Above full-employment equilibrium
An above full-employment equilibrium is a macroeconomic equilibrium in
real GDP exceeds
A person has an absolute advantage in the production of two goods, if by
using the same quantities of inputs, that person can produce more of
both goods than another person can. A country has an absolute advantage
if its output per unit of inputs of all goods is larger than that of
The process (used in building a
focusing on a limited number of variables to explain or predict an
The actual outlays or expenses incurred in production; the costs that
are actually paid and can be recorded as transactions. Also referred to
Accounting profit is the total revenue of the firm minus the total
explicit costs of the firm in producing its product. It differs from
normal profit, which is a cost to the
firm payable as the
opportunity cost of
the entrepreneur, and
which is the total revenue of the firm minus both the total explicit and
total implicit cost of the firm in producing its output. Conceptually,
both accounting profit and economic profit are residual concepts
(revenue minus cost), while normal profit is a cost concept.
Ad valorem tax
An ad valorem tax is a tax that is specified as a percentage
of value. Sales, income, and property taxes are three of the more
popular ad valorem taxes devised by government.
The tendency for people to enter into agreements in which they can use
their private information to their own advantage and to the disadvantage
of the less-informed party.
Aggregate demand is the relationship between the aggregate quantity of
real GDP demanded and the
Aggregate hours are the total number of hours worked by all the people
employed, both full time and part time, during a year.
Aggregate planned expenditure
Aggregate planned expenditure is the expenditure that households, firms,
governments, and foreigners plan to undertake in given circumstances. It
is the sum of planned consumption expenditure, planned investment,
planned government purchases of goods and services, and planned exports
minus planned imports.
Aggregate production function
The aggregate production function is the relationship between the
real GDP supplied and the
quantities of labor and capital and the state of technology.
Obtaining the most consumer satisfaction from the
resources which are available. When
allocative efficiency is attained, the economy is doing the best job
possible of satisfying unlimited wants with limited resources.
A law that
regulates and prohibits
certain kinds of market behavior, such as
monopoly and monopolistic practices.
While this type of law is continually evolving under the jurisdiction of
the U.S. Department of Justice, there are three "big" pieces of
legislation which provide the framework for its enforcement in the
United State -- the Sherman Antitrust (1890), the Clayton Act (1914) and
the Federal Trade Commission Act (1914).
The process of purchasing a
product in a
lower-priced market and re-selling it to someone else in a higher priced
market with essentially no risk; basically, the philosophy of "buy
low-sell high." For example, say the same product is sold in one market
at a price of $30 and in another market at a price of $31. In this
arbitrageur could purchase the
product in the first market and immediately turn around an sell it in
the second market, thereby earning $1 risk-free. Arbitrage
opportunities arise from minor pricing discrepencies among markets.
A person involved in
Arbitrageurs play an important role in markets by helping to eliminate
price discrepancies between markets or related products.
The price that sellers say they are willing to sell a good for in an
Something which can be owned. In general, asset may fall into one of
two classes -- physical assets and financial assets. A physical
asset (also known as a real asset) is a productive resource, property,
or satisfaction-generating good. A financial asset (also known as a
paper asset) is a legal claim to or ownership of a physical asset, such
as stocks, bonds, money, and government securities.
Automatic fiscal policy
Automatic fiscal policy is a change in
policy that is triggered by the state of the economy.
Automatic stabilizers are mechanisms that stabilize
real GDP without explicit action by the
Autonomous expenditure is the sum of those components of aggregate
planned expenditure that are not influenced by
Average cost pricing rule
A rule that sets price equal to
Average fixed cost (AFC)
Average fixed cost (AFC) is
total fixed cost
per unit of output. It is calculated by dividing total fixed cost by
The average product of a resource is the
product divided by the quantity of the resource employed.
Average revenue is the revenue per unit of output sold -- total revenue
divided by the quantity of the good sold.
Average tax rate
The percentage of income that is paid in tax.
Average total cost (ATC)
Average total cost (ATC) is
total cost per unit
of output. It is calculated by dividing total cost by output. It may
also be calculated as
average fixed cost plus
average variable cost.
Average variable cost (AVC)
Average variable cost (AVC) is
cost per unit of output. It is calculated by dividing total variable
cost by output.
An axiom is a basic precondition or assumption underlying a theory.
Axioms are basic, unverifiable world view assumptions, including
personal beliefs, political views, and cultural values, that form the
foundation of a theory. Axioms can not be verified with real world
data, and as such are largely accepted on faith. Belief in a supreme,
omnipotent, omniscience being is one such axiom. The notion that people
are basically good (or bad) is another. The presumption that the
universe abides by cause-and-effect relationships is a key axiom for
A bad is a
product, either tangible or
non-tangible, which yields
a consumer when it is consumed. Contrast with
A balanced budget is a government budget in which tax revenues and
expenditures are equal.
Balance of payments accounts
An accounting statement of the money value of international transactions
between one nation and the rest of the world over a specific time
period. The statement shows the sum of transactions of individuals,
businesses, and government agencies located in one nation, against those
of all other nations and includes trading, borrowing, and lending.
Balance of trade
That part of a nation's
balance of payments
accounts dealing with imports and exports, that is trade in goods
and services, over a given period. It is computed as the value of
exports minus the value of imports.If exports of goods exceed imports,
the trade balance is said to be 'favorable' (a balance of trade
surplus); if imports exceed exports, the trade balance if said to be
'unfavorable (a balance of trade deficit).'
Bank for International Settlements (BIS)
The BIS, located in Basle, Switzerland, was established in 1930 to
administer the post-World War I reparations agreements. Since the 1960s,
the BIS has evolved into an important international monetary
institution, and has provided a forum in which central bankers meet and
consult on a monthly basis. As an independent financial organization,
the BIS performs a variety of banking, trustee, and agent functions,
primarily with central banks.
Bank holding company (BHC)
Company that owns, or has controlling interest in, one or more banks. A
company that owns more than one bank is known as a multibank holding
company. A bank holding company may also own another bank holding
company, which in turn owns or controls a bank; the company at the top
of the ownership chain is called the top holder. The
Board of Governors is responsible for regulating
and supervising bank holding companies, even if the bank owned by the
holding company is under the primary supervision of a different federal
agency (the Comptroller of the Currency or the
Federal Deposit Insurance Corporation).
Barriers to entry
Barriers to entry are legal, financial, logistical, or natural
constraints which protect an existing firm from potential competitors.
Barriers to entry are a prime source of the
market power of a firm and of reducing the
level of competition between firms within a market.
The direct exchange of one product for other products.
Below full-employment equilibrium
A below full-employment equilibrium is a macroeconomic equilibrium in
potential GDP exceeds
Benefits principle of taxation
The idea that people should pay taxes based on the benefits they receive
from government services.
- The price that buyers say they are willing to pay for a good in an
The conflict between equity and efficiency.
A situation in which there is a single seller (a
monopoly) and a single buyer (a
An international policy having as its objective the achievement of
particular balances of trade between two nations by means of
discriminatory tariffs, exchange, or other controls. The initiative is
usually taken by the country having an 'unfavorable' balance of trade.
Extensive bilateralism results in a shift of international trade away
from channels that would result from the principle of comparative
advantage. Compare to
market in which certain goods or services
are traded in a manner contrary to the laws or regulations of the
government in power (such as the price exceeding the legally imposed
price ceiling). Typical reasons why the market goes underground in this
way include the desire by substantial numbers of buyers and sellers to
evade restrictive government price controls or inconvenient rationing
schemes, to avoid paying heavy taxes on the good or service in question,
or simply to be able to obtain forbidden products which the government
does not want the people to have at all (such as illegal drugs).
Board of Governors
Central governmental agency of the
System, located in Washington, DC, and composed of seven members who
are appointed by the President and confirmed by the Senate. The Board is
responsible for domestic and international economic analysis with other
components of the System; for the conduct of
monetary policy; for supervision and
regulation of certain banking organizations; for operation of much of
the nation's payments system; and for administration of most of the
nation's laws that protect consumers in credit transactions.
Bretton Woods system
An international monetary system operating from 1946-1973. The
value of the dollar was fixed in terms of gold, and every other country
held its currency at a fixed exchange rate against the dollar.
In this system of fixed exchange rates, the goal was for each country's
central bank to intervene in the foreign exchange market to prevent
their currency from trading outside a particular band. When trade
deficits occurred, the central bank of the deficit country financed the
deficit with its reserves of international currencies. The system was
named after a conference held in Bretton Woods, N.H.
All the combinations (or bundles) of goods a person can purchase given
(1) a money income and (2) prices for those goods. The budget
constraint limits the household's consumption choices as to what and how
much can be purchased. In a two-product/two-price case, as is used in
the analysis of
the budget constraint is often referred to as the
A budget deficit is a government's budget balance that is
negative -- government expenditures exceed tax revenues.
The various combinations of two products which can be purchased given
(1) a money income and (2) prices for those goods. The budget line is
used in the analysis of consumer behavior when combined with
A budget surplus is a government's budget balance that is positive --
tax revenues exceed government expenditures.
Established in 1875, the central bank of West Germany, located in
The business cycle is the periodic but irregular up-and-down movement in
production. The four phases of the business cycle are the
expansion (or recovery),
The output at which
average total cost is a
minimum--the output at the bottom of the U-shaped ATC curve.
Capacity utilization rate
The percentage of the economy's total plant and equipment that is
currently in production. Usually a decrease in this percentage signals
a slowing down of the economy, possibly the beginning of a
recession, while an increase signals
Capital is the man-made resources which are used in the production
process -- it is the equipment, buildings, tools, and manufactured goods
that we use to produce other products. It is one of the four classes of
resources used in production. Payments to
capital resources are known as
The capital account is a record of foreign investment in a country minus
its investment abroad.
Capital accumulation is the growth of capital resources.
A large and sudden reduction in the demand for financial assets located
in a country.
The increase in the value of an asset through an increase in its
Capital gains tax
A tax on the increase in the value of an asset.
The total quantity of plant, equipment, buildings, and inventories.
A theory of
regulation that states that
the regulations are supplied to satisfy the demand of producers to
maximize producer surplus -- to maximize
A group of firms that has entered into a collusive agreement to restrict
output and increase prices and profits.
A relation of cause and effect between variables in which one variable
is a determinant of another variable.
A central bank is a bank's bank and a public authority charged with
regulating and controlling a country's
monetary policy and financial institutions and financial markets. For
Federal Reserve System is the
central bank of the United States and the
Bundesbank is the central bank of
Ceteris paribus means "other things being equal" -- all other relevant
things remaining the same.
Chain-weighted output index
An index that measures the growth rate of
Change in demand
A change in demand is a change in consumers' willingness and ability to
purchase products which occurs when some influence on those plans (other
than the price of the product) changes. It is illustrated by a shift of the
demand curve and by the creation of a new demand schedule.
Change in supply
A change in supply is a change in producers' willingness and ability to
produce and sell their products which occurs when some influence on
those plans (other than the price of the product) changes. It is
illustrated by a shift of the supply curve and by the creation of a new
Change in the quantity demanded
A change in the quantity demanded is a change in the consumers'
willingness and ability to purchase products which occurs when
the price of the product changes,
paribus. A change in the quantity demanded is illustrated by a
movement along the demand curve and as a movement along a given demand
Change in the quantity supplied
A change in the quantity supplied is a change in the producers'
willingness and ability to produce and sell products which occurs when
the price of the product changes,
paribus. A change in the quantity supplied is illustrated by a
movement along the supply curve and as a movement along a given supply
A visual model of the economy that shows how trade exists within an
economy. The simple circular flow model uses two flows (physical and
money) to illustrate trade within two markets (product and resource)
between two sectors (household and business) of an economy. Notably,
the value of the physical flow is exactly equal to, and in opposite
directon of, the value of the money flow.
Classical growth theory
Classical growth theory is a theory of economic growth based on the view
real GDP growth is temporary and that
real GDP per person increases above
subsistence level, a population explosion brings
real GDP back to subsistence level.
An economy that does not interact with other economies in the world.
The proposition that if
rights exist and
are low, private transactions are
efficient. Equivalently, with property
rights and low transaction costs, there are no
Coincidence of wants
A condition required for exchange in a nonmonetary system; to accomplish
a trade, it is necessary to find someone who has what you want and also
wants what you have.
Property that is offered to secure a loan or other credit and that
becomes subject to seizure on default. (Also called security.)
A process of negotiation between representatives of employers and
unions to agree on terms of employment, work rules, and other items
associated with work.
An agreement between two (or more) producers to restrict output so as to
increase prices and profits.
A system in which some people give orders and other people obey
A firm, licensed either by the Comptroller of the Currency (in the U.S.
Treasury) or by a state agency to receive deposits and make loans.
depository institutions offer a
broad range of deposit accounts, including checking, savings, and time
deposits, and extend loans to individuals and businesses. Commercial
banks can be contrasted with investment banking firms, such as brokerage
firms, which generally are involved in arranging for the sale of
corporate or municipal securities.
A doctrine according to which jobs deemed comparable should be paid the
A person or country has a comparative advantage in an activity if that
person or country can perform that activity at a lower
opportunity cost than anyone else or any
Compensating wage differential
A difference in wages for people with similar skills based on some
characteristic of the job, such as riskiness, discomfort, or convenience
of the time schedule.
A market with many buyers and sellers trading
homogeneous products. In competitive
markets, since there are many buyers and many sellers, each has a
negligible impact on the market price and is said to be a
A complement is a product which is used in conjunction with another
product. With complements, the demand for one rises as the price of the
other falls (or, the demand for one falls as the price of the other
rises). Hence, an
exists between changes in the price of one good and changes in the
demand for another good (its complement). Goods which have a negative
cross price elasticity of demand are complements.
Constant returns to scale
Constant returns to scale are technological conditions under which a
given percentage increase in all of the firm's inputs (the
long-run) results in the firm's output increasing
by the same percentage. With constant returns to scale, the firm's
long-run average cost stays the same as its
Consumer efficiency is the situation which occurs when consumers cannot
make themselves better of by reallocating their budget.
Consumer equilibrium is a situation in which a consumer has allocated
his or her income in the way that maximizes his or her
total utility from the goods and services
Consumer Price Index (CPI)
The Consumer Price Index (CPI) is an index that measures the average
level of prices of the goods and services that a typical urban family
Consumer surplus is the value that the consumer gets from each unit of a
good minus the price paid for it.
Consumption expenditure is the total amount spent on consumption goods
The consumption function is the relationship between consumption
expenditure and disposable income, other things remaining the same.
market in which one firm (or a small
number of firms) operates but in which entry and exit are free, so the
firm (or firms) in the industry faces competition from potential
Contractionary fiscal policy
fiscal policy is a decrease
in government expenditures or an increase in tax revenues.
Contractionary monetary policy
monetary policy is a policy
decision of the
Federal Reserve System which is
designed to restrict the growth of money and credit in the economy.
Empirical tests of theories in a controlled setting in which particular
effects can be isolated.
The outcome of a collusive agreement between players when the players
make and share the
One of the three basic forms of business organization (the other two
partnership). A corporation is a business
established through ownership shares (termed corporate stock). A
corporation is considered a distinct legal person which can be sued,
forced to pay taxes, etc., just like a human person. Unlike
proprietorships and partnerships, a corporation exists separately from
it's owners. As such, the owners have what is termed
limited liability. Owners can not be
held personally responsible for corporate debts. They owners can only
lose the value of their ownership shares, but no more.
- The degree to which economic variables are observed to move
together: If they move in the same direction, there is positive
correlation; if they move in opposite directions, there is negative
The value of everything a seller must give up to produce a good.
A study that compares the costs and benefits to society of providing a
A term that applies when increases in the price level (inflation) are caused by increases in
cost. Compare to
An organized group of workers representing a single occupation, whose
members come from a variety of industries. Contrast to
Cross price elasticity of demand
The responsiveness of consumers in the demand for one good (holding the
price of that good constant) as the price of a related good changes,
other things remaining the same. It is measured as the percentage change
in the demand of good B divided by the percentage change in the price of
good A. A negative cross price elasticity of demand indicates the two
complements. A positive cross
price elasticity of demand indicates the two goods are
substitutes. A cross price elasticity of
demand which is inconsistent in sign or is equal to zero indicates the
the goods are unrelated in use.
The decline in private investment owing to an increase in government
Council of Economic Advisers
A three-member group of economists appointed by the President of the
United States to analyze the economy and make recommendations about
The paper bills and coins in the hands of the public.
The deviation of unemployment from its natural rate due to fluctuations
Deadweight loss is a measure of
It is equal to the loss in total surplus (consumer surplus plus
producer surplus) when output is below or
above its efficient level. Generally, these market inefficiencies are
attributable to market imperfections created by
market power, taxes,
regulations, or other factors.
A debtor nation is a country that, during its entire history, has
borrowed more from the rest of the world than it has lent to it.
Decisions at the margin
Decision making characterized by weighing additional (marginal) benefits
of a change against the additional (marginal) cost of a change with
respect to current conditions.
Decreasing returns to scale
Decreasing returns to scale are technological conditions under which a
given percentage increase in all the firm's inputs (the
long-run) results in the firm's output increasing
by the smaller percentage. With decreasing returns to scale, the firm's
long-run average cost increases as its
A deflation is a process in which the
level falls -- a negative
Demand is defined as a schedule of various prices and quantities of a
product which consumers are willing and able to purchase during a period
Demand is described by a
and illustrated by a
demand curve. A
change in the price of the product will cause a
change in quantity demanded while a change in
one of the determinants of demand will cause a
change in demand.
A demand curve is a curve that shows the relationship between the
quantity demanded of a good and its price when all other influences on
consumers' planned purchases remain the same. It is based on the
demand schedule of prices and quantities
Demand for labor
The relationship between the quantity of labor demanded and the real
wage rate when all other influences on firms hiring plans remain the
The numerical tabulation of the various quantities demanded of a good at
different prices. The demand schedule is the basis for the
A term used when an increase in
demand occurs which cannot be offset by a corresponding increase in
real supply causing an increase in the price level (inflation). An inflation that results from
an initial increase in aggregate demand.
The deposit multiplier is the amount by which an increase in bank
reserves is multiplied to calculate the increase in bank deposits.
financial institution that obtains its funds mainly through deposits
from the public. This includes commercial banks, savings and loan
associations, savings banks, and credit unions. Although historically
they have specialized in certain types of credit, the powers of nonbank
depository institutions have been broadened in recent years. For
example, NOW accounts, credit union share drafts, and other services
similar to checking accounts may be offered by thrift institutions.
The decrease in the capital stock resulting from wear and tear and
A severe or long-lasting
Demand for a productive resource which is derived from the demand for
the goods and services produced by the resource.
Diminishing marginal rate of substitution
The general tendency for the marginal rate of substitution of one good
for another to diminish as a consumer moves along an indifference curve
increasing consumption of the first good.
Diminishing marginal product
diminishing marginal returns.
Diminishing marginal returns
Diminishing marginal returns is the tendency for the
marginal product of an additional resource
eventually to be less than the marginal product of the previous unit of
Diminishing marginal utility
Diminishing marginal utility is the decrease in marginal utility that a
consumer gets from a product as more of it is consumed. Note that, even
if marginal utility is diminishing, so
long as the marginal utility is positive, increased consumption leads to
increased total utility. It is only when marginal utility is negative
that additional consumption reduces total utility.
A direct relationship is a relationship between two variables that move
in the same direction. As one variable increases, the other variable
also increases. For a comparison, see
The conversion of a future amount of money to its present value.
The discount rate is the interest rate at which the Fed stands ready to
lend reserves to commercial banks.
Discouraged workers are people who are available and willing to work but
who have given up the effort to find work.
Discretionary fiscal policy
fiscal policy is a policy
action that is initiated by an act of Congress.
A policy that responds to the state of the economy in a possibly unique
way that uses all the information available, including perceived lessons
from past "mistakes."
The offering of different opportunities to otherwise similar
individuals. Discrimination is often based on differences in
race, ethnic group, sex, age, or other personal
Diseconomies of scale
Features of a firm's technology that lead to rising
long-run average cost as output increases.
A state of either
shortage in a market.
A price other than
equilibrium price. A price
quantity demanded does not equal
quantity supplied. At a disequilibrium price, a
shortage or a
surplus is evident. If the market does not
have outside interference, it is generally expected that a
disequilibrium price will correct itself to the equilibrium price. A
shortage suggests that the price will rise, while a surplus suggests
that the price will fall.
Disposable income is aggregate income minus taxes plus transfer
Disutility is the dissatisfaction which a person receives from the
consumption of a product. Generally, a product which yields disutility
is referred to as a
bad. Contrast with
Dominant strategy equilibrium
The outcome of a game in which there is a single best strategy (a
dominant strategy) for each player, regardless of the strategy of the
Dumping is the sale of a good or service to a foreign country at a price
that is less than the cost of producing the good or service.
market in which two producers of a good or
Dynamic comparative advantage
Dynamic comparative advantage is a comparative advantage that a person
or country possesses as a result of having specialized in a particular
activity and, as a result of learning-by-doing, having become the
producer with the lowest