Glossary of economics

Glossary of Economics

This glossary of economics is a comprehensive list of terms and concepts commonly used in the field of economics. It serves as a reference for students, educators, and professionals to understand the language of economics.

A

Aggregate Demand

Aggregate demand is the total demand for goods and services within a particular market. It is the sum of consumption, investment, government spending, and net exports.

Arbitrage

Arbitrage involves the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments on different markets or in different forms.

B

Balance of Payments

The balance of payments is a statement that summarizes an economy’s transactions with the rest of the world for a specified time period. It includes the trade balance, foreign investments, and other financial transfers.

Budget Deficit

A budget deficit occurs when expenses exceed revenue, and it indicates the financial health of a country. It is often financed by borrowing.

C

Capital

In economics, capital refers to financial assets or the financial value of assets, such as funds held in deposit accounts, as well as the tangible machinery and production equipment used in environments such as factories and other manufacturing facilities.

Comparative Advantage

Comparative advantage is an economic theory that describes how, under free trade, an agent will produce more of and consume less of a good for which they have a comparative advantage.

D

Demand Curve

The demand curve is a graph showing the relationship between the price of a good and the quantity demanded. It typically slopes downward from left to right, indicating that as the price decreases, the quantity demanded increases.

Depreciation

Depreciation is the reduction in the value of an asset over time, particularly in relation to physical assets like machinery and buildings.

E

Elasticity

Elasticity measures how much the quantity demanded or supplied of a good changes when there is a change in one of the economic variables that influence it, such as price or income.

Equilibrium

Equilibrium in economics is a state where economic forces such as supply and demand are balanced. In the context of a market, it is the point where the quantity demanded equals the quantity supplied.

F

Fiscal Policy

Fiscal policy involves the use of government spending and tax policies to influence economic conditions, including demand, employment, and inflation.

Free Market

A free market is an economic system based on supply and demand with little or no government control. It is characterized by a spontaneous and decentralized order of arrangements through which individuals make economic decisions.

G

Gross Domestic Product (GDP)

Gross Domestic Product is the total value of all goods and services produced within a country in a specific period. It is a broad measure of a nation’s overall economic activity.

Game Theory

Game theory is the study of mathematical models of strategic interaction among rational decision-makers. It is used in economics to model the behavior of firms, markets, and consumers.

H

Hyperinflation

Hyperinflation is an extremely high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase.

Human Capital

Human capital refers to the economic value of a worker's experience and skills. This includes assets like education, training, intelligence, skills, health, and other things employers value such as loyalty and punctuality.

I

Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. Central banks attempt to limit inflation, and avoid deflation, in order to keep the economy running smoothly.

Interest Rate

The interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.

J

Joint Supply

Joint supply occurs when the production of one good also results in the production of another. For example, the production of beef also results in the production of leather.

K

Keynesian Economics

Keynesian economics is an economic theory of total spending in the economy and its effects on output and inflation. It was developed by John Maynard Keynes during the 1930s in an attempt to understand the Great Depression.

L

Labor Market

The labor market is the supply of available workers in relation to available work. It is a major component of any economy and is influenced by the demand for labor and the supply of workers.

Liquidity

Liquidity refers to how easily an asset can be converted into cash without affecting its market price.

M

Marginal Cost

Marginal cost is the cost of producing one additional unit of a good. It is an important concept in economics because it helps firms decide the level of production that maximizes their profits.

Monetary Policy

Monetary policy is the process by which the monetary authority of a country, typically the central bank, controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.

N

Nash Equilibrium

Nash equilibrium is a concept of game theory where the optimal outcome of a game is where no player has an incentive to deviate from their chosen strategy after considering an opponent's choice.

Net Exports

Net exports are the value of a country's total exports minus the value of its total imports. It is a component of a country's GDP.

O

Opportunity Cost

Opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. It is a key concept in economics that describes the trade-offs involved in any decision-making process.

Oligopoly

An oligopoly is a market structure in which a small number of firms has the large majority of market share. It is a form of imperfect competition.

P

Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in its price. It is a key concept in understanding how changes in price affect demand.

Public Goods

Public goods are goods that are non-excludable and non-rivalrous, meaning that individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.

Q

Quota

A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period.

R

Recession

A recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending.

Risk Aversion

Risk aversion is a concept in economics and finance, based on the behavior of humans, who, when exposed to uncertainty, attempt to lower that uncertainty.

S

Supply Curve

The supply curve is a graphical representation of the relationship between the price of a good and the quantity supplied. It typically slopes upward from left to right, indicating that as the price increases, the quantity supplied increases.

Subsidy

A subsidy is a benefit given by the government to groups or individuals, usually in the form of a cash payment or tax reduction. It is typically given to remove some type of burden and is often considered to be in the interest of the public.

T

Tariff

A tariff is a tax imposed by a government on goods and services imported from other countries. It is used to restrict trade, as they increase the price of imported goods and services, making them more expensive to consumers.

Trade Balance

The trade balance is the difference between a country's imports and its exports for a given time period. A positive trade balance means a country exports more than it imports.

U

Unemployment Rate

The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force.

Utility

Utility is a measure of preferences over some set of goods and services. It represents satisfaction experienced by the consumer of a good.

V

Value Added Tax (VAT)

Value Added Tax is a type of indirect tax that is imposed at each stage of production on the value added to a product.

Variable Costs

Variable costs are costs that vary with the level of output. They are the opposite of fixed costs.

W

Wealth Effect

The wealth effect is the change in spending that accompanies a change in perceived wealth. Typically, as the value of assets rises, individuals feel wealthier and spend more.

World Trade Organization (WTO)

The World Trade Organization is an intergovernmental organization that regulates international trade. It is the largest international economic organization in the world.

X

Xenocurrency

Xenocurrency refers to any currency that is traded in markets outside of its domestic borders.

Y

Yield Curve

The yield curve is a graph that plots interest rates of bonds having equal credit quality but differing maturity dates. It is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates.

Z

Zero-Sum Game

A zero-sum game is a situation in which one participant's gains or losses are exactly balanced by the losses or gains of the other participants.