glossary terms Flashcards
absolute advantage
the comparison
among producers of a good according to
their productivity
absolute poverty
a level of poverty
where an individual does not have access to
the basics of life – food, clothing and shelter
accounting profit
total revenue minus
total explicit cost
aggregate demand curve
a curve that
shows the quantity of goods and services
that households, firms and the govern-
ment want to buy at each price level
aggregate supply curve
a curve that
shows the quantity of goods and services
that FIRMS choose to produce and sell at
each price level
appreciation
an increase in the value
of a currency as measured by the amount
of foreign currency it can buy
automatic stabilizers
changes in fiscal
policy that stimulate aggregate demand
when the economy goes into a recession,
without policymakers having to take
any deliberate action
autonomous expenditure
spending
which is not dependent on income
balanced budget
where the total sum
of money received by a government in
tax revenue and interest is equal to the
amount it spends, including on any debt
interest owing
average total cost
total cost divided
by the quantity of output
balanced trade
a situation in which
exports equal imports
bond
a certificate of indebtedness
budget deficit
an excess of govern-
ment spending over government receipts
budget surplus
an excess of govern-
ment receipts over government spending
business cycle
fluctuations in eco-
nomic activity, such as employment and
production
catch up effect
the property whereby
countries that start off poor tend to grow
more rapidly than countries that start off
rich
central effect
an institution designed to
regulate the quantity of money in the
economy
circular flow diagram
a visual model of
the economy that shows how money and
production inputs and outputs flow through
markets among households and firms
closed economy
an economy that
does not interact with other economies in
the world
collective bargaining
the process by
which unions and firms agree on the
terms of employment
commodity money
money that takes
the form of a commodity with intrinsic
value
common currency area
a geographical
area, possibly covering several countries,
in which a common currency is used
comparative advantage
the compari-
son among producers of a good accord-
ing to their opportunity cost
competitive market
a market in which
there are many buyers and many sellers
so that each has a negligible impact on
the market price
constant returns to sales
the property
whereby long-run average total cost stays
the same as the quantity of output changes
consumer price index (cpi)
a mea-
sure of the overall prices of the goods
and services bought by a typical
consumer
consumer surplus
a buyer’s willing-
ness to pay minus the amount the buyer
actually pays
consumption
spending by households
on goods and services, with the excep-
tion of purchases of new housing
cost
the value of everything a seller
must give up to produce a good
crowding out
a decrease in investment
that results from government borrowing
crowding out effect
the offset in
aggregate demand that results when
expansionary fiscal policy raises the
interest rate and thereby reduces invest-
ment spending
currency
the paper banknotes and
coins in the hands of the public
customs union
a group of countries
that agree not to impose any restrictions at all on trade between their own
economies, but to impose the same
restrictions as one another on goods
imported from countries outside the
group
cyclical unemployment
the deviation
of unemployment from its natural rate
deadweight loss
the fall in total sur-
plus that results from a market distor-
tion, such as a tax
demand curve
a graph of the relation-
ship between the price of a good and the
quantity demanded
demand deposits
balances in bank
accounts that depositors can access on
demand by using a debit card or writing
a cheque
depreciation
a decrease in the value of
a currency as measured by the amount of
foreign currency it can buy
depression
a severe recession
direct tax
a tax that is levied directly
on a person’s income
discount rate
the interest rate at which
the Federal Reserve lends on a short-term
basis to the US banking sector
discrimination
the offering of different
opportunities to similar individuals
who differ only by race, ethnic group,
sex, age or other personal characteristics
economy
a word to describe all the
economic activity (buying and selling or
transactions) that take place in a country
or region
economic growth
the increase in the
amount of goods and services in an
economy over a period of time
economic profit
total revenue minus
total cost, including both explicit and
implicit costs
economics
the study of how society
manages its scarce resources
efficiency
the property of a resource
allocation of maximizing the total
surplus received by all members of
society
efficiency wages
above-equilibrium
wages paid by firms in order to increase
worker productivity
elasticity
a measure of the responsive-
ness of quantity demanded or quantity
supplied to one of its determinants
equilibrium
a situation in which the
price has reached the level where
quantity supplied equals quantity
demanded
European central bank
the
overall central bank of the 16 countries
comprising the European Monetary
Union
European Economic and Monetary
Union (EMU)
the European currency
union that has adopted the euro as its
common currency
eurosystem
the system made up of the
ECB plus the national central banks of
each of the 16 countries comprising the
European Monetary Union
exports
goods produced domestically
and sold abroad
externality
the uncompensated impact
of one person’s actions on the well-being
of a bystander (a third party
factors of production
the inputs used
to produce goods and services
federal reserves
the central bank
of the United States
fiat money
money without intrinsic
value that is used as money because of
government decree
financial intermidiaries
financial
institutions through which savers
can indirectly provide funds to
borrowers
financial system
the group of institutions in the economy that help to match
one person’s saving with another person’s investment
fixed costs
costs that are not determined by the quantity of output
produced
fractional reserve banking
a banking
system in which banks hold only a fraction of deposits as reserves
frictional unemployment
unemployment that results because it takes time for
workers to search for the jobs that best
suit their tastes and skills
future value
the amount of money in
the future that an amount of money
today will yield, given prevailing interest
rates
GDP deflator
a measure of the price
level calculated as the ratio of nominal
GDP to real GDP times 100
government purchases
spending on
goods and services by
gross domestic product (GDP)
the
market value of all final goods and services produced within a country in a
given period of time
gross domestic product per head
the
market value of all final goods and services produced within a country in a
given period of time divided by the
population of a country to give a per
capita figure
human capital
the accumulation of
investments in people, such as education
and on-the-job training
imports
goods produced abroad and
purchased for use in the domestic economy
import quota
a limit on the quantity of
a good that can be produced abroad and
sold domestically
in kind transfers
transfers to the poor
given in the form of goods and services
rather than cash
indexation
the automatic correction
of a money amount for the effects of
inflation by law or contract
indirect tax
a tax that is levied on
goods and services bought
inflation
an increase in the overall level
of prices in the economy
inflation rate
the percentage change
in the price index from the preceding
period
inflation tax
the revenue the government raises by creating money
investment
spending on capital
equipment, inventories and structures,
including household purchases of new
housing
labour force
the total number of
workers, including both the employed
and the unemployed
labour force participation rate (or
economic activity rate)
the percentage
of the adult population that is in the
labour force
law of demand
the claim that, other
things equal, the quantity demanded of a
good falls when the price of the good
rises
law of supply
the claim that, other
things equal, the quantity supplied of a
good rises when the price of the good
rises
liquidity
the ease with which an asset
can be converted into the economy’s
medium of exchange
macroeconomics
the study of
economy-wide phenomena, including
inflation, unemployment, and economic
growth
market
a group of buyers and sellers of
a particular good or service
market economy
an economy that
allocates resources through the decentralized decisions of many firms and
households as they interact in markets
for goods and services
market failure
a situation where scarce
resources are not allocated to their most
efficient use
market power
the ability of a single
economic agent (or small group of
agents) to have a substantial influence on
market prices
medium exchange
an item that
buyers give to sellers when they want to
purchase goods and services
menu costs
the costs of changing
prices
microeconomics
the study of how
households and firms make decisions
and how they interact in markets
model of aggregate demand
and aggregate supply
the model that
most economists use to explain short-run
fluctuations in economic activity around
its long-run trend
monetary neutrality
the proposition
that changes in the money supply do not
affect real variables
monetary policy
the set of actions
taken by the central bank in order to
affect the money supply
money
the set of assets in an economy
that people regularly use to buy goods
and services from other people
money market
the market in which
the commercial banks lend money to one
another on a short-term basis
money multiplier
the amount of
money the banking system generates
with each unit of reserves
money supply
the quantity of money
available in the economy
multiplier effect
the additional shifts
in aggregate demand that result when expansionary fiscal policy increases
income and thereby increases consumer
spending
national saving (saving)
the total
income in the economy that remains after
paying for consumption and government
purchases
natural rate of output
the output level
in an economy when all existing factors
of production (land, labour, capital and
technology resources) are fully utilized
and where unemployment is at its natural rate
natural rate of unemployment
the
normal rate of unemployment around
which the unemployment rate fluctuates
natural resources
the inputs into the
production of goods and services that are
provided by nature, such as land, rivers
and mineral deposits
net capital outflow
the purchase of
foreign assets by domestic residents
minus the purchase of domestic assets by
foreigners
net exports
spending on domestically
produced goods by foreigners (exports)
minus spending on foreign goods by
domestic residents (imports)
nominal variables
variables measured
in monetary units
normative statements
claims that
attempt to prescribe how the world
should be
open economy
an economy that
interacts freely with other economies
around the world
open market operations
the purchase
and sale of non-monetary assets from
and to the banking sector by the central
bank
opportunity cost
whatever must be
given up to obtain some item – the value
of the benefits foregone (sacrificed)
Philips curve
a curve that shows the
short-run trade-off between inflation and
unemployment
physical capital
the stock of equipment and structures that are used to
produce goods and services
positive statements
claims that
attempt to describe the world as it is
poverty rate
the percentage of the
population whose family income falls
below an absolute level called the
poverty line
price discrimination
the business
practice of selling the same good at
different prices to different
customers
price level
the price of a basket of
goods and services measured as the
weighted arithmetic average of current
prices
private saving
the income that households have left after paying for taxes and
consumption
producer surplus
the amount a seller
is paid for a good minus the seller’s cost
production function
the relationship
between the quantity of inputs used to make
a good and the quantity of output of that
good
production possibilities frontier
a
graph that shows the combinations of
output that the economy can possibly
produce given the available factors of
production and the available production
technology
profit
total revenue minus total cost
progressive tax
a tax for which highincome taxpayers pay a larger fraction of
their income than do low-income
taxpayers
public saving
the tax revenue that the
government has left after paying for its
spending
quantity supplied
the amount of a
good that sellers are willing and able to
sell
quantity theory of money
a theory
asserting that the quantity of money
available determines the price level and
that the growth rate in the quantity of
money available determines the inflation
rate
random
rational expectations
the theory
according to which people optimally use
all the information they have, including
information about government policies,
when forecasting the future
real money balances
what money can
actually buy given the ratio of the money
supply to the price level M/P
real variables
variables measured in
physical units
recession
a period of declining
real incomes and rising unemployment.
The technical definition gives recession
occurring after two successive quarters of
negative economic growth
refinancing rate
the interest rate at
which the European Central Bank lends
on a short-term basis to the Euro Area
banking sector
reserve ratio
the fraction of deposits
that banks hold as reserves
reserves
deposits that banks have
received but have not loaned out
scarcity
the limited nature of society’s
resources
shortage
a situation in which quantity
demanded is greater than quantity
supplied
social security
government benefits
that supplement the incomes of the
needy
stagflation
a period of falling output
and rising prices
standard of living
refers to the amount
of goods and services that can be purchased by the population of a country.
Usually measured by the inflationadjusted (real) income per head of the
population
stock (or share or equity)
a claim to
partial ownership in a firm
store of a value
an item that people can
use to transfer purchasing power from
the present to the future
structural unemployment
unemployment that results because the number of
jobs available in some labour markets is
insufficient to provide a job for everyone
who wants one
sunk cost
a cost that has already been
committed and cannot be recovered
supply curve
a graph of the relationship between the price of a good and the
quantity supplied
supply schedule a
supply shock
an event that directly
alters firms’ costs and prices, shifting the
economy’s aggregate supply curve and
thus the Phillips curve
surplus
a situation in which quantity
supplied is greater than quantity
demanded
tarrif
a tax on goods produced abroad
and sold domestically
trade balance
the value of a nation’s
exports minus the value of its imports;
also called net exports
trade deficit
an excess of imports over
exports
trade surplus
an excess of exports over
imports
transfer payment
a payment for
which no good or service is exchanged
unemployment insurance
a government program that partially protects
workers’ incomes when they become
unemployed
unemployment rate
the percentage of
the labour force that is unemployed
union
a worker association that bargains with employers over wages and
working conditions
unit of account
the yardstick people
use to post prices and record debts
variable costs
costs that are dependent
on the quantity of output produced
velocity costs
the rate at which
money changes hands
willingness to pay
the maximum
amount that a buyer will pay for a
good
world price
the price of a good that
prevails in the world market for that
good
