countries.
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Giffen goods
Goods that are consumed more as the price of the good rises.
An inferior good whose income effect overwhelms its substitution effect when price changes (can no longer afford more expensive substitutes so deman increase for the inferior good, even as price is rising).
Often arise in cases of limited choice (substitutions) and income constraints.
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Gross domestic product
GDP
The market value of all goods and services produced in the economy in a given time period.
or the aggregate income earned by households, companies, and the government in an economy in a given time period.
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Human capital
Accumulated knowledge and skill which a worker acquires via education, training, and experience.
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Imports
Goods and services that a domestic economy (i.e., house-holds, firms, and government) purchases from other countries.
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Income elasticity of demand
A measure of the sensitivity of demand to changes in income.
%∆QDemanded/%∆Income
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Index of Leading Economic Indicators
A composite of economic variables used to predict future economic conditions.
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Indifference curve
A curve representing all the combinations of two goods such that the consumer is indifferent. In other words, it shows the combinations of two goods that yield the same level of satisfaction or utility to the consumer.
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Industry
A group of companies offering similar products and/or services.
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Industry analysis
The process of evaluating and understanding the dynamics, trends, opportunities, and challenges within a specific industry
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Inflation
The percentage increase in the general price level from one period to the next.
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Inelastic
When the magnitude of elasticity for a good or service is less than one. Insensitive to price changes.
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Inferior goods
A good whose consumption decreases as income increases.
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Keynesians
Economists who believe fiscal policy should be used to boost demand, output, and employment when there is significant spare capacity in the economy.
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Labor force
The portion of the working age population (>= 16) which are employed + those available but not working (unemployed).
employed + unemployed but employable
All who are able to work
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Labor productivity
Goods and services (real GDP) a worker can produce per one hour of work.
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Lagging economic indicators
Factor which changes after the economic variable with which it is correlated. Believed to have value in identifying/confirming the economy’s past condition or trends.
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Law of one price
Two equivalent financial instruments or combinations should sell for the same price, after removing trade frictions. Arbitrage opportunities cannot persist.
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Laspeyres index
Price index which holds the composition of the consumption basket constant.
doesn’t make subsitutions or hedonic adjustments
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Law of diminishing returns
As more labor is added to a fixed amount of capital, additional output falls.
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Law of demand
As the price of a good rises, buyers will buy less, and as price falls, buyers will buy more..
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Liquidity trap
When demand for money becomes infinitely elastic, resulting in monetary stimulus becoming ineffective.
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Macroeconomics
The branch of economics which studies the behaviour and functioning of the economy as a whole. It considers economic quantities such as output, savings, inflation, interest rates, etc.
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Marginal product
Measures the productivity of each unit of input
calculated by taking the difference in total product from adding another unit of input (assuming other quantities are held constant).
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Marginal propensity to save
The proportion of an additional unit of disposable income which is saved instead of spent.
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Marginal propensity to consume
The proportion of an additional unit of disposable income that is consumed or spent instead of saved.
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Microeconomics
Branch of economics which focuses on markets and decision making of consumers and businesses.
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Monetarists
Economists who believe the rate of growth of the money supply is the primary cause of inflation.
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Monetary policy
When a central bank attempts to affect aggregate output and prices via changes in bank reserves, reserve requirements, or its target interest rate.
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Monetary union
An economic union in which the members adopt a common currency.
A level of economic integration
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Monetary transmission mechanism
How a central bank’s interest rate gets transmitted through the economy and affects the rate of inflation.
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Money
A generally accepted medium of exchange and unit of account.
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Money multiplier
Describes how a change in reserves is expected to affect the money supply
1/reserve requirement
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Monopolistic competition
Highly competitive form of imperfect competition; many competitors with slightly differentiated products/services
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Monopoly
When there are no substitutes for the given product or service.
Single seller has considerable power over pricing and output decisions.
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National income
Income received by factors of production used in generating final output.
= GDP - (capital consumption allowance + statistical discrepancy)
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Neo-Keynesians
Economic school which emphasizes the role of aggregate demand in determining overall economic activity. Advocate for government taking an active role in the economy. Recognize that prices and wages are slow-to-adjust, and believe that fiscal policy should be main tool to influence economy, but recognize that monetary policy has a role to play.
less focused on full employment, more focused on growth and stability
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Natural rate of unemployment
The unemployment rate that prevails when there is neither inflationary pressure nor deflationary pressure on the economy.
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Net exports
Exports - Imports
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Neutral rate of interest
Rate at which the economy is in a state of balance, with stable prices and full employment. In other words, it is the interest rate that neither stimulates economic growth nor constrains it.
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Nominal GDP
Value of goods and services measured at current prices.
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New classical macroeconomics
Approach to macroeconomics which seeks the macroeconomic conclusions of individuals maximizing utility on the basis of rational expectations.
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Non-cyclical
When performance is mostly independent of the business cycle.
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Official policy rate
The interest rate a central bank sets and announces publicly.
the rate at which it is willing to lend money to the commercial banks.
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Open economy
One that trades with other countries.
as opposed to a closed economy
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Oligopoly
A market dominated by a small number of firms.
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Open market operations
When central banks buy/sell bonds in the market in order to enact monetary policy.
bonds traded usually are sovereign bonds of the national government.
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Own-price elasticity of demand
The percentage change in quantity demanded for a percentage change in good’s own price.
%∆QDemanded/%∆P
As opposed to cross price elasticity of demand
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Per capita real GDP
Real GDP / size of the population
Can be used to measure avg standard of living
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Perfect competition
When individual firms have no pricing power, due to being small seller among a large number of firms selling essentially identical products.
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Perfectly inelastic
When quantity demanded or supplied is insensitive to a change in price.
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Perfectly elastic
When the quantity demanded or supplied is infinitely sensitive to a change in price.
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Price elasticity of demand
Measures the percentage change in the quantity demanded, given a percentage change in the price of a given product.
%∆QDemanded/%∆P
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Producer price index
PPI
Price changes experienced by domestic producers.
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Production function
Link between the level of output economy can produce and inputs in the production process.
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Productivity
Output produced by workers in a given period of time (ex. output per hour). A measure of the efficiency of labour
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Quantitative easing
QE
An expansionary monetary tool used when conventional monetary policy measures become less effective. QE involves central banks purchasing financial assets, typically government securities (bonds) and, in some cases, other assets like mortgage-backed securities, from the open market.
Done to inject liquidity into the financial system.
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Real GDP
Value of goods and services produced measured at base year prices.
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Real interest rate
Nominal interest rate - expected rate of inflation.
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Real income
Income adjusted for the effect of inflation on the purchasing power of money.
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Reserve requirement
Banks are required to hold reserves proportional to the size of deposits.
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Spot markets
Markets where assets are traded for immediate delivery.
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Spot prices
Price of an asset for immediately delivery.
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Stagflation
High inflation rate + slowdown of the economy
often with high unemployment
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Structural budget deficit
aka cyclically adjusted budget deficit
Deficit which would exist if the economy was at full employment.
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Substitutes
Two goods or services where, if the price of one increases the demand for the other increases.
Easily interchanged
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Tariffs
Taxes a government imposes on imports.
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Total factor productivity
TFP
The portion of growth that is not accounted for by explicit factor inputs (capital and labor).
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Transfer payments
Welfare payments made through the social security system (provide minimum level of income for low-income households).
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Treasury Inflation-Protected Securities
TIPS
A bond issued by the United States Treasury, designed to protect against inflation (by adjusting the principal for inflation).
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Underemployed
A person who is employed but is qualified for a significantly higher-paying job.
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Unemployed
Those actively seeking employment but currently without a job.
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Unit labor cost
Average labor cost to produce one unit of output.
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Unemployment rate
Unemployed / labor force.
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Unit elastic
An elasticity where the change in one variable results in an equally proportional change in the other.
aka unitary elastic
Price elasticity coefficient of 1 or -1
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Unexpected inflation
When inflation, or a component of inflation is a surprise.
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Veblen goods
When demand for a good increases as price increases
luxury goods
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Voluntarily unemployed
A person choosing to stay out of the labor force (viable worker refusing a position).
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Wealth effect
When an increase in household wealth results in an increase in consumer spending.
oppositie is also true
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Business cycle
Periods of expansions and contractions within the economy.
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Cabotage
Right to transport people/goods within a country by a foreign firm.
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Cooperative country
One which works to standardize rules, harmonize tariffs, reach agreements on trade/immigration/regulation, and allows free flow of information.
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Event risk
Risk associated with specific events that are known in advance.
election, interest rate decision
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Exogenous risk
Risk associated with external factors.
In this context, impacting a country
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Geophysical resource endowment
Whether a country has access to livable geography and climate, food, water, and other natural resources.
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Geopolitical risk
Risk that political, social, or economic factors in a different country may have a significant impact on global or regional stability, security, interests and operations.
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Globalization
Process of becoming more connected and interdependent around the globe.
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Hegemony
When a country uses its influence to control resources.
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Multilateralism
When countries participate in mutually beneficial trade relationships. Firms within are integrated into global supply chains.
involves multiple countries (more than 2)
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Non-cooperative country
Country with inconsistent and arbitrary rules. Often imposing restrictions on the flows across borders.
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Non-state actors
Entities who participate in global affairs but do not represent or control a nation.
ex. NGOs, multinational corporations, charities
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Regionalism
A group of countries in a region cooperate with each other.
Between bilateralism and multilateralism.
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Soft power
Influencing a country’s decisions without use of force or coercion.
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State actors
National governments, political organizations, country leaders who influence a country’s national security/resources.
Common Market
A customs union + allow free movement of the factors of production among members.
capital and labour
Level of economic integration
