This is a guide by Online MBA.
Economics affects all of us on a fundamental level, and we hear news on the global economy everyday. Understanding the basic terms of economic theory is important for comprehending economic news and making better economic policy choices. This list of basic economic terms is offered to help readers understand economics better.
Accelerator — In economics, the accelerator is the ratio between a change in gross domestic product (GDP) and investment expenditures.
Ad-valorem taxes — Ad-valorem taxes are those taxes that are expressed as a percentage of the value of the taxable item.
Aggregate demand — Aggregate demand is an expression of the total real expenditures that consumers are willing and able to pay at various price levels on end-product services and goods during a specific period of time.
Aggregate Demand Curve — The aggregate demand curve represents in graphic form the relation between price level and the total or aggregate expenditures on real production.
Aggregate Supply — Aggregate supply measures the aggregate real production of end-product services and goods that are available in an economy in a specified time period and at a range of different prices.
Aggregate Supply Curve — The aggregate supply curve is a graphic depiction of the relation between price level and real production.
Average Rate of Tax — The average tax rate measures in a percentage how much of a total tax base is actually paid in taxes. Divide total taxes paid by the total tax base to get the average rate of tax.
Balanced Budget — A balanced budget occurs when budget revenues are equal to budget expenditures.
Balance of Payments Accounts —The record of every transaction that occurs between one country’s residents and another’s is known as the balance of payments accounts.
Budget — A budget is an expression of an organization’s financial position based on anticipated revenues and expenses.
Canons of Taxation — The four criteria by which taxes are judged. They were first suggested by Adam Smith and say that the cost of collecting the tax should be low relative to the total tax yield; the taxpayer must be certain of when the tax is due and the amount owed; the manner of paying the tax and its timing must be convenient for the taxpayer; and the tax is to be charged according to the ability of the taxpayer to pay the tax.
Capital Expenditure — Capital expenditures are fund outlays made for physical assets including things like equipment, property, buildings in order to expand production.
Circular Flow of Income — This is a model for how money moves through an economy. It basically says that the expenditures of businesses eventually become the income of employees at some point, which income later is spent on the goods and services offered by the various businesses, forming a circle.
Convergence Criteria — These are the criteria that two or more countries agree to meet in order for them to create and adopt a common currency between them. The European Union had to agree to a set of convergence criteria that had to be satisfied in order for the Euro to be finally adopted.
Corporation Tax — That tax that is assessed on the profits of a corporation is known as a corporation tax.
Cost-Push Factors — Cost-push factors are those changes that end up forcing the costs of producing goods and services to increase.
Cost-Push Inflation — Cost-push inflation occurs when the average price level in a given economy increases because higher production costs have slowed production and have produced a decrease in aggregate supply.
Deflate — The average level of prices in an economy deflates when the average level declines.
Deflationary Fiscal Policy — A deflationary fiscal policy is a fiscal policy the government pursues in order to reduce the economy’s aggregate demand. A common deflationary fiscal policy would be to increase taxes and lower public spending.
Deflationary Gap — This is the economic gap that results when there is insufficient demand for goods and services to produce full employment in the economy.
Deflationary Monetary Policy — A deflationary monetary policy is one that makes use of monetary instruments such as interest rates to lower aggregate demand in the economy.
Deflationary Policies — Deflationary policies are those policies that attempt to lower an economy’s aggregate demand and slow the growth rate of economic output.
Demand-Deficient Unemployment — This is the situation that occurs when there is insufficient economic demand to produce jobs for everyone who desires work.
Demand Management Policies — These are policies instituted by the government to change aggregate demand in order to bring about stabilization in the economy.
Demand-Pull Inflation — Demand-pull inflation occurs when there is an increase in prices in an economy due to an increase in the overall aggregate demand.
Direct Taxes — Direct taxes are those taxes that are levied on a person’s or business’ income.
Disposable Income — The amount of funds leftover in the household sector of the economy after taxes and government payments like welfare and social security benefits have been paid is known as disposable income.
Economic Rent — Economic rent is the amount received by the owner of a particular resource that is over the minimum cost it takes to produce that resource.
Economies of Scale — This refers to the ability of larger businesses to lower the unit costs of their goods and services.
Expectations-Augmented Phillips Curve — The expectations-augmented Phillips Curve is Milton Friedman’s explanation for the breakdown of the Phillips Curve in the decade of the 1970s. Ultimately, it says that when an economy attempts to lower unemployment under the natural rate of unemployment in an economy, the only result will be inflation.
Externalities Negative — These are the costs that the deeds of persons and companies end up foisting onto other people.
Externalities Positive — These are the benefits that the deeds of persons and companies cause for other people in an economy.
Factors of Production — Factors of production are the four fundamental requirements for the production of services and goods and services in any economy. There are four of them: capital, land, entrepreneurship, and labor.
Fiscal Drag — The effect of inflation on average tax rates is known as fiscal drag. This occurs as people move into higher tax brackets but do not really benefit on an individual level because inflation eats up the remaining after-tax income.
Fiscal Policy — The use of federal government powers in the areas of taxing and spending in order to bring stability to the business cycle comprise its fiscal policy.
Fiscal Year — The fiscal year is the period of twelve months in which a company or government collects revenue or taxes, spends funds, and lives according to its budget.
Fisher Equation of Exchange — The Fisher equation of exchange is an economic equation that says the money in circulation times the velocity of the circulation rate equals the average level of prices times the number of transactions occurring in the economy.
Frictional Unemployment — This is the unemployment that occurs due to the amount of time it takes to match resources with production. It generally occurs as laborers seek employment and employers seek laborers but, for whatever reason, these employers and laborers have not been able to get together and form contracts.
Full-Employment Equilibrium — Full-employment equilibrium occurs when everyone who wants to have a job actually has one. There is enough economic activity to create jobs for everyone.
Funding — This is the government’s exchange of short-term securities for long-term securities in order to reduce bank liquidity.
Gearing Ratio — The gearing ratio is the measurement of the total amount of a company’s borrowed capital. It demonstrates the proportion of loan capital within a business’ total capital.
Geographical Immobility — Geographical immobility occurs when resources do not transfer freely from one place to another because they are unable to do so.
Gini Coefficient — The Gini coefficient helps economists to calculate the Lorenz Curve’s position. It measures the ratio between and the Lorenz Curve and the 45-degree line and everything under that line in the graph of the relation the percentage share of national income to the percentage of population
Gilt-Edged Securities — Gilt-edged securities are those government securities in which the government promises to repay borrowed money at a fixed rate of interest over a fixed term.
Government Capital Expenditure — A government capital expenditure is government money spent on goods that are classified as investment goods. This includes things that will be around for an extended time such as roads, schools, and so on.
Government Current Expenditure — A government current expenditure is money spent on the government’s everyday operations. This includes things like salaries for government employees.
Gross Domestic Product — Gross Domestic Product comprises the total market value of all the services and goods that are produced within a nation’s economy in a defined period of time.
Income Elasticity of Demand — Income Elasticity of Demand refers to the change in demand for a good or service that results from a person’s change in income level.
Indirect Taxes — An indirect tax is a tax on expenditures such as a sales tax.
Inflation — Inflation is the continual average price level increase that occurs in an economy.
Inflationary Gap — The inflationary gap is that economic gap that occurs when economic demand outstrips the production of goods and services in that economy.
Investment — Economists define investment as that which is sacrificed in terms of current benefits in order to pursue a venture in which greater future benefits are expected.
Invisible Hand — Popularized in Adam’s Smith The Wealth of Nations, the invisible hand is the idea that consumers and producers will, in acting out of their own self-interest, make decisions that, considered collectively, are the best for the entire economy as long as there is little government interference.
Laffer Curve — This is the graphical representation between tax rates and tax collections by government that Arthur Laffer designed. Basically, the curve affirms that the maximum amount of revenue collection occurs somewhere 0% and 100%, and it is key to Supply-Side economic theory.
Laissez-Faire — This is the notion that a hands-off approach of government to the economy is best. Free from outside coercion, the decisions of consumers and producers will produce the maximum allocation of resources at the lowest cost.
Lorenz Curve — The Lorenz Curve depicts graphically a group’s measure of inequality and concentration. It might be used, for example, to demonstrate the distribution of income within a certain population.
Macroeconomics — This is that branch of the subject of economics that deals with the whole economy, including such things as inflation, gross domestic product, the business cycle, and so on.
Majority Rule — Majority rule occurs when the vote of a majority of voters is what makes the final decision on a matter.
Managed Float — If an exchange rate has freedom to increase or decrease within certain boundaries yet it becomes subject to control of the government outside these boundaries, then it is called a managed float.
Marginal Cost/Analysis — Marginal cost is the change in total cost that comes from the change of a firm or a business’ short-term output. Marginal analysis is the economic analysis of small changes in certain important variables in an economy.
Marginal Factor Cost — This is the measurement of a total factor cost change that is found when the change in factor input quantity is divided into the total factor cost.
Marginal Product — This is the measurement of the change in total product quantity that occurs when there is a change in one variable input. Divide the change in variable input into the change in total product to get the marginal product.
Marginal Productivity Theory — This is an economic theory that says businesses will employ a worker only at a rate that adds to the company’s well-being and profitability.
Nash Equilibrium — This theory says that when different economic agents follow a certain set of strategies, equilibrium is achieved when none of the participating agents can get a larger payoff if they choose to follow a different strategy.
National Banks — National banks are those that the Comptroller of the Currency charters and not one of the fifty states in the USA.
Nationalization — Nationalization occurs when a national government takes ownership of a certain private business or entire industry. Often this occurs as a revolution produces a communistic or more socialistic economy.
Near Money — This refers to assets that are liquid but what cannot be immediately exchanged for goods and services. They have to be converted first into money, which is easy to do. An example of such assets is a personal bank account.
Needs — Needs are those things that are needed to sustain biological or physical life.
Net Domestic Product — Net Domestic Product comprises the total market value of all the services and goods that are produced within a nation’s economy in a defined period of time, after there has been adjustment made for capital depreciation.
Okun’s Law — Okun’s law says that that there is a three percentage point widening between the actual and full employment level of GDP for every one percentage point increase in unemployment.
Open Market — The open market is the market on which U.S. treasury bonds are traded.
Opportunity Cost — Opportunity cost is that value we place on the use of one of our resources. It is calculated by taking the actual cost and pleasure of the resource plus the income and pleasure that is given up to pursue the chosen resource.
Organized Labor — Organized labor refers to the group of labor unions that works on behalf of employee interests in a given economy.
Origin — In graphs, the origin is the point at which the X axis and the Y axis intersect.
Packaging — In the marketing of products, packaging refers to the design and container variables associated with said products.
Paper Currency — Paper currency refers to those paper instruments that a government issues as money for use in its economy.
Partnership — Partnership refers to a business organization wherein at least two people own and operate the company equally.
Per Unit Tax — A per unit tax is a tax that is a set charge on each particular unit of a good that is sold.
Quantity Theory of Money — This theory says that there is an equal percentage-point change in the nominal GDP for every percentage-point change in the supply of money.
Rate of Interest — The rate of interest is an extra amount of money that must be paid in order to borrow a certain sum of money.
Real GDP — Real Gross Domestic Product comprises the total market value of all the services and goods that are produced within a nation’s economy in a defined period of time, when measured in constant prices for that period of time.
Real Terms — Real terms refer to the situation in which inflation’s effect has been removed in order to measure a certain economic variable.
Reflate — To reflate an economy is to implement policies in an attempt to increase the level of economic activity in that economy.
Reflationary Policy — A reflationary policy is one that the government designs in order to increase economic activity in the economy.
Regressive Tax — A regressive tax is one wherein those with less income pay a larger percentage of their income in taxes than those with a higher income and wherein those persons with higher incomes pay a smaller percentage of their income in taxes than those with a lower income.
Research and Development — Research and development refers to any expense that is incurred in a business’ attempt to create new products for sale in the marketplace.
Return on Capital Employed — This calculates the profit of a company as a percentage of all the capital that people have invested in a certain company.
Revenue-Neutral Policies — Revenue-neutral policies are those government economic policies that have no effect on the bottom line. To lower taxes at a level commensurate with a lowering of spending would be a revenue-neutral policy.
Savings — Savings refers to any kind of income that is set aside for later and not spent immediately.
Say’s Law — Say’s Law asserts that aggregate output creates enough aggregate demand to consume or purchase all of the output.
Social Benefits — The sum of private and external benefits comprises social benefits.
Social Costs — The sum of private and external costs comprises social costs.
Supply-Side Policies — These are government economic policies that change aggregate supply in an attempt to bring stability to an economy.
Sustainable Growth — Sustainable growth is achieved when long-term economic growth occurs without consuming non-renewable resources in their entirety.
Trade Cycle — There are fluctuations in the rate of economic growth in any economy and this reality is known as the trade cycle.
Transfer Payments — Transfer payments are those that are given without any expectation of production, usually by the government. Examples of these in the United States include Social Security and other social welfare programs.
Treasury Bills — Treasury bills are securities offered by the U.S. Treasury to help pay for the deficit in the U.S. federal budget.
Voluntary Unemployment — This is unemployment that occurs when those who are willing and able to contribute to production in the economy choose not to produce.
Wage-Price Spiral — A wage-price spiral occurs when employees successfully demand a raise in income over inflation. When the raise is given, the business increases prices for goods and services to maintain profit levels despite the raise, which leads the workers to demand another raise, and so forth.