Economics Encyclopedia

Economics Encyclopedia

If you would like to prepare for school subjects or simply increase your general knowledge, then enjoy our economics encyclopedia. We tried to focus only on very important terms and definitions. We also kept our terminology very brief so that you absorb the concept more quickly and easily.

Economics Glossary (Page 1)


ABILITY-TO-PAY PRINCIPLE: The belief that people should be taxed according to their ability to pay, regardless of the benefits they receive. The U.S. individual income tax is based on this principle.
ABSOLUTE ADVANTAGE: The ability to produce more units of a good or service than some other producer, using the same quantity of resources.
ACCOUNTING LOSS: Total explicit costs are greater than total explicit revenue which results in a loss.
ACCOUNTING PROFIT: Total revenue less total costs except for the opportunity cost of capital.
ACQUIRED ENDOWMENTS: Resources a country builds for itself, like a network of roads or an educated population-adaptive expectations-expectations that respond or adapt to recent experience-adverse selection-the phenomenon that, as an insurance company raises its price, the best risks (those least likely to make a claim) drop out, so the mix of applicants changes adversely; now used more generally to refer to effects on the mix of workers, borrowers, products being sold, and so forth resulting from a change in wages (interest rates, prices) or other variables-affirmative action-actions by employers to seek out actively minorities and women for jobs and to provide them with training and other opportunities for promotion.
ADAPTIVE EXPECTATIONS: Expectations about inflation or other economic events.
ADD-ON RATE: A method of calculating interest on a loan, based on the assumption that the borrower holds the original principal for the entire loan period.
ADJUSTED BALANCE METHOD: A method of calculating finance charges by basing them on the opening balance owed after subtracting the payments made during the month.
ADVERTISING: Using advertisements (public notices, displays or presentations often based on celebrity endorsements, appeals to authority, bandwagon effects and attractive imagery) to promote the sale of goods or services.
AGGREGATE DEMAND (AD): A schedule (or graph) that shows the value of output (real GDP) that would be demanded at different price levels.
AGGREGATE SUPPLY (AS): A schedule (or graph) that shows the value of output (real GDP) that would be produced at different price levels. In the long run, the schedule shows a constant level of real GDP at all price levels, determined by the economy's productive capacity at full employment. In the short run, the aggregate supply schedule may show different levels of real GDP as the price level changes.
ALLOCATIVE EFFICIENCY: Taking advantage of every opportunity to make some individuals better off in their own estimation while not worsening the condition of anyone else.
ALLOWANCE: A sum of money paid regularly to a person, often by a parent to a child; sometimes paid in compensation for services rendered.
ALTERNATIVE: One of many choices or courses of action that might be taken in a given situation.
ALTERNATIVES: Options among which to make choices.
AMOUNT PAST DUE: In a credit arrangement, the amount of money owed and not repaid on time.
ANNUAL FEE: The yearly charge for having a credit card or credit account.
ANNUAL PERCENTAGE RATE (APR): The percentage of the principal of a loan to be paid as interest in one year. Differs from an add-on rate in that an APR is calculated on the declining balance of the loan. The Truth in Lending Act requires lenders to disclose aprs to prospective borrowers.
ANNUAL PERCENTAGE YIELD: Income earned on an investment in a year, divided by the amount of the original investment.
ANNUAL RATE OF RETURN: Income earned on an investment in a year, divided by the amount of the original investment.
ASIAN FINANCIAL CRISIS: The situation that began in 1997-1998 when investors withdrew large amounts of money from several Asian countries due to fears that assets were overpriced. This led to currency devaluations and set off a panic resulting in runs on banks, plummeting stock prices, business failures and loss of jobs. Some of the countries involved were Thailand, South Korea, Indonesia and Malaysia.
ASSET: Something of monetary value owned by an individual or an organization.
ASSUMPTIONS: Beliefs or statements presupposed to be true.
AUTOMATED TELLER MACHINE (ATM): A machine that provides cash and performs banking services (for deposits and transfers of funds between accounts, for example) automatically when accessed by customers using plastic cards coded with personal identification numbers (pins).
AVERAGE DAILY BALANCE METHOD: A method of calculating finance charges based on the average amount owed for each day of the billing cycle.
AVERAGE FIXED COST (AFC): Total fixed costs divided by the amount produced.
AVERAGE REVENUE (AR): Total revenue divided by the amount produced.
AVERAGE VARIABLE COST (AVC): Total variable costs divided by the quantity produced.
BAIT AND SWITCH: The action (generally illegal) of advertising goods that are an apparent bargain (the bait) with the intention of inducing customers to buy more expensive items (the switch), on the pretext that the advertised item is no longer available.
BALANCE OF PAYMENTS: The record of all transactions (in goods, services, physical and financial assets) between individuals, firms and governments of one country with those in all other countries in a given year, expressed in monetary terms.
BALANCE OF PAYMENTS DEFICIT: An imbalance in a nation's balance of payments where more currency is flowing out of the country than is flowing in. This unequal flow of currency is considered unfavorable and can lead to a loss of foreign currency reserves.
BALANCE OF PAYMENTS SURPLUS: An imbalance in a nation's balance of payments in which more currency is flowing into the country than is flowing out. This unequal flow of currency is considered favorable and can lead to an increase in foreign currency reserves.
BALANCE OF TRADE: The part of a nation's balance of payments accounts that deals only with its imports and exports of goods and services. The balance of trade is divided into the balance on goods (merchandise) and the balance on services. If the value of a country's exports of goods and services is greater than its imports, it has a balance of trade surplus. If the value of a country's imports of goods and services is greater than its exports, it has a balance of trade deficit.
BALANCE SHEET: An itemized statement listing the total assets and total liabilities of a given business to portray its net worth at a given moment in time.
BALANCED BUDGET: A financial plan in which income is equal to expenses.
BANK: A financial institution that provides various products and services to its customers, including checking and savings accounts, loans and currency exchange.
BANK ACCOUNT: An arrangement by which a bank holds funds on behalf of a depositor. Also, the balance of funds held under such an arrangement, credited to and subject to withdrawal by the depositor.
BANK RESERVES: The percentage of a bank's deposits that it keeps on hand, i.e., does not lend out.
BANK SERVICE CHARGES: Fees paid by bank customers for financial services, for example, check-cashing fees, fees for overdrafts from accounts, fees for using the atms of other banks and fees for using bank-issued credit cards.
BANK STATEMENT: A monthly summary providing the status of a depositor's financial accounts (checking and/or savings).
BANK, COMMERCIAL: A financial institution accepts checking deposits, holds savings, sells traveler's checks and performs other financial services.
BANKING: The industry involved with conducting financial transactions. Also, conducting business with a bank, e.g., maintaining a checking or savings account or obtaining a loan.
BARRIERS TO ENTRY: Factors that restrict entry into an industry and give cost advantages to existing firms. Examples would include the large size of existing firms, control over an essential resource or information, and legal rights such as patents and licenses.
BARRIERS TO TRADE: Restrictions on trade such as tariffs, quotas and regulations.
BARTER: Trading a good or service directly for another good or service, without using money or credit.
BEGGAR-THY-NEIGHBOR POLICIES: Restrictions on imports designed to increase a country's national output, so-called because they increase that country's output while simultaneously hurting the output of other countries-benefit taxes-taxes that are levied on a particular product, the revenues of which go for benefits to those who purchase the product-Bertrand competition-an oligopoly in which each firm believes that its rivals are committed to keeping their prices fixed and that customers can be lured away by offering lower prices-bilateral trade-trade between two parties.
BENEFIT: Monetary or non-monetary gain received because of an action taken or a decision made.
BENEFITS-RECEIVED PRINCIPLE: The belief that people should be taxed according to the benefits they receive from the good or service the tax supports. The gasoline tax is an example.
BLUE CHIP STOCKS: Stocks in large, nationally known companies that have been profitable for a long time and are well-known and trusted.
BOARD OF GOVERNORS: The Federal Reserve's governing and monetary policy-making body; consists of seven governors appointed by the President to staggered 14-year terms.
BOND: A certificate of indebtedness issued by a government or a publicly held corporation, promising to repay borrowed money to the lender at a fixed rate of interest and at a specified time.
BORROW: To receive and use something belonging to somebody else, with the intention of returning or repaying itoften with interest in the case of borrowed money.
BORROWER: An individual who has received and used something belonging to somebody else, with the intention of returning or repaying itoften with interest in the case of borrowed money.
BRAND: A trade name used to identify a product produced by a particular company, distinguishing it from similar products produced by competitors.
BUDGET: A spending-and-savings plan, based on estimated income and expenses for an individual or an organization, covering a specific time period.
BUDGET DEFICIT: Refers to national budgets; occurs when government spending is greater than government income in a given year. A yearly deficit adds to the public debt.
BUDGET SURPLUS: Refers to national budgets; occurs when government income is greater than government spending in a given year.
BUSINESS: Any activity or organization that produces or exchanges goods or services for a profit.
BUSINESS (FIRM): Private profit-seeking organizations that use resources to produce goods and services.
BUSINESS CYCLES: Fluctuations in the overall rate of national economic activity with alternating periods of expansion and contraction; these vary in duration and degrees of severity; usually measured by real gross domestic product (GDP).
BUSINESS PLAN: A description of an enterprise including its name, its goals and objectives, the product(s) sold and distributed, the work skills needed to produce those products, and the marketing strategies used to promote them.
BUSINESSES AND HOUSEHOLDS: Two sectors of the circular flow. Businesses hire resources from households; the payments for these resources represent household income. Households spend their income for goods and services produced by the businesses; household spending represents revenue for businesses.
CAPACITY: In the context of credit transactions, capacity is one of the Three Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower's current and future earnings relative to current debt. High earnings and low debt, for example, indicate a strong capacity to make payments on the loan in question.
CAPITAL: Resources and goods made and used to produce other goods and services. Examples include buildings, machinery, tools and equipment. In the context of credit transactions, capital is one of the Three Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be as determined by the borrower's current financial assets and net worth.
CAPITAL ACCOUNT: Part of a nation's balance of payments accounts; records capital outflows, i.e., expenditures made by the nation's residents to purchase physical capital and financial assets from the residents of foreign nations; also records capital inflows, i.e., expenditures by residents of foreign nations to purchase physical capital and financial assets from residents of the nation in question.
CAPITAL ACCOUNT BALANCE: Foreign government and private investment in the United States netted against similar U.S. investment in foreign countries.
CAPITAL DEEPENING: An increase in capital per worker-capital gain-the increase in the value of an asset between the time it is purchased and the time it is sold-capital goods investment-investment in machines and buildings (to be distinguished from investments in inventory, in research and development, or in training [human capital])-capital goods-the machines and buildings firms invest in, with funds from the capital market.
CAPITAL GAIN: A profit realized from the sale of property, stocks or other investments.
CAPITAL LOSS: A loss suffered upon the sale of property, stocks or other investments for less money than the purchase price of the asset in question.
CAPITAL RESOURCES: Resources made and used to produce and distribute goods and services; examples include tools, machinery and buildings.
CASH: Money in the form of paper currency or coins (as distinct from checks, money orders or credit).
CASH ADVANCE: In a credit arrangement, the amount charged to a borrower's account for cash received; an instant loan.
CASH AVAILABLE: In a credit arrangement, the difference between the cash-advance limit and withdrawals made (advances issued); the remaining balance.
CASH-ADVANCE LIMIT: In a credit arrangement, the maximum amount that can be issued for a cash advance.
CAUSES OF INFLATION: Too much money chasing too few goods is common cause for inflation. Additionally, a rise in production costs can also lead to a rise in inflation. International lending and federal taxes can also be causes of inflation, while war is also a leading cause of inflation as well.
CENTRAL BANKING SYSTEM: A nation's central bank that is established to regulate the money supply and oversee the nation's banks. In the United States the Federal Reserve is the central bank.
CERTIFICATE OF DEPOSIT (CD): A certificate issued by a bank to a person depositing money in an account for a specified period of time (often six months, one year or two years). A penalty is charged for early withdrawal from CD accounts.
CHANGE IN DEMAND: See Demand decrease and Demand increase.
CHANGE IN SUPPLY: See Supply decrease and Supply increase.
CHARACTER: In the context of credit transactions, character is one of the Three Cs of Credit. It is an indicator of how creditworthy a prospective borrower is likely to be, as determined by the borrower's handling of past debts and his or her stability in jobs and residences.
CHARACTERISTICS OF MONEY: Characteristics of money include it being durable (both physically and socially), divisible (money can be divided into increments appropriate for the cost of an item), transportable (literally meaning that money must be easy to move), and the ability to regulate the amount of money in a market by making it uncounterfeitable.
CHECK: A written order to a financial institution directing the financial institution to pay a stated amount of money, as instructed, from the customer's account.
CHECK REGISTER: A form (usually located in the back of a checkbook) on which users of checking accounts may record checks they have written and deposits they have made. Information thus recorded helps people keep track of balances in their accounts.
CHECKING ACCOUNT: A financial account into which people deposit money and from which they withdraw money by writing checks.
CHOICE: Decision made or course of action taken when faced with a set of alternatives.
CIRCULAR FLOW: The movement of output and income from one sector of the economy to another; often illustrated as a circular flow diagram.
CIRCULAR FLOW OF GOODS AND SERVICES: A model of an economy showing the interactions between households and business firms as they exchange goods and services and resources in markets.
COINCIDENT INDICATORS: Economic variables, such as payroll employment, industrial production, personal income, and manufacturing and trade sales, that tend to change at the same time that real output changes.
COINS: Government-issued pieces of metal that have value and are used as money.
COLLATERAL: Something of value (often a house or a car) pledged by a borrower as security for a loan. If the borrower fails to make payments on the loan, the collateral may be sold; proceeds from the sale may then be used to pay down the unpaid debt.
COLLISION INSURANCE COVERAGE: Insurance that pays for repairs to an automobile, or replacement of the automobile (minus the deductible in each case), if the automobile is hit by another car.
COLLUSION: A secret agreement between firms to fix prices or engage in other activities to restrict competition in an industry; illegal in the United States.
COMMAND ECONOMY: An economy in which most economic issues of production and distribution are resolved through central planning and control.
COMMODITIES MARKET: The market for the purchase and sale of commodity (a basic product, usually, but not always, agricultural or mineral) futures, contracts for the sale and delivery of commodities at some future time.
COMMUNISM: In theory, an economic system based on a classless society, common ownership of all resources, the complete disappearance of government and income allocated according to need. In practice, communism usually refers to the command economic system in existence in the former Soviet Union before its downfall in 1990-1991, and in other countries such as China and Cuba.
COMMUNITIES AND CITIES: A community can be considered a social group which retains an environment, while sharing interest in economic progress. A city can be considered a financial and commercial center.
COMPARATIVE ADVANTAGE: The ability to produce a good or service at a lower opportunity cost than some other producer. This is the economic basis for specialization and trade.
COMPARISON SHOPPING: Examining different brands or models of a product (to learn about variations in quality, size, etc.), or the prices charged by different sellers (to learn about possible cost-savings), before deciding what to buy.
COMPENSATING WAGE DIFFERENTIALS: Differences in wages that can be traced to nonpecuniary attributes of a job, such as the degree of autonomy and risk-complement-two goods are complements if the demand for one (at a given price) decreases as the price of the other increases-constant returns to scale-a production function has constant returns to scale when equiproportionate increases in all inputs increase output proportionately.
COMPETITION: Attempts by two or more individuals or organizations to acquire the same goods, services, or productive and financial resources. Consumers compete with other consumers for goods and services. Producers compete with other producers for sales to consumers.

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