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Absolute Advantage: 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. A country has an absolute advantage if its output per unit of all goods is larger than that of another country.
Aggregate Supply Curve: An equilibrium locus, showing various combinations of real GDP and the price level each of which is consistent with equilibrium in an economy. The long run AS curve is vertical.
Allocative Efficiency: The situation that occurs when no resources are wasted – when no one can be made better off without making someone else worse off.
Anticipated Inflation: An inflation rate that has been, on average, correctly forecast.
Arbitrage: The process of driving prices of related assets, or the same assets in different markets, towards consistency by purchasing assets when cheap in one market and selling them when dear in another.
Asset: Anything of value that a household, firm or government owns.
Average cost pricing rule: A rule that sets price equal to average total cost.
Average Fixed Cost: Total fixed cost per unit of output-total fixed cost divided by output.
Average Total Cost: Total cost per unit of output-total cost divided by output.
Average Variable Cost: The variable cost per unit of output.
Balanced Budget: A government budget that is neither surplus or deficit.
Balance of Payments: A country's record of international trading, borrowing and lending.
Balance of Trade: The value of exports minus the value of imports.
Base period: The period against which the current period is compared in any index.
Barriers to Entry: Legal or natural impediments protecting a firm from competition form potential new entrants.
Black Market: An illegal trading arrangement in which buyers and sellers do business at a price higher than the legally imposed price ceiling.
Bond: A legally enforceable obligation to pay specified sums of money at specified future dates.
Bond Market: A market in which the bonds of corporations and governments are traded.
Break-even Point: The output level at which total revenue equals total cost.
Budget Surplus/Deficit: The difference between government sector revenue and expenditure in a given period of time. If revenue exceeds expenditure, the government sector has a budget surplus. If expenditure exceeds revenue the sector has a budget deficit.
Business Cycle: The periodic but irregular up and down movement in economic activity, measured by fluctuations in real GDP and other macroeconomic variables.
Back to the topCapital: The real assets –the plant, buildings, vehicles and machinery used by a household, firm, or government department.
Capital Account: A record of a country's international borrowing and lending transactions.
Capitalism: An economic system based on the private ownership of capital and land used in production and on market allocation of resources.
Cartel: A group of producers who enter a collusive agreement to restrict output in order to raise prices and profits.
Central Bank: A public authority charged with regulating and controlling a country's monetary and financial institutions and markets.
Ceteris Paribus: Other things being equal, or other things remaining constant.
Closed Economy: An economy which does not transact with the rest of the world.
Collective Bargaining: A process of negotiation between employers (or their representatives) and a union on wages and other employment conditions.
Collusive Agreement: An agreement between two or more producers to restrict output in order to raise prices and profits.
Comparative Advantage: A person has a comparative advantage in producing a product if he or she can produce that product at a lower opportunity cost than anyone else. A country has a comparative advantage in producing a product if it can produce that product at a lower opportunity cost than any other country.
Competitive market: A market where firms compete actively for market share against actual and potential competitors.
Complement: A product that is used in conjunction with another product
Constant Returns to Scale: Technological conditions under which a given percentage increase in each of a firm's inputs results in the firm's output increasing by the same percentage.
Consumer Surplus: The difference between the value of a product to the consumer and the price paid for it.
Convergence Hypothesis: The hypothesis that poor countries tend to grow faster than rich countries and hence that their living standards are converging towards the world average.
Cost–push Inflation: Inflation that has its origins in cost increases.
Cross Elasticity of Demand: The percentage change in the quantity demanded of a product divided by the percentage change in the price of a substitute or complement good.
Crowding Out: The tendency for an increase in government purchases of goods and services to increase interest rates, thereby reducing or crowding out investment expenditure.
Current Account: A record of receipts from the sale of goods and services to foreigners, payments for goods and services bought from foreigners, and factor income (such as interest and profits) and current transfers (such as foreign aid) received from and paid to foreigners.
Currency Appreciation: An increase in the value of one currency in terms of another currency. If the euro exchange rate changes from parity with the US dollar to US1.18c, the euro has appreciated.
Currency Depreciation: A fall in the value of one currency in terms of another currency
Deadweight Loss: A measure of allocative inefficiency - the reduction in consumer and producer surplus resulting from restricting output below its efficient level.
Decreasing Returns to Scale: Technological conditions under which a given percentage increase in a firm's inputs yields a less than proportionate increase in the firm's output.
Deflation: A persistent downward movement in the average level of prices.
Demand curve: A graph showing the relationship between the quantity demanded of a product and its price, holding everything else constant.
Demand-pull inflation: The inflation resulting from an increase in aggregate demand that exceeds aggregate supply.
Depreciation: The fall in the value of capital or the value of a durable good resulting from its use and from obsolescence due to the passage of time.
Depression: A deep business cycle trough.
Deregulation: The removal, or relaxation, of rules that restrict entry into a sector or that set operating conditions in that sector relating to price, product standards and mode of operation.
Developing Country: A country that is relatively poor (defined by the World Bank as GDP per head below $9,200). “Developing” is a euphemism for “poor”. It conveys the idea that developing countries are not locked into a state of poverty but are accumulating capital and building up an industrial and commercial base. But, as chapter 2 shows, quite a number of so-called developing countries are in fact regressing; getting poorer rather than richer.
Derivatives: An agreement that defines certain financial rights and obligations that are contractually linked to interest rates, exchange rates or other market prices. Futures and stock options are two common types of derivatives.
Disposable Income: Gross income plus transfer payments minus taxes.
Dumping: The sale of a good in a foreign market for a lower price than in the domestic market or for a lower price than its cost of production.
Duopoly: A market structure in which two producers of a product compete with each other.
Economic Efficiency: A state in which the cost of producing a given output is as low as possible and is equal to the price.
Economic Growth: The annual percentage increase in the real output of an economy.
Economies of Scale: Technological conditions under which the long-run average cost of producing a good or service decreases as output increases.
Economies of Scope: Decreases in average total cost per unit of production made possible by increasing the range of goods produced.
Elastic Demand: A good with a price elasticity less than minus one. If price increases by x per cent, the quantity demanded of an elastic product drops by a larger percentage than x.
Endogenous Growth: Economic growth determined by factors within the economic model, as distinct from factors dependent upon external, “exogenous” and unexplained forces. Thus, endogenous growth models treat technology as endogenous, determined by investment, rather than being something that just happens.
Entry: The act of setting up a new firm in an industry.
Equilibrium Price: A situation such that there is no reason for price to either rise or fall. At the equilibrium price, supply equals demand.
Equity: The shareholders' or owner's stake in a business.
Exit: The act of closing down a firm and leaving an industry.
Exports: Goods that are domestically produced but sold abroad.
Exchange Rate: The price of a unit of foreign currency in terms of domestic currency. Alternatively the number of units of domestic currency required to purchase one unit of foreign currency. The higher this price, the weaker is the domestic currency's exchange rate. In 2000 the price of exchange rate of the euro was $1= 1.16 euro. By early 2004 one dollar cost significantly less than one euro.
Factors of production: The economy's productive resources – capital, technology, labour and land.
Final Goods and Services: Goods and services that are not used as inputs in the production of other goods and services but are bought by their final users.
Firm: An institution that buys or hires factors of production and organises them to produce and sell goods and services.
Fiscal Policy: The policy whereby governments alter their purchases of goods and services and taxes in order to promote growth and to smooth the fluctuations in total output of an economy (and as chapter 15 shows, sometimes to ensure the incumbent government is re-elected.
Fixed Cost: An input with a fixed cost is one where the cost is independent of the output level. For a firm, rent and insurance are fixed costs.
Fixed Exchange Rate: An exchange rate that is pegged to another currency or to a basket of currencies.
Flexible Exchange Rate: An exchange rate which is determined by market forces in the absence of Central Bank intervention.
Foreign Exchange Market: This market has no single physical location but refers to the processes by which currencies of different countries are exchanged for one another.
Foreign Exchange Rate: The rate at which one country's money exchanges for another's.
Forward Contract: A contract entered into and at an agreed price to buy or sell a certain quantity of any commodity (including currency) at a specified future date.
Free Rider: A person who consumes a good without paying for it. The free rider problem arises because, in a market system, the existence of free riders means that a less-than-optimal quantity of the good will be produced.
Back to the topGini Coefficient: A measure of inequality of income or wealth in a population. The coefficient has values between 0 and 1, where 0 signifies perfect equality (all individuals have the same share) and 1 represents complete inequality (one individual gets everything).
Gross Domestic Product: GDP is the total value of goods and services produced in a country during a period of time (usually a year). Gross because no account is taken of depreciation of the country's capital stock.
Gross National Product: GNP is the total value of goods and services produced by the residents of a country. In most countries GDP and GNP are virtually the same. But the difference can be large in countries that are major net recipients (
GNP Deflator: The ratio of nominal GNP to real GNP expressed as an index.
GNP per Capita: GNP divided by the total population.
Back to the topHedge Funds: Largely unregulated and privately managed investment funds that use aggressive financial strategies prohibited to mutual funds. They are mostly registered in offshore tax havens although the people running them tend to operate out of
Human Capital: The stock of expertise and know-how accumulated by an individual through education and experience.
Imports: Goods that are produced abroad but purchased for use in the domestic economy.
Income Elasticity of Demand: The percentage change in the quantity of a product demanded divided by the percentage change in consumers' incomes.
Increasing Returns to Scale: Technological conditions under which a given percentage increase in all the firm's inputs results in the firm's output increasing by a larger percentage.
Indirect Tax: A tax on the production or sale of a good or service. Indirect taxes are included in the price paid for the good or service by its final purchaser.
Inelastic Demand: A term used to describe a good with a price elasticity of demand between zero and minus one. For such a good, a price rise of x per cent results in a proportionate fall of quantity demanded less than x; hence total sales revenue increases.
Inferior Good: A good the demand for which falls as income increases. Table wine and potatoes are common examples in the Western world.
Inflation: A persistent upward movement in the general level of money prices.
Inflation Rate: The percentage change in the price level over a specified period of time (annual, quarterly, monthly).
Interest Rate Parity: A situation in which interest rates are equal across all countries once differences in risk are taken into account.
International Monetary Fund (IMF): The IMF is an international organisation headquartered in
Investment: The purchase of new plant, buildings, vehicles or machinery, and additions to inventories in a given time period.
Labour Force: The total number of people able and willing to work i.e., employed and unemployed workers.
Law of One Price: A law stating that the forces of competition will ensure that any given commodity will be sold at the same price; otherwise it will pay someone to buy where it is cheaper (thereby tending to raise price in that market) and sell where it is dearer (thereby tending to lower price in that market). The process ends only when the price is equalised in all markets. Allowance must, of course, be made for transport and transaction costs.
Lender of Last Resort: Traditionally, an entity, government or national central bank, that extends credit to an illiquid financial institution to prevent its failure. There have been proposals for governments or multilateral institutions to play a similar role for sovereign borrowers.
Long Run: A period of time in which a firm can vary the quantities of all its inputs. There are no fixed costs in the long run.
Long-Term Capital Flows: Movements of capital from one country to another with a maturity that is longer that one year. Examples include direct investments in fixed assets such as manufacturing plants and long-term portfolio investments in stocks and bonds.
Lorenz Curve: A curve that plots the cumulative percentage of income or wealth in ascending order against the cumulative percentage of population.
Back to the topMacroeconomic Equilibrium: A situation in which the quantity of real GDP demanded equals the quantity of real GDP supplied.
Managed Exchange Rate: An exchange rate, the value of which is influenced by the Central Bank's intervention in the foreign exchange market.
Marginal Cost: The addition to total cost required in order to produce one further unit increase in output.
Marginal Revenue: The change in total revenue resulting from a one unit change in the quantity sold.
Market: Any arrangement that facilitates the buying and selling of a good, service, factor of production or future commitment.
Market Failure: The inability of an unregulated market to achieve allocative effiency in all circumstances. The main types of market failure are: monopoly, externalities, public goods and information asymmetries.
Market Price: The price that people actually pay for a good or service.
Market Mechanism: A method of determining what, how, and for whom goods and services are produced, based on individual choices coordinated through markets supplied by profit-maximising businesses.
Medium of Exchange: Anything that is generally acceptable in exchange for goods and services, currency notes being the main example.
Monetarist: A macro economist who assigns a high degree of importance to variations in the quantity of money as a determinant of aggregate demand. Parenthetically, monetarists hold that money supply should not be actively adjusted for counter-cyclical purposes. Because of long and varying time-lags, the effects of such money supply manipulations would be impossible to predict accurately.
Monetary Policy: The attempt to maintain price stability and the level of the exchange rate (and sometimes, notwithstanding the objections of monetarists, to moderate the business cycle) through control of monetary policy instruments such as money supply and interest rates.
Monopoly: A market type in which there is a sole supplier of a good, service, or resource that has no close substitutes and in which there is a barrier preventing the entry of new firms into the industry.
Moral Hazard: The impact that insurance, whether it is implicit or explicit (including lender-of-last-resort activity), may have in increasing the risks (or hazard) that investors may undertake in lending strategies.
Nash Equilibrium: A Nash equilibrium, named after John Nash, Nobel prize winner and star of the movie A Beautiful Mind, is the equilibrium that is the dominant (or best) strategy for each player in the game, regardless of the action taken by any other player.
National Debt: The value of accumulated borrowing by the state and public authorities. It can be defined in several different ways. The EU uses the concept of general government debt, which includes debt of local authorities and government-guaranteed debt.
Natural Monopoly: This arises where economies of scale are such that the production level corresponding to the lowest unit cost of the firm is sufficient to meet total market demand when price equals marginal cost. Hence in a free market only one firm (the natural monopolist) will prevail.
Natural rate of Unemployment: The rate of unemployment consistent with price stability. It is also called the non-accelerating inflation rate of unemployment (NAIRU). The natural unemployment rate is not a constant. As labour markets are liberalised and deregulated, the natural rate tends to fall.
Net Present Value: The sum of the present values of payments spread over several years.
Nominal GNP: Nominal GNP is GNP valued at current prices prevailing in the year of measurement; as distinct from real GNP, which measures GNP after allowing for inflation.
Normal Good: A good for which demand increases as income increases.
Normal Profit: The return a business would need to earn in order to stay in operation and pay a competitive reward to its shareholders.
Back to the topOpen Economy: An economy which has extensive and largely unimpeded transactions with other countries. Distinct from a closed economy that imposes severe trade restrictions.
Open Market Operation: The purchase or sale of government securities by a Central Bank.
Perfect Competition: A highly idealised market structure in which there are many firms; each firm sells an identical product; there are many buyers; there are no restrictions on entry into the industry; firms in the industry have no advantage over potential new entrants; and firms and buyers are completely informed about the price of each firm's product.
Phillips Curve: Shows the relationship between inflation and unemployment. Originally the relationship looked negative implying a trade-off between inflation and unemployment but subsequent research has cast doubt on this.
Present Value: The value at the present time of a future sum of money. It is equal to the amount that, if invested today, would grow as large as the future sum, taking into account the interest rate that it will earn.
Price Discrimination: The practice of charging a higher price to some customers than to others for an identical product.
Price Elasticity of Demand: The percentage change in the quantity demanded of a product divided by the percentage change in its price.
Price Stability: A situation in which the average level of prices is neither moving up nor down. Because of measurement error, price stability deemed consistent with a small (in the range 2-3 per cent) rise in the consumer price index.
Production Frontier: The boundary between attainable and unattainable levels of production. In technical terms, the locus of points showing the maximum amounts of good Y that can be produced for each additional unit of good X.
Production Function: A relationship showing how output varies as the employment of inputs is varied.
Productivity: Output produced per unit of input. For example, labour productivity is measured as output per unit of labour (per employee, per hour's work etc).
Profit: The difference between a firm's total revenue and total cost when revenue exceeds cost.
Protectionism: A policy of systematic discrimination in favour of domestic industry against imports through import barriers and impediments on foreign investment.
Public Good: A good that is non-rivralrous (your consuming it does not prevent me consuming it) and non-exclusive (there is no way of preventing you from consuming it). A clean environment is a public good; an apple is not a public good. See chapter 8 for discussion.
Purchasing Power Parity: PPPs are the rates of currency conversion that allow for differences in price levels between countries. Normally they are given in national currency units per US dollar. Take a fixed basket of goods. Suppose it costs $100 in the
Rawlsian Theory of Fairness: A theory of distributive justice that approves a change only if it makes the poorest better off.
Real Balance effect: The influence of a change in the stock of money in real terms on aggregate demand. A key factor in some economic theories; but not so significant in real life.
Real Business Cycle Theory: A theory of aggregate fluctuations based on the existence of flexible wages, rational behaviour and random shocks to the economy's aggregate production function.
Real Exchange Rate: A measurement of the relative price of goods from different countries when measured in a common currency.
Real GNP: Output valued at constant prices. Often prices in the base period are used to compute real GDP.
Real Interest Rate: The interest rate minus the expected inflation rate.
Recession: A contraction in the level of economic activity in which real GDP declines in two successive quarters.
Regulation: Rules enforced by a government agency to restrict economic activity by determining prices, product standards and types, and the conditions under which new firms may enter the industry.
Back to the topShort Run: The short run has several meanings. In microeconomics it has two meanings. For the firm, it is the period of time in which the quantity of at least one of its inputs is fixed, while the quantities of other inputs can be varied. The fixed input is usually capital, for instance the firm has a given plant size. For the industry, the short run is the period of time in which each firm has a given plant size and the number of firms in the industry is fixed. In macroeconomics, the short run can refer to the time required for economic actors to respond to inflation trends or new developments in government debt.
Short-Term Capital Flows: The movement of capital from one country to another with a less than one-year maturity. Examples include short-term loans and liquid investments in stock markets.
Back to the topTariff: A tax on an import imposed by the government of the importing country.
Total Cost: The sum of the costs of all the inputs a firm uses in production.
Total Fixed Cost: The total cost of the fixed inputs.
Total Revenue: The amount received from the sale of a product. It equals the price of the product multiplied by the quantity sold.
Trend: A general tendency for a variable to rise or fall.
Trough: The lower turning point of a business cycle; the point at which the economy turns from contraction to expansion.
Back to the topUnanticipated Inflation: Inflation that catches people by surprise.
Unemployment: The number of adult workers who are without work, who are available for work, and are actively searching for a job.
Unemployment Rate: Number unemployed expressed as a percentage of the labour force.
Utilitarian Theory: The theory that the fairest outcome is the one that maximises the sum of all individual utilities in society.
Variable Cost: A cost that varies with the level of output.
Velocity of Circulation: The average number of times a unit of currency is used annually; often measured as the value of GDP divided by the money stock.
Wealth: The total assets of a household, firm, or government minus their respective total liabilities.
WTO: The World Trade Organisation, established in 1995, provides a contractual framework within which governments undertake to implement regulations and legislation for foreign trade. The WTO provides a platform for multilateral trade negotiation and adjudication. Over three-quarters of WTO members are developing countries.
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