Glossary (See related pages) Ability-to-Pay Principle   The amount of taxes that people pay should be based on their ability to pay (that is, their incomes). Absolute Advantage   The ability of a country to produce a good at a lower cost than its trading partners. Accelerator Principle   If sales or consumption is rising at a constant rate, gross investment will stay the same; if sales rise at a decreasing rate, both gross investment and GDP will fall. Accounting Profit   Sales minus explicit cost. Implicit costs are not considered. Aggregate Demand   The sum of all expenditures for goods and services. Aggregate Demand Curve   Curve showing planned purchase rates for all goods and services in the economy at various price levels. Aggregate Supply   The nation's total output of goods and services. Aggregate Supply Curve   Curve showing the level of real GDP produced at different price levels during a time period, ceteris paribus. Allocative Efficiency   Occurs when no resources are wasted; it is not possible to make any person better off without making someone else worse off. Anticipated Inflation   The rate of inflation that we believe will occur; when it does, we are in a situation of fully anticipated inflation. Antitrust Laws   These laws, including the Sherman and Clayton acts, attempted to enforce competition and to control the corporate merger movement. Appreciation   An increase in the value of a currency in terms of other currencies. Arbitration   An arbitrator imposes a settlement on labor and management if they cannot reach a collective bargaining agreement. Asset Demand   Holding money as a store of value instead of other assets such as stocks, bonds, savings accounts, certificates of deposit, or gold. Automatic Stabilizers   Programs such as unemployment insurance benefits and taxes that are already on the books to help alleviate recessions and hold down the rate of inflation. Autonomous Consumption   The minimum amount that people will spend on the necessities of life. Average Fixed Cost   Fixed cost divided by output. Average Propensity to Consume   The percentage of disposable income that is spent; consumption divided by disposable income. Average Propensity to Save   The percentage of disposable income that is saved; saving divided by disposable income. Average Tax Rate   The percentage of taxable income that is paid in taxes; taxes paid divided by taxable income. Average Total Cost (ATC)   Total cost divided by output. Average Variable Cost (AVC)   Variable cost divided by output. Backward-Bending Labor Supply Curve   As the wage rate rises, more and more people are willing to work longer and longer hours up to a point. They will then substitute more leisure time for higher earnings. Balanced Budget   When federal tax receipts equal federal government spending. Balance of Payments   The entire flow of U.S. dollars and foreign currencies into and out of the country. Balance of Trade   The difference between the value of our imports and our exports. Balance on Capital Account   A category that itemizes changes in foreign asset holdings in one nation and that nation's asset holdings abroad. Balance on Current Account   A category that itemizes a nation's imports and exports of goods and services, income receipts and payments on investment, and unilateral transfers. Bank   A commercial bank or thrift institution that offers checkable deposits. Bank Run   Attempts by many depositors to withdraw their money out of fear that that bank was failing, or that all banks were failing. Barrier to Entry   Anything that prevents the entry of new firms into an industry. Barter   The exchange of one good or service for another good or service; a trade. Base Year   The year with which other years are compared when an index is constructed: for example, a price index. Benefits-Received Principle   The amount of taxes people pay should be based on the benefits they receive from the government. Bonds   (See Government Bonds or Corporate Bonds.) Boom   Period of prolonged economic expansion. Break-Even Point   The low point on the firm's average total cost curve. If the price is below this point, the firm will go out of business in the long run. Budget Deficit   When federal tax receipts are less than federal government spending. Budget Surplus   When federal tax receipts are greater than federal government spending. Business Cycle*Increases and decreases in the level of business activity that occur at irregular intervals and last for varying lengths of time. CPI   (See Consumer Price Index.) Capital   All means of production (mainly plant and equipment) created by people. Capital Account   The section of a nation's international balance of payments statement in which the foreign purchases of that nation's assets and that nation's purchases of assets abroad are recorded. Capitalism   An economic system in which most economic decisions are made by private owners and most of the means of production are privately owned. Capital/Output Ratio   The ratio of capital stock to GDP. Cartel   A group of firms behaving like a monopoly. Certificate of Deposit (CD)   A time deposit (almost always of $500 or more) with a fixed maturity date offered by banks and other financial institutions. Change in Demand   A change in the quantity demanded of a good or service at at least one price that is caused by factors other than a change in the price of that good or service. Change in Supply   A change in the quantity supplied of a good or service at at least one price that is caused by factors other than a change in the price of that good or service. Circular Flow Model   Goods and services flow from business firms to households in exchange for consumer expenditures, while resources flow from households to business firms in exchange for resource payments. Classical Economics   Laissez-faire economics. Our economy, if left free from government interference, tends toward full employment. The prevalent school of economics from about 1800 to 1930. Closed Shop   An employer may hire only union members; outlawed under the Taft-Hartley Act. Collective Bargaining   Negotiations between union and management to obtain agreements on wages, working conditions, and other issues. Collusion   The practice of firms to negotiate price and/or market share decisions that limit competition in a market. Commercial Bank   A firm that engages in the business of banking, accepting deposits, offering checking accounts, and making loans. Communism   An economic system characterized by collective ownership of most resources and central planning. Comparative Advantage   Total output is greatest when each product is made by the country that has the lowest opportunity cost. Competition   Rivalry among business firms for resources and customers. Complementary Goods   Goods and services that are used together; when the price of one falls, the demand for the other rises (and conversely). Concentration Ratio   The percentage share of industry sales by the four leading firms. Conglomerate Merger   Merger between two companies in unrelated industries. Constant-Cost Industry   An industry whose total output can be increased without an increase in long-run-per-unit costs; an industry whose long-run supply curve is flat. Constant Dollars   Dollars expressed in terms of real purchasing power, using a particular year as the base of comparison, in contrast to current dollars. Constant Returns to Scale   Cost per unit of production are the same for any output. Consumer Price Index   The most important measure of inflation. This tells us the percentage rise in the price level since the base year, which is set at 100; represented by CPI. Consumer Surplus   The difference between what you pay for some good or service and what you would have been willing to pay. Consumption   The expenditure by individuals on durable goods, nondurable goods, and services; represented by C. Consumption Function   As income rises, consumption rises, but not as quickly. Contraction   The downturn of the business cycle, when real GDP is declining. Corporate Bonds   This is a debt of the corporation. Bondholders have loaned money to the company and are its creditors. Corporate Stock   Share in a corporation. The stockholders own the corporation. Corporation   A business firm that is a legal person. Its chief advantage is that each owner's liability is limited to the amount of money he or she invested in the company. Cost-of-Living Adjustments (COLAs)   Clauses in contracts that allow for increases in wages, Social Security benefits, and other payments to take account of changes in the cost of living. Cost-Push Inflation   Rising costs of doing business push up prices. Craft Unions   Labor unions composed of workers who engage in a particular trade or have a particular skill. Credit Unions   Financial institution cooperatives made up of depositors with a common affiliation. Creeping Inflation   A relatively low rate of inflation, such as the rate of less than 4 percent in the United States in recent years. Crowding-In Effect   An increase in private sector spending stimulated by federal budget deficits financed by U.S. Treasury borrowing. Crowding-Out Effect   Large federal budget deficits are financed by Treasury borrowing, which then crowds private borrowers out of financial markets and drives up interest rates. Crude Quantity Theory of Money   The belief that changes in the money supply are directly proportional to changes in the price level. Currency   Coins and paper money that serve as a medium of exchange. Current Account   The section of a nation's international balance of payments that records its exports and imports of goods and services, its net investment income, and its net transfers. Cyclical Unemployment   When people are out of work because the economy is operating below the full-employment level. It rises sharply during recessions. Decreasing Cost Industry   An industry in which an increase in output leads to a reduction in the long-run average cost, such that the long-run industry supply curve slopes downward. Deficit   (See Budget Deficit.) Deflation   A decline in the price level for at least two years. Deflationary Gap   Occurs when equilibrium GDP is less than full-employment GDP. Demand   A schedule of quantities of a good or service that people will buy at different prices; represented by D. Demand Curve   A graphical representation of the demand schedule showing the inverse relationship between price and quantity demanded. Demand Deposit   A deposit in a commercial bank or other financial intermediary against which checks may be written. Demand, Law of   When the price of a good is lowered, more of it is demanded; when the price is raised, less is demanded. Demand-Pull Inflation   Inflation caused primarily by an increase in aggregate demand: too many dollars chasing too few goods. Demand Schedule   A schedule of quantities of a good or service that people are willing to buy at different prices. Depository Institutions Deregulation and Monetary Control Act of 1980   This made all depository institutions subject to the Federal Reserve's legal reserve requirements and allowed all depository institutions to issue checking deposits. Depreciation   A fall in the price of a nation's currency relative to foreign currencies. Depression   A deep and prolonged business downturn; the last one occurred in the 1930s. Deregulation   The process of converting a regulated firm or industry into an unregulated firm or industry. Derived Demand   Demand for resources derived from demand for the final product. Devaluation   Government policy that lowers the nation's exchange rate so that its currency is worth less than it had been relative to foreign currencies. Diminishing Marginal Utility   Declining utility, or satisfaction, derived from each additional unit consumed of a particular good or service. Diminishing Returns, Law of   If units of a resource are added to a fixed proportion of other resources, marginal output will eventually decline. Direct Tax   Tax on a particular person. Most important are federal personal income tax and payroll (Social Security) tax. Discounting   The method by which the present value of a future sum or a future stream of sums is obtained. Discount Rate   The interest rate charged by the Federal Reserve to depository institutions. Discouraged Workers   People without jobs who have given up looking for work. Diseconomies of Scale   An increase in average total cost as output rises. Disequilibrium   When aggregate demand does not equal aggregate supply. Disinflation   Occurs when the rate of inflation declines. Disposable Income   Aftertax income. Term applies to individuals and to the nation. Dissaving   When consumption is greater than disposable income; negative saving. Dividends   The part of corporate profits paid to its shareholders. Division of Labor   The provision of specialized jobs. Durable Goods*Things that last at least a year or two. E-commerce   Buying and selling on the Internet. Economic Cost   Explicit costs plus implicit costs. Economic Goods   Goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price. Economic Growth   An outward shift of the production possibilities frontier brought about by an increase in available resources and/or a technological improvement. Economic Problem   When we have limited resources available to fulfill society's relatively limitless wants. Economic Profit   Sales minus explicit costs and implicit costs. Economic Rent   The excess payment to a resource above what it is necessary to pay to secure its use. Economics   The efficient allocation of the scarce means of production toward the satisfaction of human wants. Economies of Scale   Reductions in average total cost as output rises. Efficiency   Conditions under which maximum output is produced with a given level of inputs. Elasticity of Demand   Measures the change in quantity demanded in response to a change in price. Entrepreneurial Ability   Ability to recognize a business opportunity and successfully set up a business firm to take advantage of it. Equation of Exchange   Shows the relationship among four variables: M (the money supply), V (velocity of circulation), P (the price level), and Q (the quantity of goods and services produced). MV = PQ. Equilibrium   When aggregate demand equals aggregate supply. Equilibrium Point   Point at which quantity demanded equals quantity supplied; where demand and supply curves cross. Equilibrium Price   The price at which quantity demand is equal to quantity supplied. Euro   The common currency in most of Western Europe. European Union (EU)   An organization of European nations that has reduced trade barriers among themselves. Excess Reserves   The difference between actual reserves and required reserves. Exchange   The process of trading one thing for another. Exchange Rates   The price of foreign currency; for example, how many dollars we must give up in exchange for marks, yen, and pounds. Excise Tax   A sales tax levied on a particular good or service; for example, gasoline and cigarette taxes. Expected Rate of Profit   Expected profits divided by money invested. Expenditures Approach   A way of computing GDP by adding up the dollar value at current market prices of all final goods and services. Explicit Costs   Dollar costs incurred by business firms, such as wages, rent, and interest. Exports   Goods and services produced in a nation and sold to customers in other nations. Externality   A consequence of an economic activity, such as pollution, that affects third parties. FDIC   (See Federal Deposit Insurance Corporation.) Factors of Production   The resources of land, labor, capital, and entrepreneurial ability. Featherbedding   Any labor practice that forces employers to use more workers than they would otherwise employ; a make-work program. Federal Deposit Insurance Corporation   Insures bank deposits up to $100,000. Federal Funds Rate   The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves. Federal Open Market Committee (FOMC)   The principal decision-making body of the Federal Reserve, conducting open market operations. Federal Reserve Note   Paper*money issued by the Federal Reserve. Federal Reserve System   Central bank of the United States, whose main job is to control our rate of monetary growth. Fiat Money   Paper money that is not backed by or convertible into any good; it is money because the government says it is money. Financial Intermediaries   Firms that accept deposits from savers and use those deposits to make loans to borrowers. Firm   A business that employs resources to produce a good or service for profit and owns and operate one or more plants. Fiscal Policy   Manipulation of the federal budget to attain price stability, relatively full employment, and a satisfactory rate of economic growth. Fiscal Year   Budget year. U.S. federal budget fiscal year begins on October 1. Fixed Costs   These stay the same no matter how much output changes. Fixed Exchange Rate   A rate determined by government and then maintained by buying and selling quantities of its own currency on the foreign exchange market. Floating Exchange Rate   An exchange rate determined by the demand for and the supply of a nation's currency. Foreign Exchange Market   A market in which currencies of different nations are bought and sold. Foreign Exchange Rate   The price of one currency in terms of another. Fractional Reserve Banking   A system in which depository institutions held reserves that are less than the amount of total deposits. Free Trade   The absence of artificial (government) barriers to trade among individuals and firms in different nations. Frictional Unemployment   Refers to people who are between jobs or just entering or reentering the labor market. Fringe Benefits   Nonwage compensation, mainly medical insurance, that workers receive from employers. Full Employment   When a society's resources are all being used with maximum efficiency. Full-Employment GDP   That level of spending (or aggregate demand) that will result in full employment. GATT (General Agreement on Tariffs and Trade)   An agreement to negotiate reductions in tariffs and other trade barriers. GDP   (See Gross Domestic Product.) GDP deflator   A price index used to measure price changes in the items that go into GDP. GDP gap   The amount of production by which potential GDP exceed actual GDP. Gold Standard   A historical system of fixed exchange rates in which nations defined their currency in terms of gold, maintained a fixed relationship between their stock of gold and their money supplies, and allowed gold to be freely exported and imported. Government Bonds   Long-term debt of the federal government. Government Expenditures   Federal, state, and local government outlays for goods and services, including transfer payments. Government Purchases   All goods and services bought by the federal, state, and local governments. Gross Domestic Product (GDP)   The nation's expenditure on all the goods and services produced in the country during the year at market prices; represented by GDP. Gross Investment   A company's total investment in plant, equipment, and inventory. Also, a nation's plant, equipment, inventory, and residential housing investment. Herfindahl-Hirschman Index   A measure of concentration calculated as the sum of the squares of the market share of each firm in an industry. Horizontal Merger   Conventional merger between two firms in the same industry. Household   An economic unit of one or more persons living under one roof. Hyperinflation   Runaway inflation; in the United States, double-digit inflation. Imperfect Competition   All market structures except perfect competition; includes monopoly, oligopoly, and monopolistic competition. Implicit Costs   The firm's opportunity costs of using resources owned or provided by the owner. Imports   Goods and services bought by people in one country that are produced in other countries. Income   A flow of money to households. Income Approach*Method of finding GDP by adding all the incomes earned in the production of final goods and services. Income Effect   A person's willingness to give up some income in exchange for more leisure time. Incomes Policy   Wage controls, price controls, and tax incentives used to try to control inflation. Increasing Costs, Law of   As the output of a good expands, the opportunity cost of producing additional units of this good increases. Increasing Returns to Scale   A situation in which a firm's minimum long-run average total cost decrease as the level of output rises. Indirect Tax   Tax on a thing rather than on a particular person; for example, sales tax. Induced Consumption   Spending induced by changes in the level of income. Industrial Union   A union representing all the workers in a single industry, regardless of each worker's skill or craft. Inelastic Demand   A demand relationship in which a given percentage change in price results in a smaller percentage change in quantity sold. Inferior Goods   Goods for which demands decrease when people's incomes rise. Inflation   A general rise in the price level. Inflationary Gap   Occurs when equilibrium GDP is greater than full-employment GDP. Innovation   An idea that eventually takes the form of new, applied technology or a new production process. Interest   The cost of borrowed funds. Interest Rate   Interest paid divided by amount borrowed. Interlocking Directorates   When one person serves on the boards of at least two competing firms. Intermediate Goods   Goods used to Investment   The purchase or construction of any new plant, equipment, or residential housing, or the accumulation of inventory; represented by I. Jurisdictional Dispute   A dispute involving two or more unions over which should represent the workers in a particular shop or plant. Keynesian Economics   As formulated by John Maynard Keynes, this school believed the private economy was inherently unstable and that government intervention was necessary to prevent recessions from becoming depressions. Kinked Demand Curve   The demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will follow a price decrease and will ignore a price increase. Labor   The work and time for which employees are paid. Labor Force   The total number of employed and unemployed people. Labor Union   Worker organization that seeks to secure economic benefits for its members. Laffer Curve   Shows that at very high tax rates, very few people will work and pay taxes; therefore government revenue will rise as tax rates are lowered. Laissez-Faire   The philosophy that the private economy should function without any government interference. Land   Natural resources used to produce goods and services. Law of Demand   An increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price. Law of Diminishing (Marginal) Returns   The observation that, after some point, successive equal-sized increases of a resource, added to fixed factors of other resources, will result in smaller increases in output. Law of Increasing Costs   As the output of one good expands, the opportunity cost of producing additional units of this good increases. Law of Supply   An increase in the price of a product will increase the quantity of it supplied; and conversely for a decrease in price. Legal Reserves   Reserves that depository institutions are allowed by law to claim as reserves; vault cash and deposits held at Federal Reserve district banks. Legal Tender   Coins and paper money officially declared to be acceptable for the settlement of financial debts. Less Developed Countries (LDCs)   Economies in Asia, Africa, and Latin America with relatively low per capita incomes. Leveraged Buyouts   A primarily debt-financed purchase of a controlling interest of a corporation's stock. Limited Liability   The liability of the owners of a corporation is limited to the value of the shares in the firm that they own. Liquidity   Money or things that can be quickly and easily converted into money with little or no loss of value. Liquidity Preference   The demand for money. Liquidity Trap   At very low interest rates, said John Maynard Keynes, people will neither lend out their money nor put it in the bank, but will simply hold it. Loanable Funds   The supply of money that savers have made available to borrowers. Long Run   When all costs become variable costs and firms can enter or leave the industry. Lorenz Curve   Data plotted to show the percentage of income enjoyed by each percentage of households, ranked according to their income. M   The money supplyÑcurrency, checking deposits, and checklike deposits (identical to M1). M1   Currency, checking deposits, and checklike deposits. M2   M1 plus savings deposits, small-denomination time deposits, and money market mutual funds. M3   M2 plus large-denomination time deposits. Macroeconomics   The part of economics concerned with the economy as a whole, dealing with huge aggregates like national output, employment, the money supply, bank deposits, and government spending. Malthusian Theory of Population   Population tends to grow in a geometric progression (1, 2, 4, 8, 16), while food production tends to grow in an arithmetic progression (1, 2, 3, 4, 5). Marginal Cost (MC)   The cost of producing one additional unit of output. Marginal Physical Product (MPP)   The additional output produced by one more unit of input. Marginal Propensity to Consume (MPC)   Change in consumption divided by change in income. Marginal Propensity to Save (MPS)   Change in saving divided by change in income. Marginal Revenue (MR)   The revenue derived from selling one additional unit of output. Marginal Revenue Product (MRP)   The demand for a resource, based on that resource's marginal output and the price at which it is sold. Marginal Tax Rate   Additional taxes paid divided by taxable income. Marginal Utility   The additional utility derived from consuming one more unit of some good or service. Margin Requirement   The maximum percentage of the cost of a stock purchase that can be borrowed from a bank, stockbroker, or any other financial institution, with stock offered as collateral; this percentage is set by the Federal Reserve. Market   Any place where buyers and sellers exchange goods and services. Market Failure   A less than efficient allocation of resources. Maximum Profit Point   A firm will always produce at this point; marginal cost equals marginal revenue. MC = MR Rule   For a firm to maximize its profits, marginal cost must equal marginal revenue. Measure of Economic Welfare   A measure developed by James Tobin and William Nordhaus that modifies GDP by excluding "economic bads" and "regrettable necessities" and adding household, unreported, and illegal production. Mediation   A third party acts as a go-between for labor and management during collective bargaining. Medium of Exchange   Items sellers generally accept and buyers generally use to pay for a good or service; the primary job of money. Merchandise Trade Balance   The difference between the value of merchandise exports and the value of merchandise imports. Microeconomics   The part of economics concerned with individual units such as firms and households and with individual markets, particular prices, and specific goods and services. Minimum Wage   An hourly wage floor set by government that firms must pay their workers. Mixed Economy   An economy in which production and distribution is done partly by the private sector and partly by the government. Monetarism   A school of economics that places paramount importance on money as the key determinant of the level of prices, income, and employment. Monetary Policy   Control of the rate of monetary growth by the Board of Governors of the Federal Reserve. Monetary Rule   The money supply may grow at a specified annual percentage rate, generally about 3-4 percent. Money   Main job is to be a medium of exchange; also serves as a standard of value and a store of value. Money Supply   Currency, checking deposits, and checklike deposits (M or M1). Monopolistic Competition   An industry that has many firms producing a differentiated product. Monopoly   An industry in which one firm produces all the output. The good or service produced has no close substitutes. Monopsony   A market in which a single buyer has no rivals. Multinational Corporation   A corporation doing business in more than one country; often it owns production facilities in at least one country and sells in many countries.