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.
The ability to produce more units of a good or service than some other producer, using the same quantity of resources.
Total explicit costs are greater than total explicit revenue which results in a loss.
Total revenue less total costs except for the opportunity cost of capital.
Expectations about inflation or other economic events.
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.
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.
Taking advantage of every opportunity to make some individuals better off in their own estimation while not worsening the condition of anyone else.
A sum of money paid regularly to a person, often by a parent to a child; sometimes paid in compensation for services rendered.
One of many choices or courses of action that might be taken in a given situation.
Amount Past Due
In a credit arrangement, the amount of money owed and not repaid on time.
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.
Something of monetary value owned by an individual or an organization.
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.
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.
A financial plan in which income is equal to expenses.
A financial institution that provides various products and services to its customers, including checking and savings accounts, loans and currency exchange.
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.
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.
A monthly summary providing the status of a depositor's financial accounts (checking and/or savings).
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.
Trading a good or service directly for another good or service, without using money or credit.
Monetary or non-monetary gain received because of an action taken or a decision made.
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.
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.
To receive and use something belonging to somebody else, with the intention of returning or repaying it--often with interest in the case of borrowed money.
An individual who has received and used something belonging to somebody else, with the intention of returning or repaying it--often with interest in the case of borrowed money.
A trade name used to identify a product produced by a particular company, distinguishing it from similar products produced by competitors.
A spending-and-savings plan, based on estimated income and expenses for an individual or an organization, covering a specific time period.
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.
Refers to national budgets; occurs when government income is greater than government spending in a given year.
Any activity or organization that produces or exchanges goods or services for a profit.
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).
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.
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.
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.
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.
A profit realized from the sale of property, stocks or other investments.
A loss suffered upon the sale of property, stocks or other investments for less money than the purchase price of the asset in question.
Resources made and used to produce and distribute goods and services; examples include tools, machinery and buildings.
Money in the form of paper currency or coins (as distinct from checks, money orders or credit).
In a credit arrangement, the amount charged to a borrower's account for cash received; an instant loan.
In a credit arrangement, the difference between the cash-advance limit and withdrawals made (advances issued); the remaining balance.
In a credit arrangement, the maximum amount that can be issued for a cash advance.
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.
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.
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.
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.
A financial account into which people deposit money and from which they withdraw money by writing checks.
Decision made or course of action taken when faced with a set of alternatives.
The movement of output and income from one sector of the economy to another; often illustrated as a circular flow diagram.
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.
Government-issued pieces of metal that have value and are used as money.
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.
A secret agreement between firms to fix prices or engage in other activities to restrict competition in an industry; illegal in the United States.
An economy in which most economic issues of production and distribution are resolved through central planning and control.
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.
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.
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.
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.
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.
Complementary Goods and Services
Goods and/or services that are typically used together, such as hamburger and hamburger buns, or tennis rackets and tennis lessons.
Interest that is earned not only on the principal but also on the interest already earned.
Paying interest on the principal and on interest already earned. For example, if someone deposits $2,000 in an account that pays interest at 8 percent, he or she will earn $160 in interest after one year, for a balance of $2,160. If the depositor leaves this sum in the account for another year, however, he or she will earn $172.80 in interest because the 8 percent rate will apply to the new balance of $2,160, not the original $2,000 deposit. The longer the money is left in the account, the more dramatic the compounding effect.
Comprehensive Insurance Coverage
Insurance that pays for repairs to an automobile, or replacement of an automobile (minus the deductible in each case), if the automobile is stolen or damaged by something other than a collision (for example, by a hail storm).
The percentage of the total industry by the largest firms (generally four or eight) in an industry. The concentration ratio provides a measure of domination in an industry by a few firms and serves as a measure of whether an industry is an oligopoly.
A result or effect of an action or decision; may be positive or negative.
To buy and use a good or service.
The study of economics that addresses decisions of consumers in the marketplace and personal money management.
Consumer Price Index (CPI)
A price index that measures the cost of a fixed basket of consumer goods and services and compares the cost of this basket in one time period with its cost in some base period. Changes in the CPI are used to measure inflation.
The difference between the price a consumer would be willing to pay for a good or service and the price that consumer actually has to pay.
People who use goods and services to satisfy their personal needs and not for resale or in the production of other goods and services.
Spending by households on goods and services. The process of buying and using goods and services.
Contractionary Fiscal Policy
A decrease in government spending and/or an increase in taxes designed to decrease aggregate demand in the economy and control inflation.
A legal entity owned by shareholders whose liability for the firm's losses is limited to the value of the stock they own.
Inflation caused by rising costs of production.
A process of examining the advantages (benefits) and disadvantages (costs) of each available alternative in arriving at a decision.
An amount that must be paid or spent to buy or obtain something. The effort, loss or sacrifice necessary to achieve or obtain something.
Costs of Production
Amounts paid for resources (land, labor, capital and entrepreneurship) used to produce goods and services.
Council of Economic Advisers
A three-member group that gathers information on the economy, reports on economic developments and recommends strategies to the President.
The opportunity to borrow money or to receive goods or services in return for a promise to pay later.
A written promise to repay something that is borrowed.
A request for a loan, submitted to a lender (for example, a bank or a credit union) by a prospective borrower. The credit application provides background information which the lender uses to assess the prospective borrower's creditworthiness--his or her ability to repay the loan.
A small, specially coded plastic card issued by a bank, business, etc., authorizing the cardholder to purchase goods or services on credit.
Charges associated with the acceptance of a loan, including the finance charge and transaction fees (for example, loan fees, annual or monthly fees on a credit account).
A record of past borrowing and repayments.
The maximum amount of money that will be extended to a person by a financial institution or credit-card issuer.
An evaluation of a borrower's ability to repay a loan based on his or her character, capacity and capital.
A report about a person's credit history, including his or her ability and willingness to repay debts, based on how reliably he or she has repaid debts in the past. Also known as a credit report.
A report about a person's credit history, including his or her ability and willingness to repay debts, based on how reliably he or she has repaid debts in the past. Also known as a credit record.
A nonprofit financial institution owned by its members; offers various financial services including accounts and loans; regulated by the National Credit Union Association (NCUA).
A monthly summary from a credit-card company conveying information about a cardholder's purchases, payments, balance due and fees.
A person or company to whom money is owed.
The extent to which a person is deemed suitable to receive credit, especially as shown by reliability in repaying loans in the past.
Cross-Price Elasticity of Demand
The percentage change in the quantity demanded for one good divided by the percentage change in the price of a related good, everything else held constant. It measures the degree to which goods are substitutes or complements. When the cross-price elasticity of demand is positive, the goods are substitutes; when the cross-price elasticity of demand is negative, the goods are complements.
Increased interest rates and decreased private investment caused by government borrowing.
The money in circulation in any country.
A government organization existing in a few countries that establishes a fixed exchange rate for the nation's currency.
When a government adjusts the value of the nation's currency so that it buys less of foreign currencies than before.
Part of a nation's balance of payments accounts; records exports and imports of goods and services, net investment income and transfer payments with other countries.
Current Account Balance
The inflow of the goods, services, investment income and transfer accounts into the United States from foreign countries netted against the outflow of goods, services, investment income and transfer accounts from the United States to foreign countries.
Unemployment caused by fluctuations in the overall rate of economic activity or phase of the business cycle.
A small, specially coded plastic card issued by a bank; allows the cardholder to transfer funds electronically and immediately from his or her checking account, as if the cardholder were writing a check to pay for a purchase.
Money owed to someone else. Also the state or condition of owing money. Can be individual, corporate or government debt.
Misleading methods used by businesses to sell goods or services. Examples include misleading prices, bait-and-switch tactics and false advertising.
Reaching a conclusion after considering alternatives and their results.
A graph-like form into which people may enter notations about the costs and benefits of various alternatives; used for assistance in making decisions.
Regarding insurance policies: A set amount an insured person must pay per loss before the insurance company will pay a claim.
A sustained decrease in the average price level of all the goods and services produced in the economy.
The quantity of a good or service that buyers are willing and able to buy at all possible prices during a period of time.
An account from which funds may be withdrawn by writing a check at any time and without having to obtain the approval of the financial institution in advance.
Inflation caused by increasing demand for output or "too much money chasing too few goods."
Money put into a financial account. Also, to place money in a financial account.
A reduction in the value of capital goods over time due to their use in production.
Depreciation of Currency
A decline in the price of one currency relative to another.
A severe, prolonged economic contraction.
Demand resulting from what a good or service can produce, not demand for the good or service itself.
Determinants of Demand
Factors other than the price of a good or service that change (shift) the demand schedule, causing consumers to buy more or less at every price. Factors include income, number of consumers, preferences and prices of related goods.
Determinants of Supply
Factors other than the price of a good or service that change (shift) the supply schedule, causing producers to supply more or less at every price. Factors include number of producers, production costs, and technology and productivity.
The electronic transfer of a payment (for a month's salary, for example) directly from the payer's account to the recipient's account.
The relationship that exists when the values of related variables move in the same direction. Also known as a positive relationship.
The interest rate the Federal Reserve charges commercial banks for loans.
Unemployed people who have given up looking for work and are therefore not counted as part of the labor force.
A factor, often a monetary policy or disadvantage, that discourages people from doing something.
The amount of money a person has left to save or spend after income taxes, Social Security taxes and other required deductions have been taken out of his or her pay.
The allocation or dividing up of the goods and services a society produces.
Distribution of Income
The way in which the nation's income is divided among families, individuals or other designated groups.
To invest in a variety of stocks, bonds, money market accounts, etc., in order to spread risk.
A share of a company's net profits paid to stockholders.
Division of Labor
An arrangement in which workers perform only one step or a few steps in a larger production process (as when working on an assembly line).
Goods intended to last for a period of more than three years.
Money received for work performed; may include salary, wages, tips, professional fees, commissions, etc.
Monetary policy designed to stimulate the economy by increasing the level of bank reserves through lowering the discount rate, lowering reserve requirements or buying securities through open market operations.
The process of improving the quality of human lives through raising living standards. Economic development is broader than economic growth, which is concerned with year-to-year increases in production. Economic development deals with the economic, social and political institutions that govern the way the economy and society function.
A situation in which no one in a society can be made better off without making someone else worse off.
The application of our concepts of what is "fair" or "unfair" and what is "right" or "wrong" to an economic policy. Ultimately deals with the distribution of income and wealth.
The freedoms of the marketplace--the freedom of consumers to decide how they wish to allocate their spending among various goods and services; the freedom of workers to choose to change jobs, join unions and go on strike; the freedom of individuals to establish businesses and to decide what to produce and when to change their pattern of production; and the freedom of savers to decide when and where to invest their savings.
Economic Functions of Government
In a market economy, government agencies establish and maintain a legal system to regulate both commercial and social behavior, promote competition, respond to market failures by providing public goods and adjusting for externalities, redistribute income and establish macroeconomic stabilization policies. To perform these functions, governments must shift resources from private uses by taxing and/or borrowing.
An increase in real output as measured by real GDP or per capita real GDP.
Factors that motivate and influence the behavior of individuals and organizations, including firms and government agencies. Prices, profits and losses are important economic incentives in a market economy.
Organizations such as households and families; formal organizations such as corporations, government agencies, banks, labor unions and cooperatives; a system of law; customary ways of doing things such as the use of money, collective bargaining and the observance of certain holidays; and controlling values and beliefs.
Total revenue is less than total costs when total costs include all opportunity costs.
A firm's total revenue minus all explicit and implicit costs of production, including opportunity costs.
Payment for the use of something that is in fixed or perfectly inelastic supply; earnings in excess of the earnings required to keep a resource in its current use; the portion of a resource's earnings that is not necessary to keep the resource in its present use.
Protection against economic risks, such as unemployment, accidents on the job, business failures or natural disasters, over which people have little or no control.
The institutional framework of formal and informal rules that a society uses to determine what to produce, how to produce and how to distribute goods and services.
Desires that can be satisfied by consuming a good or service. Economists do not differentiate between wants and needs.
Economic Way of Thinking
A reasoning process that involves considering costs as well as benefits in making decisions.
The study of how people, firms and societies choose to allocate scarce resources with alternative uses.
Considering the costs and benefits of various alternatives and choosing the one with the greatest net benefits.
Electronic Funds Transfer Act
A federal law providing consumer protection for people who use ATMs and debit cards. The law limits users' liability for unauthorized charges made on cards that have been lost or stolen.
The percentage of the total population aged 16 or over that is employed.
A signature on the back of a check instructing the bank as to how the check may be cashed. There are three types of endorsement. Blank endorsement: The signature makes the check as good as cash to anybody who holds it. Restrictive endorsement: The signature tags the check for a specific purpose, such as "for deposit only" to a checking or savings account. Special endorsement: The signature allows the holder to transfer the check to another person.
One who draws upon his or her skills and initiative to launch a new business venture with the aim of making a profit. Often a risk-taker, inclined to see opportunity when others do not.
A characteristic of people who assume the risk of organizing productive resources to produce goods and services; a resource.
Equal Credit Opportunity Act
A federal law that prevents lenders from denying credit on the basis of an applicant's sex, marital status, race, national origin, religion, or age, or because an applicant receives public assistance.
The price at which the quantity demanded by buyers equals the quantity supplied by sellers; also called the market-clearing price.
The quantity demanded and quantity supplied at the equilibrium or market-clearing price.
Stock, both common and preferred. Also, the value of mortgaged property after accounting for charges against it or money owed.
European Union (EU)
An association of European nations created by the Maastricht Treaty signed in 1992. The EU has eliminated quotas and tariffs among its members and created other common economic policies.
A bank's cash reserves beyond the required reserves, which can be loaned.
Trading a good or service for another good or service, or for money.
The price of one nation's currency in terms of another nation's currency.
Expansionary Fiscal Policy
An increase in government spending and/or a decrease in taxes designed to increase aggregate demand in the economy, thus increasing real output and decreasing unemployment.
Payments for goods and services.
The study of people's behavior in the marketplace by scientific testing in the laboratory.
The monetary payment a firm must make to obtain a resource.
Goods and services produced in one nation and sold in other nations.
Economic side-effects or third-party effects, in which some of the benefits or costs associated with the production or consumption of a product affect someone other than the direct producer or consumer of the product. Can be positive or negative.
The theory that differences in factor endowments among countries result in different opportunity costs; countries have comparative advantages in the production of commodities that are intensive in the use of the factors of production with which their endowments are relatively abundant.
The prices of land, capital, labor and entrepreneurship.
Factors of Production
Productive resources; what is required to produce the goods and services that people want; natural resources, human resources, capital goods and entrepreneurship.
Fair Credit Billing Act
A federal law that requires creditors to mail out bills at least 14 days before payment is due and also establishes procedures for resolving billing errors on credit accounts.
Fair Credit Reporting Act
A federal law governing the activities of credit bureaus and creditors. It requires creditors to furnish accurate and complete information to borrowers; it also establishes a process consumers may use to correct inaccuracies in credit reports.
Fair Debt Collection Practices Act
A federal law that bars collection agencies from using threats, harassment or abuse in their efforts to collect debts.
A price that allows a regulated monopoly, such as gas, electric and telephone companies, to earn the approved profit.
The taxing and spending plan of the national government.
Federal Deposit Insurance Corporation (FDIC)
A federal agency that guarantees depositors' savings up to $100,000 per account in most commercial banks, savings banks and savings associations.
Federal Income Tax
A tax paid by individuals and businesses to the federal government to fund such services as national defense, human services, and the monitoring and regulation of trade.
Federal Insurance Contributions Act (FICA)
A federal system of old-age, survivors, disability and health-care insurance (Medicare) which requires employers to withhold (or transfer) wages from employees' paychecks and deposit that money in designated accounts.
The central bank of the United States. Its main function is controlling the money supply through monetary policy. The Federal Reserve System divides the country into 12 districts, each with its own Federal Reserve bank. Each district bank is directed by its nine-person board of directors. The Board of Governors, which is made up of seven members appointed by the President and confirmed by the Senate to 14-year terms, directs the nation's monetary policy and the overall activities of the Federal Reserve. The Federal Open Market Committee is the official policy-making body; it is made up of the members of the Board of Governors and five of the district bank presidents.
The total cost of credit, including interest and transaction fees.
Banks, credit unions, pension funds, insurance companies, mutual fund companies and other financial institutions that bring together savers and borrowers and buyers and sellers of stocks and bonds.
Setting short-, medium- and long-range goals; then collecting and analyzing income and expenditure information to determine how to meet one's goals.
The chance that an individual, business or government will not be able to return money invested.
Economic units that demand productive resources from households and supply goods and services to households and government agencies.
Changes in the expenditures or tax revenues of the federal government, undertaken to promote full employment, price stability and reasonable rates of economic growth.
Fixed Costs (FC)
Costs of production that do not change as a firm's output level changes; costs that must be paid whether the firm produces or not.
Fixed Exchange Rate
An exchange rate that is set and therefore prevented from rising or falling with changes in supply and demand for a nation's currency.
Expenditures that are the same from week to week or month to month, such as mortgage or rent payments and car payments.
Income that stays the same from week to week or month to month. Usually refers to income from pensions or bonds.
Flexible (Floating) Exchange Rate
An exchange rate that is determined by the international demand for and supply of a nation's money; a rate free to rise or fall (to float).
Foreign Direct Investment (FDI)
Investment that involves ownership of a firm or business in another country. FDI involves things such as constructing factories on foreign soil, rather than investing in stock markets (portfolio investment). The investing company frequently provides financial, managerial and technical assistance and other resources to the foreign country.
Foreign Exchange Market
The market where the demand for and supply of foreign currencies determines exchange rates.
The purchase of financial and/or physical assets in one county by businesses or people in another county. This term can refer to either foreign direct investment or investment in foreign financial assets, such as stocks.
Fractional Reserve Banking System
A system in which banks are required to hold only a specified fraction of their deposits available for withdrawal by depositors. The rest may be lent out, thus "creating money."
Wrongful or criminal deception intended to manipulate a person for the purpose of gain, usually financial.
The chance that an investment has been misrepresented.
One who enjoys the benefits of a good or service without paying for it.
The voluntary exchange of goods and services in the absence of trade barriers and restrictions.
Unemployment caused by the short-term movement of people between jobs and by first-time job seekers entering the labor force; always present in a dynamic economy.
The natural rate of employment; generally considered to be about 93-95 percent of the labor force, allowing for frictional unemployment of 5-7 percent.
Functional Distribution of Income
The division of an economy's total income into wages and salaries, rent, interest, and profit; shows the breakdown of income received by individuals and businesses based on the type of resources provided to the productive process.
Gains from Trade
The increased output resulting from trade; with trade, each individual, region or nation is able to concentrate on producing goods and services that it produces efficiently, while trading to obtain goods and services that it does not produce.
Although there is no one precise definition, the term usually refers to the increased flow of trade, people, investment, technology, culture and ideas among countries.
Something a person or organization plans to achieve in the future; an aim or desired result.
Tangible objects that satisfy economic wants.
Goods and services provided by government and paid for by taxing and borrowing. Federal government expenditures include national defense and a system of justice. State and local government expenditures include police, roads and public education.
Policy and budget choices by government officials that result in inefficiency.
Funds raised through taxing and borrowing to pay for government expenditures.
Spending by all levels of government on goods and services; includes categories like military, schools and roads.
A period of time allowed for payment of money owed; after the grace period has elapsed, interest may be charged.
Gross Domestic Product (GDP)
The market value of all final goods and services produced in a country in a calendar year.
A total amount of money earned (from salaries, wages, etc.) before taxes and other deductions are withheld. Also known as gross pay.
A total amount of money earned (from salaries, wages, etc.) before taxes and other deductions are withheld. Also known as gross income.
A mutual fund whose major objective is long-term capital growth. Growth funds offer the potential for substantial gains over time, but shares fluctuate in value during ups and downs in financial markets.
Products (goods or services) that are differentiated by real or imagined differences in quality or other features, such as color, taste, styling, warranties or complimentary services provided to those who buy the products.
Products (goods or services) that are identical, with no differentiating features.
A combination formed when two businesses producing the same goods or services merge.
Individuals and family units that buy goods and services (as consumers) and sell or rent productive resources (as resource owners).
Accommodation in houses, apartments, etc.
The health, education, experience, training, skills and values of people. Also known as human resources.
Human Capital Investment
Investment of time, effort and resources in education and training--to increase one's own knowledge, skills, health, etc., or to develop those assets in others.
The health, education, experience, training, skills and values of people. Also known as human capital.
A very rapid rise in the overall price level.
Unauthorized, illegal use of a person's legal and financial identification (for example, his or her Social Security number or PIN).
Any market structure in which firms are not price takers, but instead must seek the price and output levels that maximize their profits.
The monetary income a firm sacrifices when it employs a resource it owns to produce a product rather than supplying the resource in the market; equal to what the resource could have earned in the best-paying alternative employment.
Implicit Price Deflator
A price index that compares the prices of all the goods and services produced in the current-year gross domestic product (GDP) to the price levels that prevailed for those same goods and services in an earlier year or years. The implicit price deflator is used to adjust values of nominal or current-price GDP to obtain values for real GDP.
Goods and services bought from sellers in another nation.
Buying goods or services without comparison shopping or forethought about costs and benefits.
Any reward or benefit, such as money, advantage or good feeling, that motivates people to do something.
Payments earned by households for selling or renting their productive resources. May include salaries, wages, interest and dividends.
A portion of the effect on quantity demanded caused by a change in the price of a good or service. A fall in price, for example, increases a consumer's real income and leads to a change in the quantity demanded of that good or service.
Income Elasticity of Demand
The percentage change in the demand for a good or service divided by the percentage change in income.
The unequal distribution of an economy's total income among families, individuals or other designated groups.
The report of the revenue generated and expenses incurred by a firm in a designated time period, such as a month, a quarter or a year.
Payments made by individuals and corporations to the federal government (and to some state and local governments) based on income received (both earned and unearned).
A mutual fund whose objective is to match the composite investment performance of a large group of stocks or bonds such as those represented by the Standard & Poor's 500 Composite Stock Index.
The relationship that exists when the values of related variables move in the opposite direction. Also known as a negative relationship.
Individual Retirement Account (IRA)
An account in which an individual may set aside earned income in a tax-deferred savings plan for his or her retirement. There are two types of IRAs, traditional and Roth, each with its own qualifications and rules governing contributions and withdrawals.
A commodity whose quantity demanded falls when the consumer's real income rises.
A rise in the general or average price level of all the goods and services produced in an economy. Can be caused by pressure from the demand side of the market (demand-pull inflation) or pressure from the supply side of the market (cost-push inflation).
The chance that the rate of inflation will exceed the rate of return on an investment.
Initial Public Offering (IPO)
A company's first sale of stock to the public. When a company "goes public," it sells blocks of stock shares to an investment firm that specializes in initial offerings of stocks and resells them to the public.
A new idea or method.
A financial intermediary, such as a pension fund or a mutual fund, that buys stock and other investments for clients.
A practice or arrangement whereby a company provides a guarantee of compensation for specified forms of loss, damage, injury or death. People obtain such guarantees by buying insurance policies, for which they pay premiums. The process allows for the spreading out of risk over a pool of insurance policyholders, with the expectation that only a few policholders will actually experience losses for which claims must be made. Types of insurance include automobile, health, renter's, homeowner's, disability and life.
A situation in which decisions made by one person affect decisions made by other people, or events in one part of the world or sector of the economy affect other parts of the world or other sectors of the economy.
Money paid regularly, at a particular rate, for the use of borrowed money.
The price paid for using someone else's money, expressed as a percentage of the amount borrowed.
Interest Rate Risk
The chance that interest rates may change (upward) while the saver is "locked in" to a (lower) rate for a time deposit (a CD, for example) or a bond.
A good that is used in the production of final goods and services.
Something a person or organization plans to achieve from one to five years in the future.
Internal Revenue Service (IRS)
The government agency that collects federal income taxes.
International Monetary Fund (IMF)
An international organization established to supervise exchange-rate arrangements and to lend money to member countries having difficulties meeting their financial obligations to other countries.
An itemized list of goods held by a person or business. Also a quantity of goods held in stock.
The process of putting money someplace with the intention of making a financial gain. Investment possibilities include stocks, bonds, mutual funds, real estate, and other financial instruments or ventures.
The purchase of capital goods (including machinery, technology or new buildings) that are used to produce goods and services. In personal finance, the amount of money invested in stocks, bonds, mutual funds and other investment instruments.
The additional income earned from saving or investing money, often expressed as an annual percentage of the amount invested.
A figure of speech representing the idea that firms and individuals making decisions in their own self-interest will at the same time create economic order and promote society's interests; coined by Adam Smith.
A piece of work usually done on order at an agreed-upon rate. Also a paid position of regular employment.
A federally-approved, tax-deferred savings program for self-employed people, allowing them to set money aside for their retirement.
A school of thought that emphasizes the role government plays in stabilizing the economy by managing aggregate demand.
The macroeconomic theory holding that business cycles are caused by changes in aggregate demand and that such cycles can and should be influenced by fiscal and monetary policy undertaken to promote economic stability.
The quantity and quality of human effort available to produce goods and services.
The people in a nation who are aged 16 or over and are employed or actively looking for work.
The labor supply and labor demand curves. The intersection of the labor supply and labor demand curves determines the equilibrium wage and the quantity of hours people work at this equilibrium wage.
An economic institution that represents an organized group of workers (by industry or by type of worker regardless of the industry) to negotiate with management by means of collective bargaining.
Economic variables such as the prime interest rate, labor cost per unit of output, inventories to sales ratio and unemployment duration that tend to change after real output changes.
"Gifts of nature" that can be used to produce goods and services; for example, oceans, air, mineral deposits, virgin forests and actual fields of land. When investments are made to improve fields of land or other natural resources, those resources become, in part, capital resources. Also known as natural resources.
In a credit arrangement, a fee charged when payment is received after the due date.
Law of Demand
As the price of a good or service rises (or falls), the quantity of that good or service that people are willing and able to buy during a certain period of time falls (or rises).
Law of Diminishing Marginal Returns
Describes a phenomenon observed in all short-run production processes, when at least one input (usually capital) is fixed. As more and more units of a variable input (usually labor) are added to the fixed input, the additional (marginal) output associated with each increase in units of the variable input will eventually decline. In other words, successive increases in a variable factor of production added to fixed factors of production will result in smaller increases in output.
Law of Diminishing Marginal Utility
A widely observed relationship in which the additional satisfaction (marginal utility) associated with consuming additional units of the same product in a given amount of time eventually declines.
Law of Supply
As the price of a good or service that producers are willing and able to offer for sale during a certain period of time period rises (or falls), the quantity of that good or service supplied rises (or falls).
Leading Economic Indicators
Economic variables such as unemployment claims, manufacturers' new orders, stock prices, and new plant and equipment orders that tend to change before real output changes.
Legal and Social Framework
The system of laws, institutions, traditions and customs, and incentives that forms the basis of a society and its economy.
Legal Forms of Business
Forms of business organizations protected by a nation's laws; in the United States, the three forms of business organization are the corporation, partnership and sole proprietorship.
Legal Foundations of a Market Economy
The laws and institutions that support a market economy; examples include protection of private property and enforcement of contracts.
To grant someone the use of something, on condition that the object borrowed or its equivalent will be returned (often with interest, in the case of money).
One who lends; may be an individual or a business.
Letter of Application
A letter written by a job-seeker to a prospective employer in which the job-seeker may introduce himself or herself, express interest in a particular job, describe his or her qualifications for that job, request an interview and generally seek to convince the employer that he or she would make a great employee.
Legal responsibility to pay for damages or losses one has caused.
Liability Insurance Coverage
Automobile insurance that pays for costs of bodily injury and property damage when the insured person damages someone or something with his or her car.
Investments or savings (such as savings accounts and money market mutual funds) from which money can be accessed immediately.
To wind up the affairs of a company by identifying liabilities and selling off assets in order to make payments to creditors.
The ease with which savings or investments can be turned into cash.
The chance that an investor will find it difficult to turn an investment into cash (by trying to sell a house, for example, in a down market for real estate).
An illegal scheme in which somebody runs an advertisement, targeted to people who have run up large debts, offering a personal-debt consolidation loan on terms that seem to be very attractive. The consumer is instructed to send in a fee in order to obtain the loan. The loan never arrives.
Loanable Funds Market
Market in which the supply and demand for money, in the form of bank deposits and loans, determine the interest rate.
A period of time long enough for firms to change the quantities of all the resources they use; the exact amount of time varies depending on the industry.
Something a person or organization plans to achieve at least five years in the future.
The equilibrium level of output and the price level where aggregate demand equals aggregate supply.
Government actions designed to affect economic activity in an attempt to reach one or more macroeconomic goals, such as reducing unemployment and inflation. Also called economic policies, the most common types are fiscal policy and monetary policy.
The study of economics concerned with the economy as a whole, involving aggregate demand, aggregate supply, and monetary and fiscal policy.
A decision-making tool for comparing the additional or marginal benefits of a course of action to the additional or marginal costs.
The additional gain from consuming or producing one more unit of a good or service; can be measured in dollars or satisfaction.
The increase in a producer's total cost when it increases its output by one unit.
Marginal Physical Product (MPP)
The additional quantity that is produced when one additional unit of a resource is used in combination with the same quantities of all other resources.
Marginal Propensity to Consume (MPC)
Change in consumption as a proportion of change in disposable income; the ratio of the change in consumption to the change in disposable income that produces the change in consumption.
Marginal Propensity to Save (MPS)
Change in saving as a proportion of change in disposable income; the ratio of the change in saving to the change in disposable income that produces the change in saving.
Marginal Revenue (MR)
The addition to a producer's total revenue resulting from the addition of one unit to total output.
Marginal Revenue Product (MRP)
The change in the total revenue of the firm when it employs one additional unit of a resource.
The extra value or satisfaction that a consumer obtains from consuming one additional unit of output.
An economy that relies on a system of interdependent market prices to allocate goods, services, and productive resources and to coordinate the diverse plans of consumers and producers, all of them pursuing their own self-interest.
The systematic overproduction or underproduction of some goods and services that occurs when producers or consumers do not have to bear the full costs of transactions they undertake. Usually related to externalities or the need for public goods.
Market Price Risk
The chance that the value of an investment will go down because of a change in supply and demand.
The degree of competition in a market, ranging from many buyers and sellers to few or even single buyers or sellers.
Places, institutions or technological arrangements where or by means of which goods or services are exchanged. Also, the set of all sale and purchase transactions that affect the price of some good or service.
The middle value or midpoint of incomes of people in a specified area where half of the incomes are above the middle value and half of the incomes are below it.
A federal health-care program that pays for certain medical and hospital costs for people aged 65 and older (and for some people who are under the age of 65 and disabled). Part of Social Security.
Something a person or organization plans to achieve from one to five years in the future.
The study of economics concerned with individual units of the economy such as households, firms and markets; with how prices and outputs are determined in those markets; and with how the price mechanism allocates resources and distributes income.
In a credit arrangement, the lowest amount that a borrower must pay toward the credit balance each month in order to avoid a penalty.
A school of thought that emphasizes the role changes in the money supply play in determining national income and price level. Monetarists argue that in the long run only changes in the money supply change the price level.
A factor related to money, income or economic wealth that encourages people to do something.
Changes in the supply of money and the availability of credit initiated by a nation's central bank to promote price stability, full employment and reasonable rates of economic growth.
Anything that is generally accepted as final payment for goods and services; serves as a medium of exchange, a store of value and a standard of value. Characteristics of money are portability, stability in value, uniformity, durability and acceptance.
A system for income and spending that allows for the achievement of financial and consumer goals.
Money Market Account
An interest-bearing account similar to a checking account. Deposits may be added at any time; some money market accounts limit the withdrawals depositors may make without paying a penalty. Also known as money market deposit account.
Money Market Deposit Account
An interest-bearing account similar to a checking account. Deposits may be added at any time; some money market deposit accounts limit the withdrawals depositors may make without paying a penalty. Also known as money market account.
Money Market Mutual Fund (MMMF)
A fund restricted by law to investing in the short-term money market. MMMFs provide low risk and low returns, but they maintain their investment value.
A certificate purchased for a specific amount of money and signed over by the purchaser to the person or business named on the certificate.
Narrowly defined by economists as currency in the hands of the public plus checking-type deposits; also called M1. Other definitions of the money supply (M2, M3) include various savings deposits, money market deposits and money market mutual fund balances.
A market structure in which slightly differentiated products are sold by a large number of relatively small producers, and in which the barriers to new firms entering the market are low.
A market structure in which there is a single supplier of a good or service. Also, a firm that is the single supplier of a good or service for which there are no close substitutes; also known as a monopolist.
A market situation in which there is only one buyer of a resource. Also, a firm that is the only buyer of a resource; also known as a monopsonist.
A special type of loan for the purchase of a house or other real estate.
A corporation that operates in two or more countries.
The idea that a small increase in spending by consumers, businesses or government can cause large changes in economic production. The multiplier also works in reverse when spending decreases.
A pool of money used by a company to purchase a variety of stocks, bonds or money market instruments. Provides diversification and professional management for investors.
An electronic marketplace enabling buyers and sellers to get together via computer and hundreds of thousands of miles of high-speed data lines to trade stocks. NASDAQ used to be the acronym for National Association of Securities Dealers Automated Quotation System.
The total amount owed by the national government to those from whom it has borrowed to finance the accumulated difference between annual budget deficits and annual budget surpluses; also called public debt.
An industry in which the advantages of large-scale production make it possible for a single firm to produce the entire output of the market at a lower average cost than a number of firms each producing a smaller quantity.
"Gifts of nature" that can be used to produce goods and services; for example, oceans, air, mineral deposits, virgin forests and actual fields of land. When investments are made to improve fields of land or other natural resources, those resources become, in part, capital resources. Also known as land.
A negative side effect that results when the production or consumption of a good or service affects the welfare of people who are not the parties directly involved in a market exchange. Sometimes referred to as "third-party cost" or "spillover cost," it is a cost imposed on third parties by the production or consumption of other parties.
Exports minus imports.
The amount of money a person receives within a pay period after taxes and other deductions are taken out of his or her paycheck.
The current value of a person's assets minus liabilities.
New Classical Theory
A school of thought that holds that people's expectations are important and therefore government policies will have a limited effect on the business cycle since individuals and firms will take government policies into account when making decisions. Changes in real national income are a product of unexpected changes in the level of prices.
New York Stock Exchange (NYSE)
The oldest stock exchange in the United States, founded in 1792.
Nominal Gross Domestic Product (GDP)
The total market value, measured in current prices, of all final goods and services produced in a nation during a given period of time, usually one year.
Nominal Rate of Return
The rate of return from an investment before adjusting for inflation.
A factor not related to money, income or economic wealth that encourages people to do something.
Competition by firms trying to attract customers by methods other than reducing prices; examples include advertising and promotional gifts.
Non-sufficient Funds (NSF)
A term or notation used by banks in reference to checks written for more than the balance in a bank customer's checking account. An NSF is, in colloquial terms, a check that bounces. Banks charge penalty fees for NSF checks.
A property of certain goods and services such that (once the goods or services are provided) they cannot be denied to or withheld from people who have not paid for the goods or services; examples include street lights and national defense.
An organization that is exempt from federal (and sometimes state) taxes; receives income from donors, subsidized beneficiaries and, indirectly, taxpayers; and therefore should provide its goods or services free or below cost.
A commodity whose quantity demanded goes up when the consumer's real income rises.
Normal Rate of Profit
Profits just high enough to compensate producers for the explicit and implicit costs (including opportunity costs) they incur in producing a particular good or service, without leading to any net entry or exit by producers in that market. Also called normal profits. Normal profits are an economic cost of production; they mark a point at which any lower level of profit would lead a producer to pursue some other use of his or her resources.
A job or profession; also a category of work, sometimes identified by the degree of skill required.
A market structure in which a few, relatively large firms account for all or most of the production or sales of a good or service in a particular market, and where barriers to new firms entering the market are very high. Some oligopolies produce homogeneous products; others produce heterogeneous products.
Open Market Operations
The buying and selling of government bonds by the Federal Reserve to control bank reserves and the money supply.
The expenses of doing business.
The second-best alternative (or the value of that alternative) that must be given up when scarce resources are used for one purpose instead of another.
Sometimes called offshoring, outsourcing occurs when a firm in one country tries to reduce costs by locating production facilities in other countries and/or by hiring cheaper foreign workers.
A check written for more than the balance in one's checking account; in colloquial terms, a check that bounces. The bank will mark such a check NSF, for "non-sufficient funds," and will charge a penalty fee for the nuisance involved in handling a bounced check.
PACED Decision-Making Process
A decision-making process designed to help people solve problems in a rational, systematic way. It includes the following steps: State the Problem, List Alternatives, Identify Criteria, Evaluate Alternatives, and Make a Decision.
Certificates of various denominations generally recognized and accepted as a medium of exchange within a nation and elsewhere. Paper money is issued and backed by national governments or, in the case of the euro, by a group of governments.
A business with two or more owners who share the firm's profits and losses.
Passbook Savings Account
A savings account offering high liquidity but usually a low rate of interest. Deposits and withdrawals are recorded in the saver's passbook.
A loan issued to a borrower who writes a post-dated check made out to a lender (usually a company specializing in payday loans and other financial services targeted to low-income customers) for the amount he or she wishes to borrow plus a fee. The lender then gives the borrower cash in the amount stated on the check, minus the fee, and holds the check until the borrower's next payday, when the lender cashes it. No credit background check is required. The cost (in fees and interest) to those who use payday loans is often high, however, when calculated as an APR.
Payment Due Date
In a credit arrangement, the date by which the minimum payment must be made.
An amount of money automatically subtracted from an employee's gross pay for taxes, insurance, retirement benefits, etc.
Pegged Exchange Rate
An exchange rate that is fixed within a certain range or against a major currency or basket of currencies.
An account established by a business to fund retirement benefits for its workers. Pension funds invest in stocks, bonds, mutual funds and real estate.
Per Capita Gross Domestic Product (GDP)
The total market value of all final goods and services produced in an economy in a given year divided by the population.
A market structure in which a large number of relatively small firms produce and sell identical products and in which there are no significant barriers to entry into or exit from the industry. Firms in perfect competition are price takers and in the long run will earn only normal profits.
Perfectly Elastic Demand
A situation in which even the smallest change in price will cause consumers to change their consumption by a huge amount. Buyers will purchase as much of a product or resource as is available at a constant price.
Perfectly Elastic Supply
A situation in which the smallest change in price would lead to an infinite change in quantity supplied. Sellers will make available as much of the product or resource as buyers will purchase at a constant price.
Perfectly Inelastic Demand
A situation in which there is no change in the quantity demanded as the price changes.
Perfectly Inelastic Supply
A situation in which supply will not change regardless of the change in price or the length of time allowed for change.
An expenditure that occurs occasionally and for which people budget money.
Money received but not earned on a regular schedule--for example, from occasional baby-sitting jobs, summer jobs and gifts from relatives.
Personal Distribution of Income
A classification of the income received by individuals or families; shows the number of people in various income categories, ranging from those receiving the highest level of income to those receiving the lowest.
The time, money and skills that a person has.
PIN (Personal Identification Number)
A confidential code used to access private financial information or to make transactions (at an ATM, for example).
Planned Economic System
An economic system where the questions of what to produce, how to produce and for whom to produce are answered by means of a central plan rather than by markets. In the former Soviet Union, a State Planning Committee (Gosplan) oversaw planning for the production and distribution of most goods and services.
Thoughtful, deliberate spending, reflecting a consumer's judgment that the benefits to be obtained warrant the costs to be paid.
A person's or an institution's collection of savings and investments.
A beneficial or positive side effect that results when the production or consumption of a good or service affects the welfare of people who are not the parties directly involved in a market exchange. Sometimes referred to as "third-party benefit" or "spillover benefit," it is a benefit obtained without compensation by third parties from the production or consumption of other parties.
Potential Gross Domestic Product (GDP)
The real GDP an economy would produce if its labor and other resources were fully employed.
The state of being poor, variously defined. Sometimes defined relatively--by reference, for example, to the average household income in a nation or region. Sometimes defined absolutely--by reference, for example, to the income needed to provide for adequate food, housing and clothing in a nation or region.
The fee paid for insurance protection.
In a credit arrangement, last month's balance.
The amount of money that people pay when they buy a good or service; the amount they receive when they sell a good or service.
A legally established maximum price that may be charged for a good or service.
Charging different customers different prices for the same good or service.
Price Elasticity of Demand
The responsiveness of the quantity demanded of a good or service to changes in its price. The price elasticity of demand is the percentage change in quantity demanded divided by the percentage change in price.
Price Elasticity of Supply
The responsiveness of the quantity supplied of a good or service to changes in its price. The price elasticity of supply is the percentage change in quantity supplied divided by the percentage change in price.
A legally established minimum price that may be charged for a good or service.
An arrangement in an oligopolistic industry in which one firm makes pricing decisions for the entire industry; one firm sets the price and the other firms follow.
The weighted average of the prices of all goods and services in an economy; used to calculate inflation.
The absence of inflation or deflation; a broad social goal and criterion for measuring the performance of an economic system.
A firm that is unable to set a price that differs from the market price without losing profit; a firm in a perfectly competitive industry.
The market where new securities are offered for sale for the first time. Investment banks buy shares of stocks directly from corporations that issue them and sell these shares to others.
An original amount of money invested or lent.
A good that provides benefits only to the purchaser.
A basic institution in a market economy, private property involves the right to exclusive use, legal protection against invaders and the right to transfer property to other. Property rights are defined, enforced and limited through the process of government.
The difference between the price firms would have been willing to accept for their products and the price they actually receive.
People and firms that use resources to make goods and services.
A good or service that can be used to satisfy a want.
A process of manufacturing, growing, designing, or otherwise using productive resources to create goods or services used to to satisfy a want.
Production Possibilities Frontier
A table or graph that shows the full employment capacity of an economy in the form of possible combinations of two goods, or two bundles of goods, that could be produced with a given amount of productive resources and level of technology.
A firm operating where it produces a given quantity and quality of goods at the lowest possible cost; also known as technical efficiency.
Natural resources, human resources, capital resources and entrepreneurship used to make goods and services.
The amount of output (goods and services) produced per unit of input (productive resources) used.
Income received for entrepreneurial skills and risk taking, calculated by subtracting all of a firm's explicit and implicit costs from its total revenues.
Where MR = MC; profit is at a maximum when marginal revenue equals marginal cost.
The desire to make money which motivates or causes people to work hard to produce goods and services.
A tax that take a larger percentage of income from people in higher-income groups than from people in lower-income ones; the U.S. federal income tax is an example.
Legal protection for the boundaries and possession of property. Assigning of property rights to individuals, collectives or governments depends on the economic system.
A tax on land and structures built on it. Payments go to state and/or local governments to pay for police protection, public schools, libraries, etc.
A tax that takes the same percentage of income from people in all income groups.
Goods, often supplied by the government, for which use by one person does not reduce the quantity of the good available for others to use, and for which consumption cannot be limited to those who pay for the good.
The study of decision making as it affects the organization and operation of government and other collective organizations. Involves the application of economic principles to political science topics.
In a credit arrangement, the total amount spent during the billing cycle.
The amount of goods and services that a monetary unit of income can buy.
An illegal scheme of selling goods. Participants are recruited by advertisements offering big profits to those who pay a fee for agency rights, that is, rights to sell goods as a representative of the pyramid company. Each recruited agent then recruits others to join, with each new participant paying a fee to join. The key is that each person is promised commissions not only on his or her sales but on the sales of other people they recruit as distributors.
Examining products to learn whether one is better than others.
The amount of a good or service people will buy at a given price in a given period of time.
The amount of a good or service sellers are willing and able to offer at a given price in a given period of time.
In international trade, the limit on the quantity of a product that may be imported or exported, established by government laws or regulations; in command economies, more typically a production target assigned by government planning agencies to the producers of a good or service.
Rate of Return
Earnings from an investment, stated as a percentage of the amount invested; usually calculated on an annual basis.
Expectations about the future rate of inflation or other economic events that people form using all available information, including predictions about the effect of present and future policy actions by the government.
Rational Expectations Theory
A branch of New Classical theory which holds that firms and individuals have rational expectations about the economy and government policies and thus may pursue their own interests in such a way as to render those policies ineffective.
A decision not to obtain information about political issues or candidates because the costs of doing so outweigh the benefits.
Property such as land, houses and office buildings.
Real Estate Tax
A tax on land and structures built on it (houses, factories, etc.). Payments go to state and/or local governments to pay for police protection, public schools, libraries, etc.
Real Gross Domestic Product (GDP)
GDP measured in dollars of constant purchasing power. The measure is obtained by adjusting nominal GDP (GDP measured in current prices) by an appropriate price index, usually the implicit price deflator. Often used as a measure of economic activity.
Real Interest Rates
The nominal (posted) interest rate minus the rate of inflation.
Real vs. Nominal
Two ways of expressing monetary values. Nominal monetary values are measured in current prices; real monetary values are measured in constant prices, that is, in prices of a given or base period. Real monetary values are obtained by adjusting nominal monetary values with an appropriate index of prices.
The wage rate adjusted for inflation; the purchasing power of wages, the volume of goods and services that money wages will buy.
A decline in the rate of national economic activity, usually measured by a decline in real GDP for at least two consecutive quarters (i.e., six months).
The amount by which the aggregate expenditures curve must increase (shift upward) to increase the real GDP to the full-employment noninflationary level.
Redistribution of Income
The transfer of income (in cash or in kind) through government taxation, spending and assistance programs targeted at particular income groups, and programs designed to provide training to workers or to encourage private investments in education or other kinds of human capital. The goal is to transfer money from higher-income groups to lower-income groups.
A tax that takes a larger percentage of income from people in lower-income groups than from higher-income ones. Sales taxes and excise taxes are examples.
Economic regulation is the prescription of price and output for a specific industry, often a natural monopoly. Social regulation is the prescription of health, safety, performance, environmental, output and job standards across several industries.
The price of one good in relation to the price of another good; a measure of opportunity costs and therefore the price that affects economic decision making.
Rent to Own
An arrangement whereby consumers rent something (often furniture), making regular rental payments, and become owners of the rented object(s) after a specified period of time--sometimes automatically and sometimes with an additional payment. A legal business but very costly to consumers.
The minimum amount of cash reserves (a percentage of the deposits) in dollars that a bank is required by law to keep on hand or with the Federal Reserve.
The fraction of banks' deposits that they are required by law to keep on hand or with the Federal Reserve.
The basic kinds of resources used to produce goods and services: land or natural resources, human resources (including labor and entrepreneurship), and capital.
A document describing a job-seeker to prospective employers. Usually includes the job-seeker's name, telephone number, address, e-mail address, career objective, education, work experience, abilities, awards, offices held in organizations and special interests.
Accounts such as IRAs (Individual Retirement Accounts), SEPs (Simplified Employee Pension Plans) and Keogh Plans that allow individuals to save money toward retirement on a tax-deferred basis.
Earnings from an investment, usually expressed as an annual percentage.
The money a business receives from customers who buy its goods and services. Not to be confused with profit.
The chance of losing money.
Risk of Financial Loss
The chance that the value of an investment (the principal) will decrease.
As applied to investments: the greater the risk, the greater the potential reward. For example: passbook savings accounts offer depositors very low risk but also low rates of interest; growth stocks are much riskier, but they offer a potential for big gains.
Role of Government
Government activity in establishing a framework or rules of the game in economic life. In the United States, this activity involves preserving and fostering competition, regulating natural monopolies, providing information and services to enable the market to work better, regulating externalities, providing certain public goods, offering some economic security and income redistribution to individuals, assuring a sound monetary system and promoting overall economic stability and growth.
Rule of 72
A mathematical rule for determining the number of years it will take for an investment to double in value. The number of years is determined by dividing 72 by the annual rate of return. Thus, an investment expected to earn interest at a rate of 8 percent will double an investor's funds in 72/8, or nine years. Dividing 72 by the number of years in which an investor wishes to double his or her return will yield the necessary rate.
A regular payment, often at monthly or biweekly intervals, made by an employer to an employee, especially in the case of professional or white-collar employees. Salaries are paid for services rendered and are not based on hours worked.
An exchange of goods or services for money.
The money a business receives from customers who buy its goods and services. Not to be confused with profit.
Tax in the form of a percent of the cost of a good or service; paid to local and state governments when goods and services are purchased.
To keep money for future use; to divert money from current spending to a savings account or another form of investment.
Money set aside for a future use that is held in easily-accessed accounts, such as savings accounts and certificates of deposit (CDs).
An interest-bearing account (passbook or statement) at a financial institution.
Securities issued by the U.S. Treasury in relatively small denominations for individual investors. Investors who buy savings bonds in effect make a loan to the government, in return for the government's promise (represented by the bond, a nontransferable debt certificate) to repay the loan with interest. The interest is free from state and local taxation. Savings bonds are considered to be risk-free investments, since they are backed by the U.S. government.
Arrangements by means of which people save money, including savings accounts, certificates of deposit (CDs), money market deposit accounts and U.S. Savings Bonds.
A plan for setting aside money for future use.
Guidelines for workplace success developed by the U.S. Department of Labor Secretary's Commission on Achieving Necessary Skills in 1992. The Commission determined that success in any occupation requires basic skills (reading, writing and math), thinking skills, personal qualities, interpersonal skills and the ability to acquire and use resources, information systems and technology.
The condition that exists because human wants exceed the capacity of available resources to satisfy those wants; also a situation in which a resource has more than one valuable use. The problem of scarcity faces all individuals and organizations, including firms and government agencies.
Effects indirectly related to a course of action whose influence will only be seen or felt later in time.
A market in which stocks can be bought and sold once they are approved for public sale; for example, the New York Stock Exchange.
Credit with collateral (for example, a house or a car) for the lender.
A fee charged by a financial institution for certain financial services provided to customers.
Activities performed by people, firms or government agencies to satisfy economic wants.
A property of a good or service such that it can be used by many without diminishing another's ability to consume the same good; examples include street lights and radio broadcasts.
A period of time long enough for existing firms to change some--but not all--of the resources they use.
Something a person or organization plans to achieve within a one-year time period.
The situation that results when the quantity demanded for a product exceeds the quantity supplied. Generally happens because the price of the product is below the market equilibrium price.
A document bearing a person's signature, held on file in a financial institution. In cases of suspected forgery, signatures of doubtful origin can be checked against those recorded on signature cards.
Interest paid on the initial investment (the principal) only. Calculated by multiplying the investment principal times the annual rate of return times the number of years involved.
Simplified Employee Pension (SEP) Plan
A qualified, tax-deferred retirement plan for an individual with a small business.
A federal system of old-age, survivors', disability and hospital care (Medicare) insurance which requires employers to withhold (or transfer) wages from employees' paychecks and deposit that money in designated accounts.
Social Security Tax
A tax levied on employers and employees to finance public Social Security benefits.
A business owned by one person who receives all the profits and is responsible for all the debts incurred by the business.
Special Interest Group
An organization of people with a particular legislative concern. They work together to gather information, lobby politicians and publicize their concern.
A situation in which people produce a narrower range of goods and services than they consume. Specialization increases productivity; it also requires trade and increases interdependence.
Use money now to buy goods and services.
A record of spending over a period of time.
A beneficial or positive side effect that results when the production or consumption of a good or service affects the welfare of people who are not the parties directly involved in a market exchange. Sometimes referred to as "third-party benefit" or "positive externality."
A negative side effect that results when the production or consumption of a good or service affects the welfare of people who are not the parties directly involved in a market exchange. Sometimes called "third-party cost" or "negative externality."
Standard of Living
The level of subsistence of a nation, social class or individual with reference to the adequacy of necessities and comforts of daily life.
State Income Tax
A percentage of income paid by individuals and businesses to a state government to fund services such as roads, safety and health. Not all states levy an income tax.
Statement Closing Date
In a credit arrangement, the date of the last purchase billed on the statement.
Statement Savings Account
A savings account for which the bank sends a statement detailing deposits, withdrawals and interest earned once a month or once a quarter. Interest rates for statement accounts are usually lower than rates for other savings instruments, but a depositor can open a statement account with very little money and can also withdraw money from a statement account at any time.
An ownership share or shares of ownership in a corporation.
A market in which the public trades stock that someone already owns; the buying and selling of stock.
Stock Mutual Fund
A mutual fund that buys stocks in order to make profits for the investors.
The type of unemployment resulting from people's present abilities, skills, training and location not matching up with available job openings that reflect the basic structure of the economy.
Substitute Goods and Services
Goods or services that may be used in place of another good or service; examples include tap water for bottled water (or vice versa) and movies for concerts (or vice versa).
The amount of a good or service that producers are willing and able to offer for sale at each possible price during a given period of time.
Supply-Side Fiscal Policy
Policy intended to increase an economy's productive capacity by shifting aggregate supply; e.g., a tax cut giving businesses an incentive to invest and expand.
The situation that results when the quantity supplied of a product exceeds the quantity demanded. Generally happens because the price of the product is above the market equilibrium price.
The amount of money a person receives within a pay period after taxes and other deductions are taken out of his or her paycheck.
A tax on an imported good or service.
A measure of who actually pays a tax.
An omission or ambiguity in the tax law that allows some people to legally avoid paying certain taxes.
Compulsory payments to governments by households and businesses.
Improvements in a firm's ability to produce due to improved processes, methods and machines.
Three Cs of Credit
Three characteristics that determine a person's qualifications for obtaining a loan: Capital: Assets owned. Character: A person's past history in repaying debts. Capacity: A person's current and future earnings relative to current debt.
Total Available Credit
In a credit arrangement, the total credit line minus the new balance.
Total Cost (TC)
All costs associated with producing a good or service; the sum of total fixed costs plus total variable costs.
Total Credit Line
In a credit arrangement, the maximum amount that can be charged on the credit account.
Total Revenue (TR)
All money received from selling a good or service; the price times the quantity sold of each item.
The exchange of goods and services for money or other goods and services.
Restrictions that prevent free trade among nations. Examples include tariffs, import and export quotas, and nontariff restrictions such as licensing requirements and bureaucratic red tape.
The giving up of one benefit or advantage in order to gain another regarded as more favorable.
An economy in which customs and habits from the past are used to resolve most economic issues of production and distribution.
Tragedy of the Commons
Overuse or misuse of a commonly-owned resource, such as public grazing land or fishing waters.
Costs associated with buying or selling goods and services that are not included in the money prices of those goods and services. Examples include obtaining information on prices and product quality, searching for sellers, and bargaining costs.
Money collected by the government from one group and given to others. Examples include Social Security benefits, unemployment insurance payments and agricultural subsidies.
An economy that is moving from one economic system to another. The term usually refers to the movement from a planned economic system into a competitive market system.
Truth in Lending Act
A federal law that requires creditors to disclose finance charges and interest rates in a standard, uniform manner.
The number of people without jobs who are actively seeking work.
The number of unemployed people, expressed as a percentage of the labor force.
The unexpected and unplanned results of a decision or action.
The cost per unit of measurement. A way for consumers to compare the costs of different sizes of the same item.
Impulsive use of money with little or no consideration of alternatives and resulting in unplanned consequences.
Debt without collateral; credit card debt, for example.
A law which establishes a maximum permissible interest rate for a particular type of loan. Loans at rates above the usury ceiling are illegal.
An abstract measure of the satisfaction consumers derive from consuming goods and services.
The difference between the value of output and the value of the intermediate goods used in the production of that output.
Value of Money
The ability of money to buy goods and services. A wide variety of items has been used as money. Money need not have any intrinsic value. It is people's willingness to accept it that gives it value.
Variable Costs (VC)
Costs of production that change as a firm's output level changes.
Expenditures that change from week to week or month to month--for food, clothing, recreation and entertainment, for example.
Income that varies from week to week or month to month.
Velocity of Money
The average number of times each dollar is spent on final goods and services in a year.
A combination formed when two businesses, one of which supplies an ingredient of the other's product, merge.
Trading goods and services with other people because both parties expect to benefit from the trade.
Trading goods and services with other people because both parties expect to benefit from the trade.
A federal income tax document that employers complete and send to their employees and to the Internal Revenue Service at the end of a year; shows employee compensation and taxes withheld.
A federal income tax document that instructs an employer about how much money to withhold from an employee's paycheck for tax purposes.
Payments for labor services that are directly tied to time worked, or to the number of units of output produced.
Desires that can be satisfied by consuming or using a good or service. Economists do not differentiate between wants and needs.
The removal of money by a depositor from a financial account.
Money taken out of an employee's paycheck and sent to the government and credited to the employee's tax bill.
Effort applied to achieve a purpose or result, often for pay; skills and knowledge put to use to get something done; employment at a job or in a position; occupation, profession, business, trade, craft, etc.
A system of values in which central importance is ascribed to work and to qualities of character believed to be promoted by work; a sense of responsibility for doing a job well.
Ability to do things demanded in particular jobs.
People employed to do work, producing goods and services.
An international organization that makes loans and provides technical expertise to developing nations.
World Trade Organization (WTO)
A trade agreement among over 100 nations that specifies the level of tariffs among the signatories and attempts to resolve trade disputes.