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A

ability-to-pay principle the view that those with greater income should pay more in taxes than those with less income. (14)

absolute advantage a situation in which a person or country is more efficient at producing a good in comparison with another person or country. (17)

accounting profits total revenue minus total costs where total costs exclude the implicit opportunity costs; this is the definition of profits usually reported by firms. (9)

ad valorem tariff a tax on imports evaluated as a percentage of the value of the import. (18)

ad valorem tax a tax that is proportional to the value of expenditures. (7)

adverse selection in insurance markets, a situation in which the people who choose to buy insurance will be the riskiest group in the population; analogous situations apply in other markets. (13)

aggregate demand the total demand for goods and services by consumers, businesses, government, and foreigners. (19)

aggregate demand/inflation (ADI) curve a line showing a negative relationship between inflation and the aggregate quantity of goods and services demanded at that inflation rate. (27)

aggregate expenditure line the relation between the sum of the four components of spending (C + I + G + X) and aggregate income. (25)

aggregate hours the total number of hours worked by all workers in the economy in a given period of time. (21)

aggregate income the total income received by all factors of production in the economy; also simply called "income." (25)

aggregate supply the total value of all goods and services produced in the economy by the available supply of capital, labor, and technology (also called potential GDP). (19)

antidumping duty a tariff imposed on a country as a penalty for dumping goods. (18)

Antitrust Division of the Justice Department the division of the Justice Department in the United States that enforces antitrust legislation, along with the Federal Trade Commission. (16)

antitrust policy government actions designed to promote competition among firms in the economy; also called "competition policy" or "antimonopoly policy". (16)

Arrow impossibility theorem a theorem that says that no democratic voting scheme can avoid a voting paradox. (15)

ask the price that sellers say they are willing to sell a good for in an auction market. (7)

asset something of value owned by a person or a firm. (24)

asymmetric information different levels of information available to different people in an economic interaction or exchange. (13)

automatic stabilizers automatic tax and spending changes that occur over the course of the business cycle that tend to stabilize the fluctuations in real GDP. (29)

average fixed cost (AFC) fixed cost divided by the quantity produced. (8)

average product of labor the quantity produced divided by the amount of labor input. (8)

average revenue total revenue divided by quantity. (10)

average tax rate the total tax paid divided by the total taxable income. (14)

average total cost (ATC) total costs of production divided by the quantity produced (also called cost per unit). (8)

average total cost pricing a regulatory method that stipulates that the firm charge a price that equals average total cost. (16)

average variable cost (AVC) variable costs divided by the quantity produced. (8)

 

B

backward-bending labor supply curve the situation in which the income effect outweighs the substitution effect of an increase in the wage, causing the labor supply curve to bend back and take on a negative slope at higher levels of income. (12)

balance of payments the record of all the transactions between a country and the rest of the world; it includes information on the value of trade in goods and services as well as transfer payments. (31)

balanced budget a budget for which tax revenues equal spending. (29)

balanced budget multiplier the ratio of the change in real GDP to a change in government purchases when the change in government purchases is matched by an equivalent change in taxes. (26)

bank a firm that channels funds from savers to investors by accepting deposits and making loans. (24)

barriers to entry anything that prevents firms from entering a market. (10)

barter trade in goods or services without the use of money. (24)

baseline the path of an economic variable that would occur without the policy change under consideration. (28)

bid the price that buyers say they are willing to pay for a good in an auction market. (7)

bilateral monopoly the situation in which there is one buyer and one seller in a market. (12)

bilateral trade balance the value of imports less the value of exports between two countries. (31)

Board of Governors of the Federal Reserve System the seven-member governing board of the central bank of the United States. (32)

bond a financial contract that stipulates a specific repayment of principal plus interest on a loan at a given date in the future. (29)

bond a promise by a firm or government to pay a certain amount of money to the bondholder on a fixed date in the future. (24)

boom unusually rapid increases in real GDP; frequently used to refer to the period when real GDP is greater than potential GDP. (28)

boom-bust cycle a business cycle caused by a monetary policy in which interest rates are initially too low, causing a boom, and there is a subsequent increase in interest rates, which causes a recession. (28)

breakeven point the point at which price equals the minimum of average total cost. (8)

Bretton Woods system the international monetary system put in place after World War II; it was based on fixed exchange rates. Infrequent adjustments of the exchange rates were permitted and did occur under the Bretton Woods system. (31)

budget constraint an income limitation on a person's expenditure on goods and services. (5)

budget cycle the more than two-year process in which the federal budget is proposed, modified, enacted, and implemented. (29)

budget deficit the amount by which government spending exceeds tax revenues. (29)

budget line a line showing the maximum combinations of two goods that it is possible for a consumer to buy, given a budget constraint and the market prices of the two goods. (5ap)

budget surplus the amount by which tax revenues exceed spending. (29)

business cycles short-term fluctuations in real GDP and employment. (19)

business fixed investment investment by firms in physical capital, such as factories and equipment. (20)

 

C

capital the factories, improvements to cultivated land, machinery and other tools, equipment, and structures used to produce goods and services. (1, 19, 22)

capital abundant a higher level of capital per worker in one country relative to another. (17)

capital account the part of the international accounts of a country that keeps track of the change in domestic assets owned by foreigners and foreign assets owned by citizens. (31)

capital gain the increase in the value of an asset through an increase in its price. (13)

capital gains tax a tax on the increase in the value of an asset. (32)

capital income the sum of profits, rental payments, and interest payments. (20)

capital intensive production that uses a relatively high level of capital per worker. (17)

capital loss the decrease in the value of an asset through a decrease in its price. (13)

capital-saving technological change a technological innovation that reduces the amount of capital needed to produce a given amount of output with a given amount of labor. (23)

capitalism an economic system based on a market economy in which capital is individually owned, and production and employment decisions are decentralized. (34)

cartel a group of producers in the same industry who coordinate pricing and production decisions. (11)

Cartesian coordinate system a graphing system in which ordered pairs of numbers are represented on a plane by the distances from a point to two perpendicular lines, called axes. (1ap)

catch-up line the downward-sloping relation between the level of productivity and growth of productivity predicted by growth theory. (33)

causation a relation of cause and effect between variables in which one variable is a determinant of another variable. (1)

central bank the government institution that controls monetary policy in most countries. (24, 30)

central bank independence a description of the legal authority of central banks to make decisions on monetary policy with little interference by the government in power. (30)

ceteris paribus all other things being equal; refers to holding all other variables constant or keeping all other things the same when one variable is changed. (1)

chain weighted price index a price index using a changing basket of goods and services computed just as real GDP is computed, usually mentioned as a measure of inflation. (20)

checking deposit an account at a financial institution on which checks can be written; also called "checkable deposit." (24)

choice a selection among alternative goods, services, or actions. (2)

Clayton Antitrust Act a law passed in 1914 in the United States aimed at preventing monopolies from forming through mergers. (16)

Coase theorem the idea that private negotiations between people will lead to an efficient resolution of externalities regardless of who has the property rights as long as the property rights are defined. (15)

coincidence of wants a condition required for exchange in a nonmonetary system; to accomplish a trade, it is necessary to find someone who has what you want and also wants what you have. (24)

collectivized farm a farm in a planned economy that is in theory collectively owned by peasants, but controlled by the government. (34)

command and control the regulations and restrictions that the government uses to correct market imperfections. (15)

command economy an economy in which the government determines prices and production; also called a centrally planned economy. (1, 34)

commerce clause the clause in the U.S. Constitution that prohibits restraint of trade between states. (17)

commodity money a good used as money that has some intrinsic value in a nonmonetary use. (24)

communism an economic system in which all capital is collectively owned. (34)

comparative advantage a situation in which a person or country can produce one good more efficiently than another good in comparison with another person or country. (2, 17, 31)

compensating wage differential a difference in wages for people with similar skills based on some characteristic of the job, such as riskiness, discomfort, or convenience of the time schedule. (12)

compensation all the pay a worker receives including fringe benefits. (12)

competitive equilibrium model a model that assumes utility maximization on the part of consumers and profit maximization on the part of firms, along with competitive markets and freely determined prices. (7)

competitive industry an industry characterized by many firms selling the same product and free entry and exit of firms. (10)

competitive market a market where no firm has the power to affect the market price of a good. (6)

complement a good that is usually consumed or used together with another good. (3)

conditional forecast a prediction that depends on assumed values for government purchases, taxes, or some other variable that affects the forecast. (25)

conditionality stipulations on loans to countries from the International Monetary Fund that certain policy prescriptions, such as price reforms or reducing government budget deficits, must be met to receive funds. (33)

conjectural variations approach a model that assumes that firms make decisions based on what they expect other firms to do in reaction to their decisions. (11)

constant money growth rule a monetary policy in which the central bank keeps money growth constant. (30)

constant returns to scale a situation in which long-run average total cost is constant as the output of a firm changes. (8)

consumer price index (CPI) a price index equal to the current price of a fixed market basket of consumer goods and services in a base year. (20)

consumer surplus the difference between what a person is willing to pay for an additional unit of a good--the marginal benefit--and the market price of the good; for the market as a whole, it is the sum of all the individual consumer surpluses or the area below the market demand curve and above the market price. (5, 7)

consumption purchases of final goods and services by individuals. (20)

consumption function the positive relationship between consumption and income. (25)

consumption share the proportion of GDP that is used for consumption; equals consumption divided by GDP, or C/Y. (22)

consumption smoothing the idea that, although their incomes fluctuate, people try to stabilize consumption spending from year to year. (26)

contestable market a market in which the threat of competition is enough to encourage firms to act like competitors. (10, 16)

contingent valuation an estimation of the willingness to pay for a project on the part of consumers who may benefit from the project. (15)

controlled experiments empirical tests of theories in a controlled setting in which particular effects can be isolated. (1)

convergence of positions the concentration of the stances of political parties around the center of citizens' opinions. (15)

cooperative outcome an equilibrium in a game where the players agree to cooperate. (11)

coordination failure a situation where, because their actions are interdependent, people fail to act in a manner that is mutually beneficial. (32)

corporate income tax a tax on the accounting profits of corporations. (14)

corporation a firm characterized by limited liability on the part of owners and the separation of ownership and management. (6)

correlation the degree to which economic variables are observed to move together: If they move in the same direction, there is positive correlation; if they move in opposite directions, there is negative correlation. (1)

cost-benefit analysis an appraisal of a project based on the costs and benefits derived from it. (15)

Council of Economic Advisers a three-member group of economists appointed by the president of the United States to analyze the economy and make recommendations about economic policy. (1)

countercyclical policy a policy designed to offset the fluctuations in the business cycle. (29)

country in transition a country that is transforming from a centrally planned economy to a market economy. (33)

coupon the fixed amount that a borrower agrees to pay to the bondholder each year. (13)

Cournot model a model using the conjectural variations approach that assumes that each firm expects other firms to keep their production constant in response to actions the firm takes. (11)

craft union a union organized to represent a single occupation, whose members come from a variety of industries. (12)

credibility the believability of the government's intentions to carry out stated policies. (29)

cross-price elasticity of demand the percentage change in the quantity demanded of one good divided by the percentage change in the price of another good. (4)

crowding out the decline in private investment owing to an increase in government purchases. (22)

currency money in its physical form: coin and paper money. (24)

currency to deposit ratio the proportion of currency that people in the economy want to hold relative to their deposits; it equals currency divided by deposits. (24)

current account balance the value of exports minus the value of imports plus net factor income from abroad plus net transfers from abroad. (31)

Current Population Survey a monthly survey of a sample of U.S. households done by the U.S. Census Bureau; it measures employment, unemployment, the labor force, and other characteristics of the U.S. population. (14, 21)

customs union a free trade area with a common external tariff. (18)

cyclical deficit the difference between the actual deficit and the structural deficit. (29)

cyclical unemployment unemployment due to a recession, when the rate of unemployment is above the natural rate of unemployment. (21)

 

D

deadweight loss the loss in producer and consumer surplus due to an inefficient level of production. (7, 10)

debt contract a contract in which a lender agrees to provide funds today in exchange for a promise from the borrower, who will repay that amount plus interest at some point in the future. (13)

debt to GDP ratio the total amount of outstanding loans the federal government owes divided by nominal GDP.
(29)

deferred payment contract an agreement between a worker and an employer whereby the worker is paid less than the marginal revenue product when young, and subsequently paid more than the marginal revenue product when old. (12)

deflation a decrease in the overall price level, or a negative inflation rate. (28)

demand a relationship between price and quantity demanded. (3)

demand curve a graph of demand showing the downward-sloping relationship between price and quantity demanded. (3)

demand schedule a tabular presentation of demand showing the price and quantity demanded for a particular good, all else being equal. (3)

demand shock a shift in one of the components of aggregate demand that leads to a shift in the aggregate demand/inflation curve. (28)

depreciation the decrease in an asset's value over time; for capital, it is the amount by which physical capital wears out over a given period of time. (13, 20)

deregulation movement begun in the late 1970s, the drive to reduce the government regulations controlling prices and entry in many industries. (16)

derived demand demand for an input derived from the demand for the product produced with that input. (12)

developing country a country that is poor by world standards in terms of real GDP per capita. (33)

diffusion the spreading of an innovation throughout the economy. (23)

diminishing marginal utility the decline in additional utility from consumption of an additional unit of a good as more and more of the good is consumed. (5)

diminishing returns a situation in which successive increases in the use of an input, holding other inputs constant, will eventually cause a decline in the additional production derived from one more unit of that input. (23)

diminishing returns to labor a situation in which the incremental increase in output due to a unit increase in labor declines with increasing labor input; a decreasing marginal product of labor. (6)

discount rate an interest rate used to discount future payment when computing present discounted value. (13ap)

discount rate the interest rate that the Fed charges commercial banks when they borrow from the Fed. (30)

discounting the process of translating a future payment into a value in the present. (13ap)

discretionary fiscal policy changes in tax or spending policy requiring legislative or administrative action by the president or Congress. (29)

diseconomies of scale also called "decreasing returns to scale"; a situation where long-run average total cost increases as the output of a firm increases. (8)

disinflation a reduction in the inflation rate. (28)

disposable income income that households have to spend after taxes have been paid and transfers from the government have been received. (25)

dividend yield the dividend stated as a percentage of the price of the stock. (13)

division of labor dividing work into different tasks with groups of workers specializing in each task. (2, 23)

domestic content restriction a requirement that a fraction of the product must be produced within the area to qualify for zero tariffs between the countries in the free trade area. (18)

double-auction market a market in which several buyers and several sellers state prices at which they are willing to buy or sell a good. (7)

dual scale a graph that uses time on the horizontal axis and different scales on left and right vertical axes to compare the movements in two variables over time. (1ap)

dumping the selling of goods by foreign firms at a price below average cost or below the price in the domestic
country. (18)

dynamic comparative advantage changes in comparative advantage over time from investment in physical and human capital and in technology. (17)

 

E

earned income tax credit (EITC) a part of the personal income tax through which people with low income who work receive a payment from the government or a rebate on their taxes. (14)

earnings accounting profits of a firm. (13)

economic development the process of growth by which countries raise income per capita and become industrialized; also refers to the branch of economics that studies this process. (33)

economic fluctuations swings in real GDP that lead to deviations of the economy from its long-term growth trend. (19)

economic growth an upward trend in real GDP, reflecting expansion in the economy over time; it can be represented as an outward shift in the production possibilities curve. (2, 19)

economic history the study of economic events and the collection of economic observations from the past. (1)

economic interaction exchanges of goods and services between people. (2)

economic model an explanation of how the economy or part of the economy works. (1)

economic profits total revenue minus total costs, where total costs include opportunity costs, whether implicit or explicit. (9)

economic regulation government regulation that sets prices or conditions on the entry of firms into an industry. (16)

economic rent the price of something that has a fixed supply. (13)

economic variable any economic measure that can vary over a range of values. (1)

economies of scale also called "increasing returns to scale"; a situation in which long-run average total cost declines as the output of a firm increases. (8, 16)

efficiency wage a wage higher than that which would equate quantity supplied and quantity demanded set by employers in order to increase worker efficiency, for example, by decreasing shirking by workers. (12, 21)

efficient market hypothesis the idea that markets adjust rapidly enough to eliminate profit opportunities immediately. (13)

elastic demand demand for which price elasticity is greater than 1. (4)

emission tax a charge made to firms that pollute the environment based on the quantity of pollution they emit. (15)

employment-to-population ratio the ratio (usually expressed as a percentage) of employed workers to the working-age population. (21)

equilibrium interest rate the interest rate that equates the sum of consumption, investment, and net export shares to the share of GDP available for nongovernment use. (22)

equilibrium price the price at which quantity supplied equals quantity demanded. (3, 7)

equilibrium quantity the quantity traded at the equilibrium price. (3)

equilibrium risk-return relationship the positive relationship between the risk and the expected rate of return on an asset derived from the fact that, on average, risk-averse investors who take on more risk must be compensated with a higher return. (13)

equity contract shares of ownership in a firm in which payments to the owners of the shares depend on the firm's profits. (13)

European monetary system a system of exchange rates in which European currencies are fixed relative to each other but are flexible against the dollar, the yen, and other currencies. (31)

excess capacity a situation in which a firm produces below the level that gives minimum average total cost. (11)

excess costs costs of production that are higher than the minimum average total cost. (11)

exchange market intervention purchases and sales of foreign currency by a government in exchange markets with the intention to affect the exchange rate. (31)

exchange rate the price of one currency in terms of another. (2)

excise tax a tax paid on the value of goods at the time of purchase. (14)

exclusive dealing a condition of a contract by which a manufacturer does not allow a retailer to sell goods made by a competing manufacturer. (16)

exclusive territories the region over which a manufacturer limits the distribution or selling of its products to one retailer or wholesaler. (16)

expansion the period between the trough of a recession and the next peak, consisting of a general rise in output and employment. (19)

expected return the return on an uncertain investment calculated by weighting the gains or losses by the probability that they will occur. (13)

experimental economics a branch of economics that uses laboratory experiments to analyze economic behavior. (1)

explicit collusion open cooperation of firms to make mutually beneficial pricing or production decisions. (11)

export supply curve a curve showing the quantity of exports supplied at various prices. (18)

export-led strategythe government's encouragement of the economy's development by establishing an open trade policy and increasing exports. (33)

export the sale of goods and services abroad. (17)

exports the total value of the goods and services that people in one country sell to people in other countries. (20)

external diseconomies of scale a situation in which growth in an industry causes average total cost for the individual firm to rise because of some factor external to the firm; it corresponds to an upward-sloping long-run industry supply curve. (9)

external economies of scale a situation in which growth in an industry causes average total cost for the individual firm to fall because of some factor external to the firm; it corresponds to a downward-sloping long-run industry supply curve. (9)

externality the situation in which the costs of producing or the benefits of consuming a good spill over onto those who are neither producing nor consuming the good. (15)

 

F

face value the principal that will be paid back when a bond matures. (13)

factor income earnings for a factor of production including wages and profits. (31)

factor-price equalization the equalization of the price of labor and the price of capital across countries when they are engaging in free trade. (17)

family support programs transfer programs through which the federal government makes grants to states to give cash to certain low-income families. (14)

federal budget a summary of the federal government's proposals for spending, taxes, and the deficit. (29)

federal debt the total amount of outstanding loans owed by the federal government. (29)

federal funds rate the interest rate on overnight loans between banks that the Federal Reserve influences by changing the supply of funds (bank reserves) in the market. (27)

Federal Open Market Committee (FOMC) the committee, consisting of the seven members of the Board of Governors and the twelve presidents of the Fed district banks, that meets about eight times per year to decide monetary policy; only five of the presidents vote at any one time. (24)

Federal Reserve System (the Fed) the central bank of the United States, which oversees the creation of money in the United States. (24)

Federal Trade Commission (FTC) the government agency established to help enforce antitrust legislation in the United States; it shares this responsibility with the Antitrust Division of the Justice Department. (16)

final good a new good that undergoes no further processing before it is sold to consumers. (20)

financial capital funds used to purchase, rent, or build physical capital. (13)

financial intermediary a firm that channels funds from savers to investors by accepting deposits and making loans. (24)

firm an organization that produces goods or services. (6)

first theorem of welfare economics the conclusion that a competitive market results in an efficient outcome; sometimes called the "invisible hand theorem"; the definition of efficiency used in the theorem is Pareto efficiency. (7)

fiscal policy the government's plans for spending, for taxes, and for borrowing. (29)

fiscal policy rule a description of how the instruments of policy regularly respond to the state of the economy. Automatic stabilizers are an example of a fiscal policy rule. (29)

five-year plan a document that stated production goals for the entire Soviet economy for the succeeding five years. (34)

fixed costs costs of production that do not depend on the quantity of production. (6, 8)

fixed exchange rate system a system of international exchange rates in which the countries agree to maintain a predetermined value of their currencies in terms of other currencies. (31)

flat tax a tax system for which there is a constant marginal tax rate for all levels of taxable income. (14)

flexible exchange rate system an international monetary system in which exchange rates are determined in foreign exchange markets and governments do not agree to fix them. (31)

flexible price assumption an assumption that prices adjust instantaneously in response to a change in supply or demand. (25)

food stamp program a government program that pays coupons (food stamps) to people with low incomes in order to buy food. (14)

forecast a prediction of an economic variable such as real GDP. (25)

foreign direct investment investment by a foreign entity of at least a 10 percent direct ownership share in the firm. (33)

45-degree line the line showing that aggregate expenditure equals aggregate income. (25)

forward-looking consumption model a model that explains consumer behavior by assuming people anticipate future income when deciding on consumption spending today. (26)

free entry and exit movement of firms in and out of an industry that is not blocked by regulation, other firms, or any other barriers. (9)

free trade a complete lack of restrictions on international trade. (17)

free trade area (FTA) an area that has no trade barriers between the countries in the area. (18)

freely determined price a price that is determined by the individuals and firms interacting in markets. (2)

free-rider problem a problem arising in the case of public goods because those who do not contribute to the costs of providing the public good cannot be excluded from the benefits of the good. (15)

frictional unemployment short-term unemployment arising from normal turnover in the labor market, such as when people change occupations or locations, or are new entrants. (21)

fringe benefits compensation that a worker receives excluding direct money payments for time worked: insurance, retirement benefits, vacation time, and maternity and sick leave. (12)

futures market a market that deals in commodities to be delivered in the future. (31)

 

G

gains from trade improvements in income, production, or satisfaction owing to the exchange of goods or services. (2, 17)

game theory a branch of applied mathematics with many uses in economics including the analysis of the interaction of firms that take each other's actions into account. (11)

GDP deflator nominal GDP divided by real GDP; it measures the level of prices of goods and services included in real GDP relative to a given base year. (20)

General Agreement on Tariffs and Trade (GATT) an international treaty and organization designed to promote mutual reductions in tariffs and other trade barriers among countries. (18)

Gini coefficient an index of income inequality ranging between 0 (for perfect equality) and 1 (for absolute inequality); it is defined as the ratio of the area between the Lorenz curve and the perfect equality line, divided by the area between the lines of perfect equality and perfect inequality. (14)

gold standard a monetary standard in which the value of money is linked to gold. (24, 30)

Gosplan the planning agency of the former Soviet Union. (34)

government failure a situation in which the government makes things worse than the market, even though there may be market failure. (2)

government procurement the process by which governments buy goods and services. (18)

government purchases purchases by federal, state, and local governments of new goods and services. (20)

government purchases share the proportion of GDP that is used for government purchases; equals government purchases divided by GDP, or G/Y. (22)

gradualism the slow phasing-in of free market reforms. (34)

gross domestic product (GDP) a measure of the value of all the goods and services newly produced in an economy during a specified period of time. (1)

gross investment the total amount of investment, including that which goes to replacing worn-out capital. (20)

growth accounting formula an equation that states that the growth rate of real GDP per hour of work equals capital's share of income times the growth rate of capital per hour of work plus the growth rate of technology. (23)

 

H

Head Start a government transfer program that provides day care and nursery school training for poor children. (14)

hedge to reduce risk, usually by buying a futures contract to guarantee a price several months in the future. (31)

Herfindahl-Hirschman index (HHI) an index ranging in value from 0 to 10,000 indicating the concentration in an industry; it is calculated by summing the squares of the market shares of each firm in the industry. (16)

horizontal merger a combining of two firms that sell the same good or same type of good. (16)

hostile takeover a situation in which investors buy a large share of a company and replace the management. (13)

housing assistance programs government programs that provide subsidies either to low-income families to rent housing or to contractors to build low-income housing. (14)

human capital a person's accumulated knowledge and skills. (12, 23)

 

I

implicit contract an informal agreement between a firm and its customers or between a firm and its employees. (25)

implicit rental price the interest payments on the funds borrowed to buy the capital plus the depreciation of the capital over a given period of time. (13)

import the purchase of goods and services from abroad. (17)

import demand curve a curve showing the quantity of imports demanded at various prices. (18)

import substitution strategy a trade policy designed to encourage local firms to produce goods that are normally imported into the country. (33)

imports the total value of the goods and services that people in one country buy from people in other countries. (20)

incentive a device that motivates people to take action, usually so as to increase economic efficiency. (2)

incentive regulation a regulatory method that sets prices for several years ahead and then allows the firm to keep any additional profits or suffer any losses over that period of time. (16)

income effect the amount by which the quantity demanded falls because of the decline in real income from a price increase. (5)

income elasticity of demand the percentage change in quantity demanded of one good divided by the percentage change in income. (4)

income inequality disparity in levels of income among individuals in the economy. (7)

increasing opportunity cost a situation in which producing more of one good requires giving up producing an increasing amount of another good. (2)

indifference curve a curve showing the combinations of two goods that leave the consumer with the same level of utility. (5ap)

indirect business taxes taxes, such as sales taxes, that are levied on products when they are sold. (20)

individual demand curve a curve showing the relationship between quantity demanded of a good by an individual and the price of the good. (5)

industrial union a union organized within a given industry, whose members come from a variety of occupations. (12)

industrialized country a country with a large industrial base that is relatively well off by world standards in terms of real GDP per capita. (33)

industry a group of firms producing a similar product. (9)

inelastic demand demand for which the price elasticity is less than 1. (4)

infant industry argument the view that a new industry may be encouraged by protectionist policies. (18)

inferior good a good for which demand decreases when income rises and increases when income falls. (3)

inflation an increase in the overall price level. (1)

inflation rate the percentage increase in the overall price level over a given period of time, usually one year. (1, 19)

informal economy the portion of an economy characterized by illegal, unregulated businesses. (33)

innovation applications of new knowledge in a way that creates new products or significantly changes old ones. (23)

inputs or factors of production labor, capital, and other resources used in the production of goods and services. (1)

insider a person who already works for a firm and has some influence over wage and hiring policy. (21)

intellectual property laws laws that protect ownership rights over ideas and inventions; includes patent laws, copyright laws, and trademark laws. (23)

interest rate the amount received per dollar loaned per year, usually expressed as a percentage (e.g., 6 percent) of the loan. (19)

interindustry trade trade between countries in goods from different industries. (11, 18)

intermediate good a good that undergoes further processing before it is sold to consumers. (20)

internalize the process of providing incentives so that externalities are taken into account internally by firms or consumers. (15)

International Monetary Fund (IMF) an international agency, established after World War II, designed to help countries with balance of payments problems and to ensure the smooth functioning of the international monetary system. (33)

international monetary independence the idea that a flexible exchange rate system gives a country the ability to have much different interest rates than other countries. (31)

international trade exchange of goods and services between people or firms in different nations. (2, 17)

international transfer payments payments across international borders in the form of grants, remittances, and aid. (31)

intraindustry trade trade between countries in goods from the same or similar industries. (11, 17)

invention a discovery of new knowledge. (23)

inventory investment a change in the stock of inventories from one date to another. (20)

investment purchases of final goods by firms plus purchases of newly produced residences by households. (20, 22)

investment-saving gap the difference between the level of investment and the level of saving in the economy. (31)

investment share the proportion of GDP that is used for investment; equals investment divided by GDP, or I/Y. (22)

investment tax credit a reduction in taxes for firms that buy new investment goods that is proportional to the expenditures on the good. (32)

invisible hand the idea that the free interaction of people in a market economy leads to a desirable social outcome; the term was coined by Adam Smith. (7)

iron law of wages the prediction that wages will always tend to equal the subsistence level. (23)

isocost line a line showing the combinations of two inputs that result in the same total costs. (8ap)

isoquant a curve showing the combinations of two inputs that yield the same quantity of output. (8ap)

 

J

job leavers people who are unemployed because they quit their previous job. (21)

job losers people who are unemployed because they lost their previous job. (21)

job rationing a reason for unemployment in which the quantity of labor supplied is greater than the quantity demanded because the real wage is too high. (21)

job search a reason for unemployment in which uncertainty in the labor market and workers' limited information requires people to spend time searching for a job. (21)

job vacancies positions that firms are trying to fill, but for which they have yet to find suitable workers. (21)

 

K

Keynesian revolution a change in macroeconomic thinking, shaped by the Great Depression and the work of John Maynard Keynes, leading to a greater consideration of demand-side policies. (32)

Keynesian school a school of macroeconomic thought concerned with pursuing demand-side macroeconomic policies--primarily fiscal policies working through the multiplier--to reduce unemployment and encourage economic growth. (32)

 

L

labor the number of hours people work in producing goods and services. (1, 19)

labor abundant a lower level of capital per worker in one country relative to another. (17)

labor demand the relationship between the quantity of labor demanded by firms and the wage. (12)

labor demand curve a downward-sloping relationship showing the quantity of labor firms are willing to hire at each wage. (21)

labor force all those who are either employed or unemployed. (21)

labor force participation rate the ratio (usually expressed as a percentage) of people in the labor force to the working-age population. (21)

labor income the sum of wages, salaries, and fringe benefits paid to workers. (20)

labor intensive production that uses a relatively low level of capital per worker. (17)

labor market the market in which individuals supply their labor time to firms in exchange for wages and salaries. (12)

labor market equilibrium the situation in which the quantity supplied of labor equals the quantity demanded of labor. (12)

labor productivity output per hour of work. (12, 19)

labor-saving technological change a technological innovation that reduces the amount of labor needed to produce a given amount of output with a given amount of capital. (23)

labor supply the relationship between the quantity of labor supplied by individuals and the wage. (12)

labor supply curve the relationship showing the quantity of labor workers are willing to supply at each wage. (21)

labor union a coalition of workers, organized to improve wages and working conditions of their members. (12)

law of demand the tendency for the quantity demanded of a good in a market to decline as its price rises. (3)

law of one price the notion that, with low transportation costs and no trade barriers, the same commodity is sold for the same price in two different countries when measured in the same currency. (31)

law of supply the tendency for the quantity supplied of a good in a market to increase as its price rises. (3)

learning by doing a situation in which workers become more proficient by doing a particular task many times. (23)

Leontief paradox the inconsistency that Wassily Leontief found between the data on U.S. trade and the Heckscher-Ohlin model. (17)

liability something of value a person or firm owes to someone else. (24)

life-cycle model a type of forward-looking consumption model that assumes that people base their consumption decisions on their expected lifetime income rather than on their current income. (26)

limited information a situation in which firms have incomplete knowledge about some market conditions, such as whether a change in demand for their product is temporary or permanent or whether the change is due to a recession or boom in the whole economy. (25)

linear a situation in which a curve is straight, with a constant slope. (1ap)

liquidity constraint the situation in which people cannot borrow to smooth their consumption spending when their income is low. (26)

loan an interest-bearing asset to the bank that lends money to an individual or firm. (24)

long run the minimum period of time during which all inputs to production can be changed. (8)

long-run average total cost curve the curve that traces out the short-run average total cost curves, showing the lowest average total cost for each quantity produced as the firm expands in the long run. (8)

long-run competitive equilibrium model a model of firms in an industry in which free entry and exit produce an equilibrium such that price equals the minimum of average total cost. (9)

long-run equilibrium a situation in which entry and exit from an industry is complete and economic profits are zero with price (P) equal to average total cost (ATC). (9)

long-run industry supply curve a curve traced out by the intersections of demand curves shifting to the right and the corresponding short-run supply curves. (9)

long-term employment contract an agreement, either explicit or implicit, between employers and workers that sets conditions concerning the work relationship for a long period of time. (12)

Lorenz curve a curve showing the relation between the cumulative percentage of the population and the proportion of total income earned by each cumulative percentage. It measures income inequality. (14)

 

M

M1 currency plus checking deposits plus travelers checks. (24)

M2 M1 plus savings, time, and limited checking deposits. (24)

macroeconomics the branch of economics that examines the workings and problems of the economy as a whole--economic growth, inflation, unemployment, and economic fluctuations. (1)

Malthusian equilibrium a situation in which production equals the subsistence level of output because population adjusts based on consumption of food. (23)

managed trade a situation in which a government takes actions to promote or restrict trade in certain goods, usually by setting targets for exports or imports. (18)

mandated benefits benefits that a firm is required by law to provide to its employees. (14)

marginal benefit the increase in the willingness to pay to consume one more unit of a good. (5)

marginal cost the change in total cost due to a one-unit change in quantity produced. (6, 8)

marginal cost pricing a regulatory method that stipulates that the firm charge a price that equals marginal cost. (16)

marginal private benefit the marginal benefit from consumption of a good as viewed by a private individual. (15)

marginal private cost the marginal cost of production as viewed by the private firm or individual. (15)

marginal product of labor the change in production due to a one-unit increase in labor input. (6, 12)

marginal propensity to consume (MPC) the slope of the consumption function, showing the change in consumption that is due to a given change in income. (25)

marginal propensity to import (MPI) the change in imports because of a given change in income. (26)

marginal propensity to save (MPS) the change in saving due to a given change in income; MPS -1- marginal propensity to consume (MPC). (26)

marginal revenue the change in total revenue due to a one-unit increase in quantity sold. (6)

marginal revenue product of capital the change in total revenue due to a one-unit increase in capital. (13)

marginal revenue product of labor the change in total revenue due to a one-unit increase in labor input. (12)

marginal social benefit the marginal benefit from consumption of a good from the viewpoint of society as a whole. (15)

marginal social cost the marginal cost of production as viewed by society as a whole. (15)

marginal tax rate the change in total tax divided by the change in income. (14)

marginal utility the additional utility from an additional unit of consumption of a good. (5)

market an arrangement by which economic exchanges between people take place. (1, 2)

market definition demarcation of a geographic region and a category of goods or services in which firms compete. (16)

market demand curve the horizontal summation of all the individual demand curves for a good; also simply called the demand curve. (5)

market economy an economy characterized by freely determined prices and the free exchange of goods and services in markets. (1, 34)

market equilibrium the situation in which the price is equal to the equilibrium price and the quantity traded equals the equilibrium quantity. (3)

market failure any situation in which the market does not lead to an efficient economic outcome and in which there is a potential role for government. (2, 15)

market power a firm's power to set its price without losing its entire share of the market. (10)

maturity date the date when the principal on a loan is paid back. (13)

means-tested transfer a transfer payment that depends on the income of the recipient. (14)

median voter theorem a theorem stating that the median or middle of political preferences will be reflected in the government decisions. (15)

Medicaid a health insurance program designed primarily for families with low incomes. (14)

Medicare a government health insurance program for the elderly. (14)

medium of exchange an item that is generally accepted as a means of payment for goods and services. (2, 24)

mercantilism the notion, popular in the 1700s, that the wealth of a nation was based on how much it could export in excess of its imports, and thereby accumulate precious metals. (17)

merchandise trade trade in goods that have physical form, such as oil, wheat, or computers. (31)

merchandise trade balance the value of merchandise exports minus the value of merchandise imports. (31)

microeconomics the branch of economics that examines individual decision-making at firms and households and the way they interact in specific industries and markets. (1)

minimum efficient scale the smallest scale of production for which long-run average total cost is at a minimum. (8)

minimum wage a wage per hour below which it is illegal to pay workers. (3, 21)

minimum wage legislation a law that sets a floor on the wage, or price of labor. (12)

mixed economy a market economy in which the government plays a very large role. (1)

monetarist school a school of macroeconomic thought that holds that changes in the money supply are the primary cause of fluctuations in real GDP and the ultimate cause of inflation. (32)

monetary base currency plus reserves. (24, 30)

monetary policy rule a description of how much the interest rate or other instruments of monetary policy respond to inflation or other measures of the state of the economy. (27)

monetary transmission channel a description of how a change in monetary policy eventually affects real GDP. (30)

money that part of a person's wealth that can be readily used for transactions; money also serves as a store of value and a unit of account. (24)

money demand a relationship between the interest rate and the quantity of money that people are willing to hold at any given interest rate. (30)

money multiplier the multiple by which the money supply changes due to a change in the monetary base. (24)

money supply the sum of currency (coin and paper money) held by the public and deposits at banks. (24)

monopolistic competition a market structure characterized by many firms selling differentiated products in an industry in which there is free entry and exit. (11)

monopoly one firm in an industry selling a product for which there are no close substitutes. (10)

monopsony a situation in which there is a single buyer of a particular good or service in a given market. (12)

moral hazard in insurance markets, a situation in which a person buys insurance against some risk and subsequently takes actions that increase the risks; analogous situations arise when there is asymmetric information in other markets. (13)

most-favored nation (MFN) the principle by which all countries involved in GATT negotiations receive the same tariff rates as the country with the lowest negotiated tariff rates. (18)

movement along the curve a situation in which a change in the variable on one axis causes a change in the variable on the other axis, but maintains the position of the curve. (1ap)

multilateral negotiation simultaneous tariff reductions on the part of many countries. (18)

multilateral trade trade among more than two persons or nations. (2)

multiplier the ratio of the change in real GDP to the shift in the aggregate expenditure line. (26)

 

N

national income the sum of labor income and capital income. (20)

national income and product accounts official government tabulation of the components of GDP and aggregate income. (20)

national saving aggregate income minus consumption minus government purchases. (20)

national saving rate the proportion of GDP that is saved, neither consumed nor spent on government purchases; equals national saving (S) divided by GDP, or S/Y. It also equals 1 minus the consumption share minus the government purchases share of GDP. (22)

nationalization the taking over of private firms by the government. (34)

natural monopoly a single firm in an industry in which average total cost is declining over the entire range of production and the minimum efficient scale is larger than the size of the market. (10, 16)

natural unemployment rate the unemployment rate that exists in normal times when there is neither a recession nor a boom and real GDP is equal to potential GDP. (21, 25)

negative externality the situation in which costs spill over onto someone not involved in producing or consuming the good. (15)

negative slope a slope of a curve that is less than zero, representing a negative or inverse relationship between two variables. (1ap)

negatively related a situation in which an increase in one variable is associated with a decrease in another variable; also called "inversely related." (1)

neoclassical growth school an approach to macroeconomics that uses the aggregate production function and the growth accounting formula in describing long-term growth, emphasizing aggregate supply rather than aggregate demand. (32)

net exports the value of goods and services sold abroad minus the value of goods and services bought from the rest of the world; exports minus imports. (17, 20)

net exports share the proportion of GDP that is equal to net exports; equals net exports divided by GDP, or X/Y. (22)

net factor income from abroad the difference between receipts of factor income from foreign countries and payments of factor income to foreigners. (31)

net foreign assets the difference between citizens' net assets held abroad and net assets in the domestic country held by foreigners. (31)

net investment gross investment minus depreciation. (20)

net transfers from abroad the difference between transfer payments received and transfer payments made to other countries. (31)

new classical school a school of macroeconomics that holds that prices are perfectly flexible, expectations are rational, and therefore anticipated monetary policy will have no effect on the economy. (32)

new entrants people who are unemployed because they just entered the labor force and are still looking for work. (21)

new Keynesian school a school of macroeconomics that holds that prices are sticky and expectations are rational to explain the effect of monetary and fiscal policy. (32)

new trade theory model of international trade in which cost per unit declines as the international market grows. (17)

newly industrialized country a country that is growing rapidly and quickly developing its industrial base. (33)

nominal GDP gross domestic product without any correction for inflation; the same as GDP; the value of all goods and services newly produced in a country during some period of time, usually a year. (20)

nominal interest rate the interest rate uncorrected for inflation. (19)

nominal rigidities inflexibilities in wages and prices. (25)

noncooperative outcome an equilibrium in a game where the players cannot agree to cooperate and instead follow their individual incentives. (11)

nonexcludability the situation in which no one can be prevented from consuming a good. (15, 23)

nonrivalry the situation in which more people can consume a good without reducing the amount available for others to consume. (15, 23)

nontariff barrier any government action other than a tariff that reduces imports, such as a quota or a standard. (18)

normal good a good for which demand increases when income rises and decreases when income falls. (3)

normal profits the amount of accounting profits when economic profits are equal to zero. (9)

normative economics economic analysis that makes recommendations about economic policy. (1)

North-South problem refers to the geographic dispersion of incomes: Northern countries tend to be relatively rich, and southern ones tend to be relatively poor. (33)

 

O

oligopoly an industry characterized by few firms selling the same product with limited entry of other firms. (11)

on-the-job training the building of the skills of a firm's employees while they work for the firm. (12)

open-market operation the buying and selling of bonds by the central bank. (30)

opportunity cost the value of the next-best foregone alternative that was not chosen because something else was chosen. (2)

organization a human structure, such as a family, firm, government, or college, through which people may exchange goods and services. (2)

outsider someone who is not working for a particular firm, making it difficult for him or her to get a job with that firm although he or she is willing to work for a lower wage. (21)

overall price level an average of the prices of all goods and services with greater weight given to items on which more is spent. (1)

 

P

paper money currency made of paper that has no intrinsic value. (24)

Pareto efficiency a situation in which it is not possible to make someone better off without making someone else worse off. (7)

partnership a firm owned by more than one person in which the partners decide the division of the firm's income among them and are jointly liable for losses the firm incurs. (6)

part-time worker someone who works between 1 and 34 hours per week. (21)

patent a grant giving an inventor exclusive rights to use an invention for 17 years. (23)

payroll tax a tax on wages and salaries of individuals. (14)

peak the highest point in real GDP before a recession. (19)

per se rule a standard in antitrust cases in which it is only necessary to show that an action occurred, not also that there was intent or significant impact. (16)

perestroika the restructuring of the Soviet economy by reforming the central planning process. (34)

perfectly elastic demand demand for which the price elasticity is infinite, indicating an infinite response to a change in the price and therefore a horizontal demand curve. (4)

perfectly elastic supply supply for which the price elasticity is infinite, indicating an infinite response of quantity supplied to a change in price and thereby a horizontal supply curve. (4)

perfectly inelastic demand demand for which the price elasticity is zero, indicating no response to a change in price and therefore a vertical demand curve. (4)

perfectly inelastic supply supply for which the price elasticity is zero, indicating no response of quantity supplied to a change in price and thereby a vertical supply curve. (4)

permanent income model a type of forward-looking consumption model that assumes that people distinguish between temporary changes in their income and permanent changes in their income; the permanent changes have a larger effect on consumption. (26)

personal income income paid directly to individuals; includes labor income, transfer payments, and the part of capital income that is paid out to individuals. (20)

personal income tax a tax on all forms of income an individual or household receives. (14)

phaseout the gradual reduction of a government regulation or trade barrier. (17)

Phillips curve a downward-sloping relationship between inflation and unemployment; originally found by A. W. Phillips in data from the late 1800s and early 1900s. (24)

piece-rate system a system by which workers are paid a specific amount per unit they produce. (12)

policy ineffectiveness proposition the proposition that anticipated monetary policy will have no effect on the economy. (32)

political business cycle a business cycle resulting from politicians' use of fiscal or monetary policy to affect the outcome of an election. (32)

portfolio diversification spreading the collection of assets owned to limit exposure to risk. (13)

portfolio investment investment by a foreign entity of less than a 10 percent ownership share in the firm. (33)

positive economics economic analysis that explains what happens in the economy and why, without making recommendations about economic policy. (1)

positive externality the situation in which benefits spill over onto someone not involved in producing or consuming the good. (15)

positive slope a slope of a curve that is greater than zero, representing a positive or direct relationship between two variables. (1ap)

positively related a situation in which an increase in one variable is associated with an increase in another variable; also called "directly related." (1)

potential GDP the economy's long-term growth trend for real GDP determined by the available supply of capital, labor, and technology. Real GDP fluctuates above and below potential GDP. (19, 25)

poverty line an estimate of the minimum amount of annual income required for a family to avoid severe economic hardship. (14)

poverty rate the percentage of people living below the poverty line. (14)

predatory pricing action on the part of one firm to set a price below its shutdown point to drive its competitors out of business. (16)

preemptive monetary strike a Fed interest rate increase in anticipation of a rise in inflation. (30)

present discounted value the value in the present of future payments. (13ap)

price refers to a particular good and is defined as the amount of money or other goods that one must pay to obtain the good. (3)

price adjustment (PA) line a flat line showing the level of inflation in the economy at a given point in time. It shifts up when real GDP is greater than potential GDP, and it shifts down when real GDP is less than potential GDP; it also shifts when expectations of inflation or raw materials prices change. (27)

price ceiling a government price control that sets the maximum allowable price for a good. (3)

price control a government law or regulation that sets or limits the price to be charged for a particular good. (3)

price discovery the process by which a market finds the equilibrium market price. (7)

price discrimination a situation in which different groups of consumers are charged different prices for the same good. (10)

price elasticity of demand the percentage change in the quantity demanded of a good divided by the percentage change in the price of that good. (4)

price elasticity of supply the percentage change in quantity supplied divided by the percentage change in price. (4)

price fixing the situation in which firms conspire to set prices for goods sold in the same market. (16)

price floor a government price control that sets the minimum allowable price for a good. (3)

price leader the price-setting firm in a collusive industry where other firms follow the leader. (11)

price level the average level of prices in the economy. (20)

price shock a change in the price of a key commodity such as oil, usually because of a shortage, that causes a shift in the price adjustment line; also sometimes called a supply shock. (28)

price-cost margin the difference between price and marginal cost divided by the price. This index is an indicator of market power, where an index of 0 indicates no market power and a higher price-cost margin indicates greater market power. (10, 11)

price-directed approach a management technique in which the instructions to a division of a firm are to maximize profits given transfer prices set by executives. (8)

price-earnings ratio the price of a stock divided by its annual earnings per share. (13)

price-maker a firm that has the power to set its price, rather than taking the price set by the market. (10)

price-taker any firm that takes the market price as given; this firm cannot affect the market price because the market is competitive. (6)

principal-agent relationship description of the relationship between the owners and managers of a firm in which the owners are viewed as the principals and the managers are viewed as agents for the owners. (6)

prisoner's dilemma a game in which individual incentives lead to a nonoptimal (noncooperative) outcome. If the players can credibly commit to cooperate, then they achieve the best (cooperative) outcome. (11)

private remedy a procedure that eliminates or internalizes externalities without government action other than defining property rights. (15)

privatization the process of converting a government enterprise into a privately owned enterprise. (15, 34)

producer surplus the difference between the price received by a firm for an additional item sold and the marginal cost of the item's production; for the market as a whole, it is the sum of all the individual firms' producer surpluses; or the area above the market supply curve and below the market price. (6, 7)

product differentiation the effort by firms to produce goods that are slightly different from other types of goods. (11)

production function a relationship that shows the quantity of output for any given amount of input. (6, 8)

production function the relationship that describes output as a function of labor, capital, and technology. (19)

production possibilities alternative combinations of production of various goods that are possible, given the economy's resources. (2)

production possibilities curve a curve showing the maximum combinations of production of two goods that are possible, given the economy's resources. (2)

production target a goal set for the production of goods and services in a planned economy. (34)

productivity curve a relationship stating the output per hour of work for each amount of capital per hour of work in the economy. (23ap)

profit maximization an assumption that firms try to achieve the highest possible level of profits--total revenue minus total costs--given their production function. (6)

profit sharing programs in which managers and employees receive a share of profits earned by the firm. (9, 13)

profits total revenue received from selling the product minus the total costs of producing the product. (6)

progressive tax a tax for which the amount of an individual's taxes rises as a proportion of income as the person's income increases. (14, 29)

property rights rights over the use, sale, and proceeds from a good or resource. (2)

property tax a tax on the value of property owned. (14)

proportional tax a tax for which the amount of an individual's taxes as a percentage of income is constant as the person's income rises. (14)

protectionist policy a policy that restricts trade to protect domestic producers. (18)

public choice models models of government behavior that assume that those in government take actions to maximize their own well-being, such as getting reelected. (15)

public good a good or service that has two characteristics: nonrivalry in consumption and nonexcludability. (15)

public infrastructure investment purchases of capital by government for use as public goods, which add to the productive capacity of the economy. (22)

public infrastructure project an investment project such as a bridge or jail funded by government designed to improve publicly provided services such as transportation or criminal justice. (15)

purchasing power parity the theory that exchange rates are determined in such a way that the prices of goods in different countries are the same when measured in the same currency. (31)

purchasing power parity exchange rate an exchange rate such that the prices of similar goods in different countries are the same when measured in the same currency. (20)

 

Q

quantity demanded the amount of a good that people want to buy at a given price. (3)

quantity equation of money the equation relating the price level and real GDP to the quantity of money and the velocity of money: The quantity of money times its velocity equals the price level times real GDP; in terms of growth rates it states that money growth plus velocity growth equals inflation plus real GDP growth. (24)

quantity supplied the amount of a good that firms are willing to sell at a given price. (3)

quantity-directed approach a management technique in which decisions handed down by executives instruct a division to produce a given quantity. (8)

quintile divisions or groupings of one-fifth of a population ordered by income, wealth, or some other statistic. (14)

quota a governmental limit on the quantity of a particular good sold or imported. (3, 18)

 

R

rate of return the return on an asset stated as a percentage of the price of the asset. (13)

rate of technical substitution the rate at which one input must be substituted for another input to maintain the same production; it is the slope of the isoquant. (8ap)

rational expectations assumption the assumption that people forecast the future no better or no worse than economic forecasters. (26, 29)

rational expectations revolution a change in macroeconomic thinking during the 1970s based on the assumption that people make rational, forward-looking decisions using all the information available to them. (32)

real business cycle school a group of economists who believe that shifts in potential GDP, largely due to changes in technology, are the primary cause of economic fluctuations. (32)

real business cycle theory a theory of macroeconomics that stresses that shifts in potential GDP are a primary cause of fluctuations in real GDP; the shifts in potential GDP are usually caused by changes in technology. (25, 28)

real exchange rate a measure of the exchange rate between two currencies that adjusts for differences in inflation levels in the two countries. (31)

real gross domestic product (real GDP) a measure of the value of all the goods and services newly produced in a country during some period of time, adjusted for inflation. (1, 19, 20)

real interest rate the interest rate minus the expected rate of inflation; it adjusts the nominal interest rate for inflation. (19)

real wage the wage or price of labor adjusted for inflation; in contrast, the nominal wage has not been adjusted for inflation. (12, 21)

recession a decline in real GDP that lasts for at least six months. (19)

Reciprocal Trade Agreement Act passed in 1934 by the U.S. Congress, it allowed cuts in tariff rates based on similar cuts in tariff rates in European countries. (18)

recovery the early part of an economic expansion, immediately after the trough of the recession. (19)

regressive tax a tax for which the amount of an individual's taxes falls as a proportion of income as the person's income increases. (14)

reinflation an increase in the inflation rate caused by a change in monetary policy. (28)

relative price the price of a particular good compared to the price of other goods. (1)

relatively elastic a situation in which the elasticity of one good is greater than the elasticity of another good. (4)

rent control a government price control that sets the maximum allowable rent on a house or apartment. (3)

rent-seeking behavior on the part of firms or individuals intended to preserve or obtain rights, privileges, or licenses through which above-normal profits (economic profits greater than zero) can be earned. (33)

rental price of capital the amount that a rental company charges for the use of capital equipment for a specified period of time. (13)

required reserve ratio the fraction of a bank's deposits that it is required to hold at the Fed. (24)

resale price maintenance the situation in which a producer sets a list price and does not allow the retailer to offer a discount to consumers. (16)

research and development (R & D) activities designed to further scientific knowledge and develop new products. (23)

reserves deposits that commercial banks hold at the Fed. (24)

residential investment purchases of new houses and apartment buildings. (20)

return the income received from the ownership of an asset; for a stock, the return is the dividend plus the capital gain. (13)

revenue tariff an import tax whose main purpose is to provide revenue to the government. (18)

Ricardian equivalencethe view that a change in taxes today will not affect consumption because people recognize that their, or their children's, future tax burden will change in an opposite direction. (29)

rule of reason an evolving standard by which antitrust cases are decided, requiring not only the existence of monopoly power but also the intent to restrict trade and the existence of significant impact. (16)

 

S

sales tax a type of excise tax that applies to total expenditures on a broad group of goods. (14)

savings deposit an account at a financial institution that is very liquid but generally cannot be easily used for transactions. (24)

scarcity the situation in which the quantity of resources is insufficient to meet all wants. (2)

scatter plot a graph in which points in a Cartesian coordinate system represent the values of two variables. (1ap)

seasonal unemployment unemployment that varies with the seasons of the year due to seasonal fluctuations in supply or demand for labor. (21)

sectoral trade balance the value of exports less the value of imports in a particular sector or industry. (31)

services trade trade in services, or things that do not have a physical form, such as consulting or telecommunications. (31)

services trade balance the value of services exports minus the value of services imports. (31)

Sherman Antitrust Act a law passed in 1890 in the United States to reduce anticompetitive behavior; Section 1 makes price fixing illegal, and Section 2 makes attempts to monopolize illegal. (16)

shift of the curve a change in the position of a curve usually caused by a change in a variable not represented on either axis. (1ap)

shock therapy the abrupt introduction of free markets in a formerly centrally planned economy. (34)

short run the period of time during which it is not possible to change all inputs to production; only some inputs, such as labor, can be changed. (8)

shortage the situation in which quantity demanded is greater than quantity supplied. (3)

shutdown point the point at which price equals the minimum of average variable cost. (8)

slope refers to a curve and is defined as the change in the variable on the vertical axis divided by the change in the variable on the horizontal axis. (1ap)

Smoot-Hawley tariff a set of tariffs imposed in 1930 that raised the average tariff level to 59 percent by 1932. (18)

social insurance transfer a transfer payment, such as social security, that does not depend on the income of the recipient. (14)

social regulation government regulation, such as environmental, health, or safety regulation, that aims to overcome or correct externalities in which private costs differ from social costs. (16)

social security the system through which individuals make payments to the government when they work and receive payments from the government when they retire or become disabled. (14)

socialism an economic system in which the government owns and controls all the capital and makes decisions about prices and quantities as part of a central plan. (34)

sole proprietorship a firm owned by a single person. (6)

specialization the situation in which a resource, such as labor, concentrates and develops efficiency at a particular task. (2)

specific tariff a tax on imports that is proportional to the number of units or items imported. (18)

specific tax a tax that is proportional to the number of items sold. (7)

spending balancethe level of income or real GDP at which the 45-degree line and the aggregate expenditure line cross; also called "equilibrium income." (25)

stagflation the situation in which high inflation and high unemployment occur simultaneously. (28)

Standard Industrial Classification (SIC) a taxonomy used to label and group industries for statistical purposes; each industry is given a SIC code. (9)

state enterprise an organization, analogous to a firm in a market economy, that is owned and controlled by the government. (34)

statistical discrepancy the discrepancy between calculations of GDP using the spending approach and the income approach due to unreported data or errors in data collection. (20)

sticky price assumption an assumption that prices do not move quickly in response to a change in supply or demand; the assumption is used in the theory of economic fluctuations. (25)

store of value something that will allow purchasing power to be carried from one period to the next. (24)

strategic behavior firm behavior that takes into account the market power and reactions of other firms in the industry. (11)

strategic demand curve a downward-sloping demand curve in which the firm incorporates its expectations of what other firms will do. (11)

strategic marginal revenue curve the marginal revenue curve derived from a strategic demand curve. (11)

strategic trade policy a set of government actions designed to encourage large firms to locate or start up in that country. (18)

structural deficit the level of the government budget deficit under the scenario where real GDP is equal to potential GDP; also called the "full-employment deficit." (29)

structural unemployment long-term unemployment due to structural problems such as poor skills or longer-term changes in demand or insufficient work incentives. (21)

structure-conduct-performance method a method of analyzing the market power in an industry by looking at the structure of the industry. (11)

subsistence line a line representing the minimum amount of production the population needs to survive or subsist. (23)

substitute a good that has many of the same characteristics and can be used in place of another good. (3)

substitution effect the amount by which quantity demanded falls when the price rises, exclusive of the income effect. (5)

supplemental security income (SSI) a means-tested transfer program designed primarily to help the poor who are disabled or blind. (14)

supply a relationship between price and quantity supplied. (3)

supply curve a graph of supply showing the upward- sloping relationship between price and quantity supplied. (3)

supply schedule a tabular presentation of supply showing the price and quantity supplied of a particular good, all else being equal. (3)

supply side economics the branch of economics that emphasizes that reducing marginal tax rates on investments and labor will increase aggregate supply, thereby stimulating the macroeconomy. (32)

surplus the situation in which quantity supplied is greater than quantity demanded. (3, 7)

systematic risk the level of risk in asset markets that investors cannot reduce by diversification. (13)

 

T

tacit collusion implicit or unstated cooperation of firms to make mutually beneficial pricing or production
decisions. (11)

tangency point the only point in common for two curves, showing the point where the two curves just touch. (5ap)

target inflation rate the central bank's goal for the average rate of inflation over the long run. (27)

tariff a tax on imports. (17)

tax bracket a range of taxable income that is taxed at the same rate. (14)

tax incidence the allocation of the burden of the tax between buyer and seller. (14)

tax rate the percentage of income or the value of a good paid to the government in the form of taxes. (26)

tax revenue the total amount the government receives in the form of taxes; equals the tax rate times income (also simply called taxes). (14, 26)

taxable income a household's income minus exemptions and deductions. (14)

technological change improvement in technology over time. (23)

technology anything that raises the amount of output that can be produced with a given level of capital and labor. (19, 23)

terms of trade quantity of imported goods a country can obtain in exchange for a unit of exported goods. (17)

time deposit an account at a financial institution that requires that the money be left in the account for a specified period of time. (24)

time inconsistency the situation in which policymakers have the incentive to announce one economic policy but then change that policy after citizens have acted on the initial, stated policy. (15, 30)

time-series graph a graph that plots a variable over time, usually with time on the horizontal axis. (1ap)

total costs the sum of variable costs and fixed costs. (6, 8)

total revenue the price per unit times the quantity the firm sells. (6)

tradable goods goods for which transportation costs are not prohibitive. (31)

tradable permit a governmentally granted license to pollute that can be bought and sold. (15)

trade adjustment assistance transfer payments made to workers who will be hurt by the move to free trade. (17)

trade balance the value of exports minus the value of imports. (20)

trade creation the increase in trade due to a decrease in trade barriers. (18)

trade diversion the shifting of trade away from the low-cost producer toward a higher-cost producer because of a reduction in trade barriers with the country of the higher-cost producer. (18)

trade war a conflict among nations over trade policies caused by imposition of protectionist policies on the part of one country and subsequent retaliatory actions by other countries. (18)

transaction cost the cost of buying or selling in a market including search, bargaining, and writing contracts. (2, 15)

transfer payment a grant of funds from the government to an individual. (14)

transfer price a price that one department of an organization must pay to receive goods or services from another department in the same organization. (2)

treble damages penalties awarded to the injured party equal to three times the value of the injury. (16)

trough the lowest point of real GDP at the end of a recession. (19)

twin deficits a term referring to a situation in which a government budget deficit and an international trade deficit occur simultaneously. (26)

 

U

unemployment insurance a program that makes payments to people who lose their jobs. (14)

unemployment rate the ratio (usually expressed as a percentage) of unemployed workers to the labor force. (19, 21)

unilateral disarmament in trade policy, the removal of trade barriers by one country without reciprocal action on the part of other countries. (18)

unit elastic demand demand for which price elasticity equals 1. (4)

unit of account a standard unit in which prices can be quoted and values of goods can be compared. (24)

unit-free measure a measure that does not depend on a unit of measurement. (4)

Uruguay Round the most recent round of negotiations on the General Agreement on Tariffs and Trade, begun in 1986 in Uruguay. (18)

user fee a fee charged for the use of a good normally provided by the government. (15)

utility a numerical indicator of a person's preferences in which higher levels of utility indicate a greater preference. (5)

utility maximization an assumption that people try to achieve the highest level of utility given their budget
constraint. (5)

utility maximizing rulea condition that a consumer maximizes utility by choosing to purchase a combination of two goods such that the ratio of marginal utilities for the two goods equals the ratio of the market prices or, alternatively, such that the ratio of the marginal utility to the price of each of the two goods is equal. (5)

 

V

value added the value of the firm's production minus the value of the intermediate goods used in production. (20)

variable costs costs of production that vary with the quantity of production. (6, 8)

velocity a measure of how fast money is turned over in the economy: Velocity equals nominal GDP divided by the money supply. (24)

vertical merger a combining of two firms in which one supplies goods to the other. (16)

voluntary import expansion (VIE) a government agreement to expand imports from a particular country. (18)

voluntary restraint agreement (VRA) a country's self-imposed government restriction on exports to a particular country. (18)

voting paradox a decision-making dilemma caused by the fact that aggregate voting patterns will not consistently reflect citizens' preferences because of multiple issues on which people vote. (15)

 

W

wage the price of labor defined over a period of time worked. (12)

welfare notch a situation in which there is a decrease in total income for families on welfare when they increase the amount they work. (14)

working-age population persons over 16 years of age who are not in an institution such as a jail or hospital. (21)

World Bank an international agency, established after World War II, designed to promote the economic development of poorer countries through lending channeled from industrialized countries. (33)

World Trade Organization (WTO) an international organization that can mediate trade disputes. (18)

 

Y

yield the annual rate of return on a bond if the bond were held to maturity. (13)

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