Glossary of Economic Terms and Concepts

Glossary of Economic Terms and Concepts Absolute advantage - The ability to produce something with fewer resources than other producers would use to produce the same thing  Alternatives - Options among which to make choices.   Balance of trade - The part of a nation's balance of payments that deals with merchandise (or visible) imports or exports.  Bank, commercial - A financial institution accepts checking deposits, holds savings, sells traveler's checks and performs other financial services.  Barter - The direct trading of goods and services without the use of money.  Benefit - The gain received from voluntary exchange.  Bond - A certificate reflecting a firm's promise to pay the holder a periodic interest payment until the date of maturity and a fixed sum of money on the designated maturity date.  Business (firm) - Private profit-seeking organizations that use resources to produce goods and services.    Capital - All buildings, equipment and human skills used to produce goods and services.  Capital resources - Goods made by people and used to produce other goods and services. Examples include buildings, equipment, and machinery.  Change in demand - see Demand decrease and Demand increase.   Change in supply - see Supply decrease and Supply increase. Choice - What someone must make when faced with two or more alternative uses of a resource (also called economic choice).  Circular flow of goods and services (or Circular flow of economic activity) - A model of an economy showing the interactions between households and business firms as they exchange goods and services and resources in markets.  Collateral - Anything of value that is acceptable to a lender to guarantee repayment of a loan.  Command economy - A mode of economic organization in which the key economic functions--what, how, and for whom--are principally determined by government directive.  Sometimes called a "centrally planned economy."  Comparative advantage - The principle of comparative advantage states that a country will specialize in the production of goods in which it has a lower opportunity cost than other countries.  Competition - The effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms.  Complements - Products that are used with one another such as hamburger and hamburger buns  Consumers - People whose wants are satisfied by consuming a good or a service.  Consumption - In macroeconomics, the total spending, by individuals or a nation, on consumer goods during a given period.  Strictly speaking, consumption should apply only to those goods totally used, enjoyed, or "eaten up" within that period.  In practice, consumption expenditures include all consumer goods bought, many of which last well beyond the period in question --e.g., furniture, clothing, and automobiles.  Consumer spending - The purchase of consumer goods and services.  Corporation - A legal entity owned by stockholders whose liability is limited to the value of their stock.  Costs - See Opportunity Cost  Costs of production - All resources used in producing goods and services, for which owners receive payments.  Craftsperson - A worker who completes all steps in the production of a good or service.  Credit - (1) In monetary theory, the use of someone else's funds in exchange for a promise to pay (usually with interest) at a later date.  The major examples are short-term loans from a bank, credit extended by suppliers, and commercial paper.  (2) In balance-of-payments accounting, an item such as exports that earns a country foreign currency.  Criteria - Standards or measures of value that people use to evaluate what is most important.  Decision making - Choosing from alternatives the one with the greatest benefit net of costs.  Deflation - A sustained and continuous decrease in the general price level.  Demand - A schedule of how much consumers are willing and able to buy at all possible prices during some time period.  Demand decrease - A decrease in the quantity demanded at every price; a shift to the left of the demand curve.  Demand increase -  An increase in the quantity demanded at every price; a shift to the right of the demand curve.  Determinants of demand - Factors that influence consumer purchases of goods, services, or resources.  Determinants of supply - Factors that influence producer decisions about goods, services, or resources.  Distribution - The manner in which total output and income is distributed among individuals or factors (e.g., the distribution of income between labor and capital).  Division of labor -  The process whereby workers perform only a single or a very few steps of a major production task (as when working on an assembly line.)  Durables - Consumer goods expected to last longer than three years.  Earn - Receive payment (income) for productive efforts.  Economic growth - An increase in the total output of a nation over time.  Economic growth is usually measured as the annual rate of increase in a nation's real GDP.  Economic system - The collection of institutions, laws, activities, controlling values, and human motivations that collectively provide a framework for economic decision making.  Economic wants - Desires that can be satisfied by consuming a good or a service.  Some economic wants range from things needed for survival to things that are nice to have.  Employment - See Full employment  Entrepreneur - One who organizes, manages, and assumes the risks of a business or enterprise.  Entrepreneurship - The human resource that assumes the risk of organizing other productive resources to produce goods and services.  Equilibrium price - The market clearing price at which the quantity demanded by buyers equals the quantity supplied by sellers.  Exchange - Trading goods and services with others  for other goods and services or for money (also called trade).  When people exchange voluntarily, they expect to be better off as a result.  Exchange rates - The rate, or price, at which one country's currency is exchanged for the currency of another country.  Excise Tax - Taxes imposed on specific goods and services, such as cigarettes and gasoline.  Exports - Goods or services produced in one nation but sold to buyers in another nation.   Factors of production -  Resources used by businesses to produce goods and services.  Federal Reserve System - The central bank and monetary authority of the United States.  Final goods - Products that end up in the hands of consumers.  Fiscal policy - A government's program with respect to (1) the purchase of goods and services and spending on transfer payments, and (2) the amount and type of taxes.  Functions of money - The roles played by money in an economy.  These roles include medium of exchange, standard of value, and store of value.  Full employment - A  term that is used in many senses.  Historically, it was taken to be that level of employment at which no (or minimal) involuntary unemployment exists.  Today economists rely upon the concept of the natural rate of unemployment to indicate the highest sustainable level of employment over the long run.  Goods - Objects that can satisfy people's wants.  Government - National, state and local agencies that use tax revenues to provide goods and services for their citizens.  Gross domestic product (GDP) - The value, expressed in dollars, of all final goods and services produced in a year.  Gross domestic product (GDP), real - GDP corrected for inflation.   Households - Individuals and family units which, as consumers, buy goods and services from firms and, as resource owners, sell or rent productive resources to business firms.  Human capital - The health, strength, education, training, and skills which people bring to their jobs.  Human resources - The quantity and quality of human effort directed toward producing goods and services (also called labor).  Incentives - Factors that motivate and influence the behavior of households and businesses.  Prices, profits, and losses act as incentives for participants to take action in a market economy.  Imports - Goods or services bought from sellers in another nation.  Income - The payments made for the use of borrowed or loaned money.  Increase in productivity - When the same amount of an output can be produced with fewer inputs; more output can be produced with the same amount of inputs; or a combination of the two.  Inflation - A sustained and continuous increase in the general price level.  Interdependence - Dependence on others for goods and services; occurs as a result of specialization.  Interest rates - The price paid for borrowing money for a period of time, usually expressed as a percentage of the principal per year.  Investment in capital goods - Occurs when savings are used to increase the economy's productive capacity by financing the construction of new factories, machines, means of communication, and the like.  Investment - The purchase of a security, such as a stock or bond.  Investment in capital resources - Business purchases of new plant and equipment.  Investment in human capital - An action taken to increase the productivity of workers.  These actions can include improving skills and abilities, education, health, or mobility of workers.   Labor force - That group of people 16 years of age and older who are either employed or unemployed.  Labor market - A setting in which workers sell their human resources and employers buy human resources.  Labor union - A group of employees who join together to improve their terms of employment.  Land - Natural resources or gifts of nature that are used to produce goods and services.  Law of demand - The principle that price and quantity demanded are inversely related.  Law of supply - The principle that price and quantity supplied are directly related.  Loss - Business situation in which total cost of production exceeds total revenue; negative profit.   Market - A setting where buyers and sellers establish prices for identical or very similar products, and exchange goods and/or services.  Market economy - An economic system where most goods and services are exchanged through transactions by private households and businesses.  Prices are determined by buyers and sellers making exchanges in private markets.  Medium of exchange - One of the functions of money whereby people exchange goods and services for money and in turn use money to obtain other goods and services.  Mixed economy - The dominant form of economic organization in noncommunist countries.  Mixed economies rely primarily on the price system for their economic organization but use a variety of government interventions (such as taxes, spending, and regulation) to handle macroeconomic instability and market failures.  Monetary policy - The objectives of the central bank in exercising its control over money, interest rates, and credit conditions.  The instruments of monetary policy are primarily open-market operations, reserve requirements, and the discount rate.  Money - Anything that is generally accepted as a medium of exchange with which to buy goods and services, a good that can be used to buy all other goods and services, that serves as a standard of value, and has a store of value.  Money market - A term denoting the set of institutions that handle the purchase or sale of short-term credit instruments like Treasury bills and commercial paper.   National debt - The net accumulation of federal budget deficits.  National income - The amount of aggregate income earned by suppliers of resources employed to produce GNP; net national product plus government subsidies minus indirect business taxes.  Natural resources - "Gifts of nature" that are used to produce goods and services.  They include land, trees, fish, petroleum and mineral deposits, the fertility of soil, climatic conditions for growing crops, and so on.  Non-durables - Consumer goods expected to last less than three years.  Non-price determinants of supply - The factors that influence the amount a producer will supply of a product at each possible price.  The non-price determinants of supply are the factors that can change the entire supply schedule and curve.  Normal profit - The minimum payment an entrepreneur expects to receive to induce the entrepreneur to perform entrepreneurial functions.  Normative economics - Normative economics considers "what ought to be"--value judgments, or goals, of public policy.  Positive economics, by contrast, is the analysis of facts and behavior in an economy, or "the way things are."   Opportunity cost - The next best alternative that must be given up when a choice is made.  Physical capital - Manufactured items used to produce goods and services.  Price - The money value of a unit of a good, service, or resource  Prices - The amounts that people pay for units of particular goods or services.  Private goods - A commodity that benefits the individual.  An example is bread, which, if consumed by one person, cannot be consumed by another person. Producers - People who use resources to make goods and services (also called workers).  Production - The making of goods available for use; total output especially of a commodity or industry.  Productive resources - All natural resources (land), human resources (labor), and human-made resources (capital) used in the production of goods and services.  Productivity - The ratio of output (goods and services) produced per unit of input (productive resources) over some period of time.  Profit - The difference between total revenues and the full costs involved in producing or selling a good or service; it is a return for risk taking.  Property tax - Taxes paid by households and businesses on land and buildings.  Public goods - A commodity whose benefits are indivisibly spread among the entire community, whether or not particular individuals desire to consume the public good.  For example, a public-health measure that eradicates smallpox protects all, not just those paying for the vaccinations.  These goods are often provided by the government.  To be contrasted with private goods.   Quantity demanded - The amount of a product consumers will purchase at a specific price.  Quota - A legal limit on the quantity of a particular product that can be imported or exported.  Quantity supplied - The amount of a product producers will produce and sell at a specific price.   Resources - All natural, human, and human-made aids to production of goods and services (also called productive resources).  Revenue - Payments received by businesses from selling goods and services.   Sales tax - Taxes paid on the goods and services people buy.  Save - Set aside earnings (income) for a future use.  Saving - Occurs when individuals, businesses, and the economy as a whole do not consume all of current income (or output).  Scarcity - The condition that results from the imbalance between relatively unlimited wants and the relatively limited resources available for satisfying those wants.  Services - Activities that can satisfy people's wants.  Shortage - The situation resulting when the quantity demanded exceeds the quantity supplied of a good or service, usually because the price is for some reason below the equilibrium price in the market.  Specialists - People who produce a narrower range of goods and services than they consume (also called specialized workers).  Specialization - The situation in which people produce a narrower range of goods and services than they consume.  Spend - Use earnings (income) to buy goods and services.  Standard of living - A minimum of necessities, comforts, or luxuries held essential to maintaining a person or group in customary or proper status or circumstances.  Standard of value - One of the functions of money whereby the value of goods and services is expressed in money terms (prices).  Stock - A certificate reflecting ownership of a corporation.  Store of value - One of the functions of money allowing people to save current purchasing power to buy goods and services in a future time period.  Substitutes - Products that can replace one another such as butter and margarine.  Supply - A schedule of how much producers are willing and able to sell at all possible prices during some time period.  Supply decrease - A decrease in the quantity supplied at every price; a shift to the left of the supply curve.  Supply increase - An increase in the quantity supplied at every price; a shift to the right of the supply curve.  Surplus - The situation resulting when the quantity supplied exceeds the quantity demanded of a good or service, usually because the price is for some reason below the equilibrium price in the market.  Tariff - A tax on an imported good.  Taxes - Required payments of money made to governments by households and business firms.  Total cost - Cost of resources used in producing a product multiplied by the quantity produced.  Total revenue - Selling price of a product multiplied by the quantity demanded.  Trade -  Exchange. Trade agreement - An international agreement on conditions of trade in goods and services.  Trade-off - Giving up some of one thing to get some of another thing.  Traditional economy - A mode of economic organization which borrows economic decisions made at an earlier time or by an earlier generation   Unemployment - The situation in which people are willing and able to work at current wage rates, but do not have jobs.   Wages - The payment resource earners receive for their labor.  Work - Employment of people in jobs to make goods or services.  Workers -  Producers.