Dictionary

English
abatement: Practices to limit or reverse environmental damages.
abatement policy: A policy designed to reduce environmental damages.
absolute advantage: A person or a country has an absolute advantage in the production of a particular good if, given a set of available inputs, they can produce more of it than another person or country. A person or country has this in the production of a good if the inputs it uses to produce this good are less than in some other person or country.
accountability: The obligation of a decision-maker (or body) to be responsive to the needs and wishes of people affected by his, her or its decisions.
acyclical: No tendency to move either in the same or opposite direction to aggregate output and employment over the business cycle.
adjustment gap: The lag between some outside change in labour market conditions and the movement of the economy to the neighbourhood of the new equilibrium.
administratively feasible: Policies for which the government has sufficient information and staff for implementation.
adverse selection: The problem faced by parties to an exchange in which the terms offered by one party will cause some exchange partners to drop out.
aggregate demand: The total of the components of planned spending in the economy: AD = C + I + G + X – M. It is the total amount of demand for (or planned expenditure on) goods and services produced in the economy. The total of the components of spending in the economy, added to get GDP: Y = C + I + G + X – M. It is the total amount of demand for (or expenditure on) goods and services produced in the economy.
aggregate output: The total output in an economy, across all sectors and regions.
allocation: A description of who does what, the consequences of their actions, and who gets what as a result (for example in a game, the strategies adopted by each player and their resulting payoffs).
altruism: The willingness to bear a cost in order to help another person. Altruism is a social preference.
antitrust policy: Government policy and laws to limit monopoly power and prevent cartels. Also known as: competition policy.
arbitrage: The practice of buying a good at a low price in one market to sell it at a higher price in another. Traders engaging in arbitrage take advantage of the price difference for the same good between two countries or regions. As long as the trade costs are lower than the price gap, they make a profit.
artificially scarce good: A public good for which it is possible to exclude some people from enjoying.
asset: Anything of value that is owned.
asset price bubble: A sustained and significant rise in the price of an asset, fuelled by expectations of future price increases.
asymmetric information: Information that is relevant to all the parties in an economic interaction, but is known by some and not by others.
austerity: A term used to describe policies through which a government tries to improve its budgetary position in a recession by increasing its saving. A policy where a government tries to improve its budgetary position in a recession by increasing its saving.
automatic stabilizers: Automatic stabilizers are tax and transfer policies that have the effect of offsetting an expansion or contraction of the economy. For example, spending on unemployment benefits rises during a recession. Characteristics of the tax and transfer system in an economy that have the effect of offsetting an expansion or contraction of the economy. An example is the unemployment benefits system.
automation: The use of machines that are substitutes for labour.
autonomous consumption: In a model of consumption demand, autonomous consumption is planned consumption expenditure that does not depend on other variables in the model (such as income, or the interest rate). Con­sumption that is independent of current income.
autonomous demand: In a model of demand for goods and services, autonomous demand is planned expenditure that does not depend on other variables in the model (such as income, or the interest rate). Components of aggregate demand that are independent of current income.
average cost: The total cost of producing the firm’s output divided by the total number of units of output produced. The total cost of the firms’s output divided by the total number of units of output.
average product: Total output divided by a particular input, for example per worker (divided by the number of workers) or per worker per hour (total output divided by the total number of hours of labour put in).
average product of labour: Total output divided by by the number of units of labor employed.
balance of payments (BP): This records the sources and uses of foreign exchange. This account records all payment transactions between the home country and the rest of the world, and is divided into two parts: the current account and the capital and financial account. Also known as: balance of payments account. This records the sources and uses of foreign exchange. This account records all payment transactions between the home country and the rest of the world, and is divided into two parts: the current account and the capital and financial account. Also known as: balance of payments account.
balance sheet: A record of the assets, liabilities, and net worth of an economic actor such as a household, bank, firm, or government.
bank: A firm that creates money in the form of bank deposits in the process of supplying credit.
bank bailout: The government buys an equity stake in a bank or some other intervention to prevent it from failing.
bank money: Money in the form of bank deposits created by commercial banks when they extend credit to firms and households.
bank run: A situation in which depositors withdraw funds from a bank because they fear that it may go bankrupt and not honour its liabilities (that is, not repay the funds owed to depositors).
bargaining gap: The difference between the real wage that firms wish to offer in order to recruit/retain workers and provide them with incentives to work, and the real wage that allows firms the markup that maximizes profits given the degree of competition. The difference between the real wage that firms wish to offer in order to provide workers with incentives to work, and the real wage that allows firms the markup that maximizes profits given the degree of competition.
bargaining power: The extent of a person's advantage in securing a larger share of the economic rents made possible by an interaction.
barriers to entry: The term barriers to entry refers to anything making it difficult for new firms to enter a market, such as intellectual property rights or economies of scale in production.
base money: Cash held by households, firms, and banks, and the balances held by commercial banks in their accounts at the central bank, known as reserves.
behavioural experiment: An experiment designed to study some aspect of human behaviour.
best response: In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select.
Beveridge curve: The inverse relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labour force). Named after the British economist of the same name.
biodiversity loss (rate of): Proportion of species that become extinct every year.
biological survival constraint: This shows all the points that are ‘biologically feasible’.
biologically feasible: An allocation that is capable of sustaining the survival of those involved is biologically feasible.
bond: A financial asset where the government (or a company) borrows for a set period of time and promises to make regular fixed payments to the lender (and to return the money when the period is at an end). A type of financial asset for which the issuer promises to pay a given amount over time to the holder. Also known as: corporate bonds.
Bretton Woods system: An international monetary system of fixed but adjustable exchange rates, established at the end of the Second World War. It replaced the gold standard that was abandoned during the Great Depression.
broad money: The stock of money in circulation, which is defined as the sum of bank money and the base money that is in the hands of the non-bank public. The stock of money in circulation, which is the sum of base money (excluding legal tender held by banks) and bank money.
budget constraint: An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one's budgetary resources.
business cycle: Alternating periods of faster and slower (or even negative) growth rates. The economy goes from boom to recession and back to boom. Alternating periods of faster and slower (or even negative) growth rates. The economy goes from boom to recession and back to boom.
cap and trade: A policy through which a limited number of permits to pollute are issued, and can be bought and sold on a market. It combines a quantity-based limit on emissions, and a price-based approach that places a cost on environmentally damaging decisions.
capacity constrained: A situation in which a firm has more orders for its output than it can fill.
capacity utilization: A firm, industry, or entire economy is at full capacity utilization if it is producing as much as the stock of its capital goods and current knowledge will allow. If is is producing less, it is ‘below full capacity utilization’ or ‘at a low capacity utilization rate’.
capacity utilization rate: A measure of the extent to which a firm, industry, or entire economy is producing as much as the stock of its capital goods and current knowledge would allow.
capital adequacy requirements: At both the national and international level, regulators require banks to hold a minimum amount of equity or capital relative to their assets. The objective of this regulation is to reduce risk-taking by banks. If unregulated, banks, believing they are too large or too interconnected to be allowed to fail, may take excessive risks and impose costs on society were they either to fail or to be rescued. Regulators assess the riskiness of a bank’s assets (its loans) and specify the capital that must be held relative to their risk-weighted assets.
capital goods: The durable and costly non-labour inputs used in production (machinery, buildings) not including some essential inputs, e.g. air, water, knowledge that are used in production at zero cost to the user.
capital intensity: The capital intensity of a production process is the amount of capital used for each unit of labour employed. So if output is produced using \(K\) units of capital and \(N\) workers, the capital intensity is measured by \(K/N\).
capital intensity (of production): The amount of capital goods per worker.
capital-intensive: Making greater use of capital goods (for example machinery and equipment) as compared with labour and other inputs.
capital productivity: Output per unit of capital good.
capitalism: An economic system in which the main form of economic organization is the firm, in which the private owners of capital goods hire labour to produce goods and services for sale on markets with the intent of making a profit. The main economic institutions in a capitalist economic system, then, are private property, markets, and firms.
capitalist firm: A business organization which pays wages and salaries to employ people, and purchases inputs to produce and market goods and services with the intention of making a profit.
capitalist revolution: Rapid improvements in technology combined with the emergence of a new economic system.
cartel: A group of firms that collude in order to increase their joint profits.
catch-up growth: When an economy with relatively low GDP experiences a period of rapid growth that brings incomes closer to those in high-income countries, this is described as catch-up growth. The process by which many (but far from all) economies in the world close the gap between the world leader and their own economy.
categorical inequality: Inequality between particular social groups (identified, for instance, by a category such as race, nation, caste, gender or religion). Also known as: group inequality.
causal: We can say that a relationship between two variables is causal if we can establish that a change in one variable produces a change in the other. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept.
causality: A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation is simply an assessment that two things have moved together, causation implies a mechanism accounting for the association, and is therefore a more restrictive concept.
central bank: The only bank that can create base money. Usually part of the government. Commercial banks have accounts at this bank, holding base money.
central planning: In a centrally-planned economy, decisions about what to produce and how are taken by the government, rather than by firms responding to market prices.
ceteris paribus: Economists often simplify analysis by setting aside things that are thought to be of less importance to the question of interest. The literal meaning of the expression is 'other things equal'. In an economic model it means an analysis 'holds other things constant'.
club good: See: artificially scarce good, public good.
co-insurance: A means of pooling savings across households in order for a household to be able to maintain consumption when it experiences a temporary fall in income or the need for greater expenditure.
codified knowledge: Knowledge that can be written down in a form that would allow it to be understood by others and reproduced, such as the chemical formula for a drug.
collateral: An asset that a borrower pledges to a lender as a security for a loan. If the borrower is not able to make the loan payments as promised, the lender becomes the owner of the asset.
collateralized debt obligation (CDO): A structured financial instrument (a derivative) consisting of a bond or note backed by a pool of fixed-income assets. The collapse in the value of the instruments of this type that were backed by subprime mortgage loans was a major factor in the financial crisis of 27–28.
commodities: Physical goods traded in a manner similar to shares. They include metals such as gold and silver, and agricultural products such as coffee and sugar, oil and gas. Sometimes more generally used to mean anything produced for sale.
common currency area: A common currency area (sometimes called a currency union or monetary union) is group of countries that use the same currency. This means there is just one monetary policy for the group.
common-pool resource: A rival good that one cannot prevent others from enjoying.
comparative advantage: A person or a country has a comparative advantage in the production of a particular good if the cost to them of producing it, relative to the cost of another good, is lower than for another person or a country. A person or country has comparative advantage in the production of a particular good, if the cost of producing an additional unit of that good relative to the cost of producing another good is lower than another person or country’s cost to produce the same two goods.
competition policy: Government policy and laws to limit monopoly power and prevent cartels.
competitive equilibrium: A market outcome in which all buyers and sellers are price-takers, and at the prevailing market price, the quantity supplied is equal to the quantity demanded.
complements: Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other.
complete contract: A contract is complete if it a) covers all of the aspects of the exchange in which any party to the exchange has an interest, and b) is enforceable (by the courts) at close to zero cost to the parties.
compound annual growth rate (CAGR): The average annual compound growth rate over a given time period.
concave: A function, \(f(x)\), is said to be concave if its second derivative is negative for all values of x.
concave function: A function of two variables for which the line segment between any two points on the function lies entirely below the curve representing the function (the function is convex when the line segment lies above the function).
conflict of interest: The situation which arises if in order for one party to gain more from the interaction, another party must do less well.
congestible public goods: If a public good becomes partially rival as more people use it, it may be described as a congestible public good.
conspicuous consumption: The purchase of goods or services to publicly display one's social and economic status.
constant prices: Prices corrected for increases in prices (inflation) or decreases in prices (deflation) so that a unit of currency represents the same buying power in different periods of time.
constant returns to scale: These occur when doubling all of the inputs to a production process doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs.
constrained choice problem: This problem is about how we can do the best for ourselves, given our preferences and constraints, and when the things we value are scarce.
constrained optimization problem: Problems in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit) subject to a constraint that determines the feasible set (such as the demand curve).
consumer durables: Consumer goods with a life expectancy of more than three years such as home furniture, cars, and fridges.
consumer good: Any good that can be bought by consumers, including both short-lived goods and long-lived goods, which are called consumer durables.
consumer price index (CPI): A measure of the general level of prices that consumers have to pay for goods and services, including consumption taxes.
consumer surplus: The consumer's willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold.
consumption: Expenditure on consumer goods. Consumer goods include both short-lived goods and services and long-lived goods, which are called consumer durables.
consumption: Expenditure on both short-lived goods and services and long-lived goods, which are called consumer durables.
consumption function (aggregate): A relationship that shows how consumption spending in the economy as a whole depends on other variables. For example, in the multiplier model, aggregate consumption depends on current disposable income and autonomous consumption. An equation that shows how consumption spending in the economy as a whole depends on other variables. For example, in the multiplier model, the other variables are current disposable income and autonomous consumption.
consumption good: A good or service that satisfies the needs of consumers over a short period.
consumption smoothing: Actions taken by an individual, family, or other group in order to sustain their customary level of consumption. Actions include borrowing or reducing savings to offset negative shocks, such as unemployment or illness; and increasing saving or reducing debt in response to positive shocks, such as promotion or inheritance.
contingent valuation: A survey-based technique used to assess the value of non-market resources. Also known as: stated-preference model.
contract: A legal document or understanding that specifies a set of actions that parties to the contract must undertake.
convex: A function, \(f(x)\), is said to be convex if its second derivative is positive for all values of x.
convex preferences: A person whose indifference curves have a convex shape—they get flatter as you move along the curve to the right of the diagram—is said to have convex preferences. This typical shape arises because when someone has more of one good (relative to another) they are willing to give up more of it in exchange for a unit of the other good: their marginal rate of substitution falls along the curve.
cooperation: Participating in a common project that is intended to produce mutual benefits.
cooperative firm: A firm that is mostly or entirely owned by its workers, who hire and fire the managers.
coordination game: A game in which there are two Nash equilibria, one of which may be Pareto superior to the other. Also known as: assurance game. A game in which there are two Nash equilibria, of which one may be Pareto superior to the other. Also known as: assurance game.
copyright: Ownership rights over the use and distribution of an original work.
correlation: A statistical association in which knowing the value of one variable provides information on the likely value of the other, for example high values of one variable being commonly observed along with high values of the other variable. It can be positive or negative (it is negative when high values of one variable are observed with low values of the other). It does not mean that there is a causal relationship between the variables.
correlation coefficient: A measure of how closely associated two variables are and whether they tend to take similar or dissimilar values, ranging from a value of 1 indicating that the variables take similar values ('are positively correlated') to –1 indicating that the variables take dissimilar variables ('negative' or 'inverse' correlation). A value of 1 or –1 indicates that knowing the value of one of the variables would allow you to perfectly predict the value of the other. A value of 0 indicates that knowing one of the variables provides no information about the value of the other.
cost function: The relationship between a firm’s total costs and its quantity of output. The cost function C(Q) tells you the total cost of producing Q units of output (including the opportunity cost of capital).
costs of entry: Startup costs that are incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and initial costs of finding staff. Startup costs that would be incurred when a seller enters a market or an industry. These would usually include the cost of acquiring and equipping new premises, research and development, the necessary patents, and the cost of finding and hiring staff.
countercyclical: Tending to move in the opposite direction to aggregate output and employment over the business cycle.
creative destruction: Joseph Schumpeter's name for the process by which old technologies and the firms that do not adapt are swept away by the new, because they cannot compete in the market. In his view, the failure of unprofitable firms is creative because it releases labour and capital goods for use in new combinations.
credit constraints: Credit constraints are restrictions on the amounts or terms on which individuals can borrow.
credit-excluded: A description of individuals who are unable to borrow on any terms.
credit-constrained: A description of individuals who are able to borrow only on unfavourable terms.
credit ratings agency: A firm which collects information to calculate the credit-worthiness of individuals or companies, and sells the resulting rating for a fee to interested parties.
credit rationing: The process by which those with less wealth borrow on unfavourable terms, compared to those with more wealth.
crowding out: There are two quite distinct uses of the term. One is the observed negative effect when economic incentives displace people's ethical or other-regarding motivations. In studies of individual behaviour, incentives may have a crowding-out effect on social preferences. A second use of the term is to refer to the effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest rate.
current account (CA): The sum of all payments made to a country minus all payments made by the country.
current account deficit: The excess of the value of a country’s imports over the combined value of its exports plus its net earnings from assets abroad.
current account surplus: The excess of the combined value of its exports and net earnings from assets abroad over the value of its imports.
cyclical component: The short-run (business cycle) fluctuations around the long-run trend component of a macroeconomic time series. Commonly obtained using the Hodrick–Prescott (HP) filter.
cyclical unemployment: The increase in unemployment above equilibrium unemployment caused by a fall in aggregate demand associated with the business cycle.
deadweight loss: A loss of total surplus relative to a Pareto-efficient allocation.
decile: A subset of observations, formed by ordering the full set of observations according to the values of a particular variable and then splitting the set into ten equally-sized groups. For example, the 1st decile refers to the smallest 10% of values in a set of observations.
decreasing returns to scale: These occur when doubling all of the inputs to a production process less than doubles the output.
default risk: The risk that credit given as loans will not be repaid.
deflation: A decrease in the general price level.
demand curve: The curve that gives the quantity consumers will buy at each possible price.
demand shock: An unexpected or exogenous change in demand. In macroconomics a demand shock means a change in aggregate demand, such as a rise or fall in autonomous consumption, investment, or exports. In microeconomics it refers to an exogenous shift in the demand curve for a particular good. An unexpected change in aggregate demand, such as a rise or fall in autonomous consumption, investment, or exports.
demand side (aggregate economy): How spending decisions generate demand for goods and services, and as a result, employment and output. It uses the multiplier model.
demand side: The demand side of the economy refers to the expenditure on the goods and services it produces, which consists of consumption, investment, government purchases, and purchases by foreigners. In a microeconomic model of the market for a particular good, it refers to the decisions of the buyers of the good.
democracy: A political system, that ideally gives equal political power to all citizens, defined by individual rights such as freedom of speech, assembly, and the press; fair elections in which virtually all adults are eligible to vote; and in which the government leaves office if it loses.
democratic accountability: Political accountability by means of elections and other democratic processes.
demographic transition: A slowdown in population growth as a fall in death rate is more than balanced by a fall in birth rates.
depreciation: The loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence).
depreciation (of a currency): If the number of units of the home currency that have to be exchanged to obtain one unit of a foreign currency increases, the home currency is said to have depreciated relative to the foreign currency. This is sometimes described as a nominal depreciation; it corresponds to an increase in the conventional measure of the nominal exchange rate.
depreciation: The loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence).
derivative: A financial instrument in the form of a contract that can be traded, whose value is based on the performance of underlying assets such as shares, bonds or real estate.
developmental state: A government that takes a leading role in promoting the process of economic development through its public investments, subsidies of particular industries, education and other public policies.
difference-in-difference: A method that applies an experimental research design to outcomes observed in a natural experiment. It involves comparing the difference in the average outcomes of two groups, a treatment and control group, both before and after the treatment took place.
differentiated product: A product produced by a single firm that has some unique characteristics compared to similar products of other firms.
diffusion: The spread of the invention throughout the economy.
diffusion gap: The lag between the first introduction of an innovation and its general use.
diminishing average product of labour: A property of a production process in which, as the input of labour is increased, the amount of output per unit of labour (the average product) falls. A situation in which, as more labour is used in a given production process, the average product of labour typically falls.
diminishing marginal product: A property of some production functions according to which each additional unit of input results in a smaller increment in total output than did the previous unit.
diminishing marginal returns to consumption: The value to the individual of an additional unit of consumption declines, the more consumption the individual has.
diminishing marginal utility: A property of some utility functions according to which each additional unit of a given variable results in a smaller increment to total utility than did the previous additional unit.
diminishing returns: A situation in which the use of an additional unit of a factor of production results in a smaller increase in output than the previous increase. Also known as: diminishing marginal returns in production
discount rate: A measure of a person's impatience: how much that person values an additional unit of consumption now relative to an additional unit of consumption later. It is the absolute value of the slope of a person's indifference curve for consumption now and consumption later, minus one.
discounting future generations' costs and benefits: A measure of how we currently value the costs and benefits experienced by people who will live in the future. Note that this is not a measure of individual impatience about one’s own future benefits and costs.
diseconomies of scale: These occur when doubling all of the inputs to a production process less than doubles the output.
disequilibrium: A situation in which at least one of the actors can benefit by altering his or her actions and therefore changing the situation, given what everybody else is doing.
disequilibrium process: An economic variable may change either because the things that determine the equilibrium value of that variable have changed (an equilibrium process), or because the system is not in equilibrium so that there exist forces for change that are internal to the model in question (a disequilibrium process). The latter process applies when the economy moves towards a stable equilibrium or away from a tipping point (an unstable equilibrium).
disequilibrium rent: The economic rent that arises when a market is not in equilibrium, for example when there is excess demand or excess supply in a market for some good or service. In contrast, rents that arise in equilibrium are called equilibrium rents.
disinflation: A decrease in the rate of inflation.
disposable income: A household or individual’s disposable income is the maximum they can spend (‘dispose of’) without borrowing or using savings, after paying tax and receiving transfers (such as unemployment insurance and pensions) from the government. It is also the maximum amount a household or individual could consume over a given time period while leaving their wealth unchanged. Disposable income is measured over a period of time, such as a year. Income available after paying taxes and receiving transfers from the government.
distributionally neutral: A policy that is neither progressive or regressive so that it does not alter the distribution of income.
disutility of effort: The degree to which doing some task (effort) is unpleasant.
division of labour: The specialization of producers to carry out different tasks in the production process.
dominant strategy: Strategy that yields the highest payoff for a player, no matter what the other players do.
dominant strategy equilibrium: An outcome of a game in which every player plays his or her dominant strategy.
dominant technology: A technology that produces the same amount at lower cost than alternative technologies irrespective of the prices of inputs. It is capable of producing the same amount of output as the alternative technology with less of at least one input, and not more of any input.
dominated: We describe an outcome in this way if more of something that is positively valued can be attained without less of anything else that is positively valued. In short: an outcome is dominated if there is a win-win alternative.
earnings: Wages, salaries, and other income from labour.
economic accountability: Accountability achieved by economic processes, notably competition among firms or other entities in which failure to take account of those affected will result in losses in profits or in business failure.
economic cost: The out-of-pocket cost of an action, plus the opportunity cost.
economic inequality: Differences among members of a society in some economic attribute such as wealth, income, or wages.
economic profit: A firm’s revenue minus its total costs (including the opportunity cost of capital).
economic rent: A payment or other benefit received above and beyond what the individual would have received in his or her next best alternative (or reservation option).
economic system: A way of organizing the economy that is distinctive in its basic institutions. Economic systems of the past and present include: central economic planning (e.g. the Soviet Union in the 20th century), feudalism (e.g. much of Europe in the early Middle Ages), slave economy (e.g. the US South and the Caribbean plantation economies prior to the abolition of slavery in the 19th century), and capitalism (most of the world’s economies today).
economically feasible: Policies for which the desired outcomes are a Nash equilibrium, so that once implemented private economic actors will not undo the desired effects.
economics: The study of how people interact with each other and with their natural surroundings in providing their livelihoods, and how this changes over time.
economies of agglomeration: The advantages that firms may enjoy when they are located close to other firms in the same or related industries.
economies of scale: These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm’s long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs. Also known as: increasing returns to scale.
economies of scope: Cost savings that occur when two or more products are produced jointly by a single firm, rather being produced in separate firms.
effective tax rate on profits: This is calculated by taking the before-tax profit rate, subtracting the after-tax profit rate, and dividing the result by the before-tax profit rate. This fraction is usually multiplied by 1 and reported as a percentage.
efficiency unit: A unit of effort is sometimes called an efficiency unit.
efficiency wages: The payment an employer makes that is higher than an employee's reservation wage, so as to motivate the employee to provide more effort on the job than he or she would otherwise choose to make.
employment protection legislation: Laws making job dismissal more costly (or impossible) for employers.
employment rate: The ratio of the number of employed to the population of working age.
employment relationship: The interaction between an employee and an employer in which the employer sets the hours and other conditions of work and the wage, directs the employee’s activities and may terminate her employment, and the employee chooses how hard to work and whether to quit her job. The employee's level of effort, or her decision to remain in the firm, are determined by the choices made by the two parties—and are affected by the exercise of power by the employer and the social norms of both parties.
employment rent: The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed).
endogenous: Produced by the workings of a model rather than coming from outside the model.
endowment: The facts about an individual that may affect his or her income, such as the physical wealth a person has, either land, housing, or a portfolio of shares (stocks). Also includes level and quality of schooling, special training, the computer languages in which the individual can work, work experience in internships, citizenship, whether the individual has a visa (or green card) allowing employment in a particular labour market, the nationality and gender of the individual, and even the person's race or social class background.
enforceable contract: A contract is enforceable if it is legally binding. For a contract to be enforceable, a court must be able to establish whether the both parties complied with its terms.
entrepreneur: A person who creates or is an early adopter of new technologies, organizational forms, and other opportunities.
environment-consumption indifference curve: A curve on which all points are combinations of environmental quality and consumption that are equally valued by an individual or policymaker. The slope of the indifference curve is the ratio of the marginal disutility of lost consumption due to the cost of abating and of the marginal utility of environmental quality (a public good shared by all).
equilibrium: An equilibrium is a situation or model outcome that is self-perpetuating: if the outcome is reached it does not change, unless an external force disturbs it. By an ‘external force’, we mean something that is determined outside the model. A model outcome that does not change unless an outside or external force is introduced that alters the model’s description of the situation. A model outcome that is self-perpetuating. In this case, something of interest does not change unless an outside or external force is introduced that alters the model’s description of the situation.
equilibrium: A model outcome that does not change unless an outside or external force is introduced that alters the model’s description of the situation.
equilibrium price: This term normally refers to the price at which supply and demand for a good are equalized, so that the market is in equilibrium (also known as the market-clearing price). But it could refer to the level of the price in the equilibrium of other economic models.
equilibrium rent: Rent in a market that is in equilibrium. Also known as: stationary or persistent rents.
equilibrium unemployment: The number of people seeking work but without jobs, which is determined by the intersection of the wage-setting and price-setting curves. This is the Nash equilibrium of the labour market and product market where neither employers nor workers could do better by changing their behaviour.
equity: An individual's own investment in a project. This is recorded in an individual's or firm's balance sheet as net worth.
evolutionary economics: An approach that studies the process of economic change, which includes technological innovation, the diffusion of new social norms, and the development of novel institutions. An approach that studies the process of economic change, including technological innovation, the diffusion of new social norms, and the development of novel institutions.
excess demand: A situation in which the quantity of a good demanded is greater than the quantity supplied at the current price.
excess supply: A situation in which the quantity of a good supplied is greater than the quantity demanded at the current price.
exchange rate: The number of units of home currency that can be exchanged for one unit of foreign currency. For example, Australia’s exchange rate between the Australian dollar (AUD) and the US dollar (USD) is defined as the number of AUD per USD. An increase in this number is a depreciation of the AUD, and a decrease is an appreciation of the AUD. The number of units of home currency that can be exchanged for one unit of foreign currency. For example, the number of Australian dollars (AUD) needed to buy one US dollar (USD) is defined as number of AUD per USD. An increase in this rate is a depreciation of the AUD and a decrease is an appreciation of the AUD.
excludable: A good is excludable if (at zero or low cost) a potential user may be denied access to the good.
club good:
exogenous: Coming from outside the model rather than being produced by the workings of the model itself.
exogenous shock: A sharp change in external conditions affecting a model.
expected inflation: The belief formed by wage-setters and price-setters about the level of inflation in the next period. The opinion that wage- and price-setters form about the level of inflation in the next period.
exports: Goods and services produced in a particular country and sold to households, firms, and governments in other countries.
exports (X): Goods and services produced in a particular country and sold to households, firms and governments in other countries.
expropriation risk: The probability that an asset will be taken from its owner by the government or some other actor.
external benefit: A positive external effect: that is, a positive effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit in a contract.
external cost: A negative external effect: that is, the negative effect of production, consumption, or other economic decisions on another person or party, which is not specified as a liability in a contract.
external diseconomy: A negative effect of a production, consumption, or other economic decision, that is not specified as a liability in a contract.
external economy: A positive effect of a production, consumption, or other economic decision, that is not specified as a benefit in a contract.
external effect: When a person's action confers a benefit or cost on some other individual, and this effect is not taken account of by the person in deciding to take the action. It is external because it is not included in the decision-making process of the person taking the action. Positive effects refer to benefits, and negative effects to costs, that are experienced by others. A person breathing second-hand smoke from someone else's cigarette is a negative external effect. Enjoying your neighbour's beautiful garden is a positive external effect.
factor of production: Any input into a production process is called a factor of production. Factors of production may include labour, machinery and equipment (usually referred to as capital), land, energy, and raw materials.
factors of production: The labour, machinery and equipment (usually referred to as capital), land, and other inputs to a production process.
fairness: A way to evaluate an allocation based on one's conception of justice.
fallacy of composition: Mistaken assumption that what is true of the parts (such as households) must be true of the whole (such as the economy as a whole). For an example see: paradox of thrift. Mistaken inference that what is true of the parts (for example a household) must be true of the whole (in this case the economy as a whole).
feasible frontier: The curve made of points that defines the maximum feasible quantity of one good for a given quantity of the other.
feasible set: All of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces.
final income: A measure of the value of goods and services a household can consume from its disposable income. This is equal to disposable income minus VAT paid, plus the value of public services received.
financial accelerator: When an asset (such as housing) is used as collateral for loans, an increase in price raises the value of the collateral enabling more borrowing, raising demand, and causing further price rises. This amplification process is called a financial accelerator. The mechanism through which firms’ and households’ ability to borrow increases when the value of the collateral they have pledged to the lender (often a bank) goes up.
financial deregulation: Policies allowing banks and other financial institutions greater freedom in the types of financial assets they can sell, as well as other practices.
fire sale: The sale of something at a very low price because of the seller’s urgent need for money.
firm: Economic organizations in which private owners of capital goods hire and direct labour to produce goods and services for sale on markets to make a profit.
firm-specific asset: An asset is something that is owned and has value. It is firm-specific if it is only of value within a particular firm. Firm-specific assets include any knowledge or skills that are only valuable while a person remains employed in a particular firm. Something that a person owns or can do that has more value in the individual’s current firm than in their next best alternative.
first copy costs: The fixed costs of the production of a knowledge-intensive good or service.
fiscal capacity: The ability of a government to impose and collect substantial taxes from a population at low administrative and other costs. One measure of this is the amount collected divided by the cost of administering the tax system.
fiscal multiplier: The total (direct and indirect) change in output caused by an initial change in government spending.
fiscal policy: Fiscal policy refers to policies setting the levels of taxes, transfers, and goverment spending. Since fiscal policy affects the level of aggregate demand, it may be used by the government to stabilize the economy by changing aggregate demand; in this case, it may be described as discretionary fiscal policy.
fiscal stimulus: The use by the government of fiscal policy (via a combination of tax cuts and spending increases) with the intention of increasing aggregate demand.
Fisher equation: The relation that gives the real interest rate as the difference between the nominal interest rate and expected inflation: real interest rate = nominal interest rate – expected inflation.
fixed costs: Costs of production that do not vary with the number of units produced.
fixed investment: In the national accounts, fixed investment, also known as gross fixed capital formation, refers to investment by firms and government in new capital goods (equipment and buildings), plus spending on new residential buildings.
fixed-proportions technology: A technology that requires inputs in fixed proportions to each other. To increase the amount of output, all inputs must be increased by the same percentage so that they remain in the same fixed proportions to each other.
flow: A quantity measured per unit of time, such as weekly income, or annual carbon emissions. A quantity measured per unit of time, such as annual income or hourly wage.
flow variable: A quantity measured per unit of time, such as annual income or hourly wage.
foreign direct investment (FDI): Ownership and substantial control over assets in a foreign country.
foreign portfolio investment: The acquisition of bonds or shares in a foreign country where the holdings of the foreign assets are not sufficiently great to give the owner substantial control over the owned entity. Foreign direct investment (FDI), by contrast, entails ownership and substantial control over the owned assets.
free ride: Benefiting from the contributions of others to some cooperative project without contributing oneself.
free ride: Benefiting from the contributions of others to some cooperative project without contributing oneself.
fundamental value: See: fundamental value of a share.
fundamental value of a share: The share price based on anticipated future earnings and the level of risk.
gains from trade: The benefits that each party gains from a transaction compared to how they would have fared without the exchange.
game: A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs.
game theory: A branch of mathematics that studies strategic interactions, meaning situations in which each actor knows that the benefits they receive depend on the actions taken by all.
GDP deflator: A measure of the change in the level of prices for domestically produced output, based on price changes of consumption, investment, government expenditure, and exports. A measure of the level of prices for domestically produced output. This is the ratio of nominal (or current price) GDP to real (or constant price) GDP.
gender division of labour: The ways men and women differ in how they spend their work time.
general-purpose technologies: Technological advances that can be applied to many sectors, and spawn further innovations. Information and communications technology (ICT), and electricity are two common examples.
gig economy: An economy made up of people performing services matched by means of a computer platform with those paying for the service. Workers are paid for each task they complete, and not per hour. They are not legally recognized as employees of the company that owns the platform, and typically receive few benefits from the owners, other than matching.
Gini coefficient: A measure of inequality of any quantity such as income or wealth, varying from a value of zero (if there is no inequality) to one (if a single individual receives all of it).
global financial crisis: This began in 2007 with the collapse of house prices in the US, leading to the fall in prices of assets based on subprime mortgages and to widespread uncertainty about the solvency of banks in the US and Europe, which had borrowed to purchase such assets. The ramifications were felt around the world, as global trade was cut back sharply. Goverments and central banks responded aggressively with stabilization policies.
global greenhouse gas abatement cost curve: This shows the total cost of abating greenhouse gas emissions using abatement policies ranked from the most cost-effective to the least.
globalization: A process by which the economies of the world become increasingly integrated by the freer flow across national boundaries of goods, investment, finance, and to a lesser extent, labour. The term is sometimes applied more broadly to include ideas, culture, and even the spread of epidemic diseases.
Globalization I and II: Two separate periods of increasing global economic integration: the first extended from before 1870 until the outbreak of the First World War in 1914, and the second extended from the end of the Second World War into the twenty-first century.
gold standard: The system of fixed exchange rates, abandoned in the Great Depression, by which the value of a currency was defined in terms of gold, for which the currency could be exchanged.
golden age (of capitalism): The period of high productivity growth, high employment, and low and stable inflation extending from the end of the Second World War to the early 197s.
goods: Economists sometimes use this word in a very general way, to mean anything an individual cares about and would like to have more of. As well as goods that are sold in a market, it can include (for example) ‘free time’ or ‘clean air’.
goods market equilibrium: A goods market is in equilibrium when the supply of goods is equal to the demand. In the multiplier model, aggregate demand for goods and services, AD, depends on income, Y, and income is equal to the output that firms supply. Goods market equilibrium is at the value of Y where aggregate demand is equal to output: AD = Y. The point at which output equals the aggregate demand for goods produced in the home economy. The economy will continue producing at this output level unless something changes spending behaviour.
governing elite: Top government officials such as the president, cabinet officials, and legislative leaders, unified by a common interest such as membership in a particular party.
government: Within a given territory, the only body that can dictate what people must do or not do, and can legitimately use force and restraints on an individual's freedom to achieve that end.
government bond: A financial instrument issued by governments that promises to pay flows of money at specific intervals.
government budget balance: The difference between government tax revenue and government spending (including government purchases of goods and services, investment spending, and spending on transfers such as pensions and unemployment benefits).
government budget deficit: If government spending exceeds its tax revenue in the same year, the government budget is in deficit and the size of the deficit is the difference between spending and tax revenue. When the government budget balance is negative.
government budget surplus: When the government budget balance is positive.
government debt: The total amount of money owed by the government at a specific point in time. The sum of all the bonds the government has sold over the years to finance its deficits, minus the ones that have matured.
government failure: A failure of political accountability. (This term is widely used in a variety of ways, none of them strictly analogous to market failure, for which the criterion is simply Pareto inefficiency).
government spending: Expenditure by the government to purchase goods and services. When used as a component of aggregate demand, this does not include spending on transfers such as pensions and unemployment benefits.
government spending (G): Expend­iture by the government to purchase goods and services. When used as a component of aggregate demand, this does not include spending on transfers such as pensions and unemployment benefits.
government transfers: Spending by the government in the form of payments to households or individuals. Unemployment benefits and pensions are examples. Transfers are not included in government spending (G) in the national accounts.
Great Depression: The period of a sharp fall in output and employment in many countries in the 193s.
great moderation: A period of low volatility in aggregate output in advanced economies between the 198s and the 28 financial crisis. The name was suggested by James Stock and Mark Watson, the economists, and popularized by Ben Bernanke, then chairman of the Federal Reserve. Period of low volatility in aggregate output in advanced economies between the 198s and the 28 financial crisis. The name was suggested by James Stock and Mark Watson, the economists, and popularized by Ben Bernanke, then chairman of the Federal Reserve.
great recession: The prolonged recession that followed the global financial crisis of 28.
green adjustment: Accounting adjustment made to conventional measures of national income to include the value of natural capital.
greenhouse gas: Gases—mainly water vapour, carbon dioxide, methane and ozone—released in the earth’s atmosphere that lead to increases in atmospheric temperature and changes in climate.
gross domestic product (GDP): A measure of the market value of the output of final goods and services in the economy in a given period. Output of intermediate goods that are inputs to final production is excluded to prevent double counting.
gross domestic product (GDP) per capita: A measure of the market value of the output of the economy in a given period (GDP) divided by the population.
gross income: Income net of taxes paid. Includes depreciation.
gross unemployment benefit replacement rate: The proportion of a worker’s previous gross (pre-tax) wage that is received (gross of taxation) when unemployed.
hawk-dove game: A game in which there is conflict (when hawks meet), sharing (when doves meet), and taking (by a hawk when it meets a dove).
hedge finance: Financing used by firms to fulfil contractual payment obligations using cashflow. Term coined by Hyman Minsky in his Financial Instability Hypothesis.
hedonic pricing: A method used to infer the economic value of unpriced environmental or perceptual qualities that affect the price of a marketed good. It allows a researcher to put a price on hard-to-quantify characteristics. Estimations are based on people’s revealed preferences, that is, the price they pay for one thing compared to another.
hidden actions (problem of): This occurs when some action taken by one party to an exchange is not known or cannot be verified by the other.
hidden attributes (problem of): This occurs when some attribute of the person engaging in an exchange (or the product or service being provided) is not known to the other parties.
homo economicus: Latin for ‘economic man’, referring to an actor assumed to adopt behaviours based on an amoral calculation of self-interest.
human capital: The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. It is part of an individual's endowments. Investment in this through education, training, and socialization can increase the stock, and such investment is one of the sources of economic growth.
hyperglobalization: An extreme (and so far hypothetical) type of globalization in which there is virtually no barrier to the free flows of goods, services, and capital.
idiosyncratic risk: A risk that only affects a small number of assets at one time. Traders can almost eliminate their exposure to such risks by holding a diverse portfolio of assets affected by different risks.  Also known as: diversifiable risk. A risk that only affects a small number of assets at one time. Traders can almost eliminate their exposure to such risks by holding a diverse portfolio of assets affected by different risks. Also known as: diversifiable risk.
impatience: Any preference to move consumption from the future to the present. This preference may be derived either from pure impatience or diminishing marginal returns to consumption.
imports: Goods and services produced in other countries and purchased by domestic households, firms, and the government.
imports (M): Goods and services produced in other countries and purchased by domestic households, firms, and the government.
in-kind transfers: Public expenditure in the form of free or subsidized services for households rather than in the form of cash transfers.
inactive population: People in the population of working age who are neither employed nor actively looking for paid work. Those working in the home raising children, for example, are not considered as being in the labour force and therefore are classified this way.
incentive: Economic reward or punishment, which influences the benefits and costs of alternative courses of action.
inclusive trade union: A union, representing many firms and sectors, which takes into account the consequences of wage increases for job creation in the entire economy in the long run.
income: The amount of labour earnings, dividends, interest, rent, and other payments (including transfers from the government) received by an economic actor, net of taxes paid, measured over a period of time, such as a year. The maximum amount that you could consume and leave your wealth unchanged.
income effect: The effect, for example, on the choice of consumption of a good that a change in income would have if there were no change in the price or opportunity cost.
income elasticity of demand: The percentage change in demand that would occur in response to a 1% increase in the individual's income.
income net of depreciation: Disposable income minus depreciation.
incomplete contract: A contract that does not specify, in an enforceable way, every aspect of the exchange that affects the interests of parties to the exchange (or of any others affected by the exchange).
increasing returns to scale: These occur when doubling all of the inputs to a production process more than doubles the output. The shape of a firm's long-run average cost curve depends both on returns to scale in production and the effect of scale on the prices it pays for its inputs.
incremental innovation: Innovation that improves an existing product or process cumulatively.
index: An index is formed by aggregating the values of multiple items into a single value, and is used as a summary measure of an item of interest. Example: The HDI is a summary measure of wellbeing, and is calculated by aggregating the values for life expectancy, expected years of schooling, mean years of schooling, and gross national income per capita. A measure of the amount of something in one period of time, compared to the amount of the same thing in a different period of time, called the reference period or base period. It is common to set its value at 1 in the reference period.
indifference curve: A curve of the points which indicate the combina­tions of goods that provide a given level of utility to the individual.
Industrial Revolution: A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy.
industry: Goods-producing business activity: agriculture, mining, manufacturing, and construction. Manufacturing is the most important component.
inequality aversion: A dislike of outcomes in which some individuals receive more than others. It is considered a social preference.
infant industry: A relatively new industrial sector in a country that has relatively high costs, because its recent establishment means that it has few benefits from learning by doing, its small size deprives it of economies of scale, or a lack of similar firms means that it does not benefit from economies of agglomeration. Temporary tariff protection of this sector or other support may increase productivity in an economy in the long run.
inferior good: A good whose consumption decreases when income increases (holding prices constant).
inflation: An increase in the general price level in the economy. Usually measured over a year.
inflation-adjusted price: Price that takes into account the change in the overall price level.
inflation-stabilizing rate of unemployment: The unemployment rate (at labour market equilibrium) at which inflation is constant. Originally known as the 'natural rate' of unemployment.
inflation target: Inflation targeting is a form of monetary policy, where the central bank changes interest rates in order to influence aggregate demand and keep the economy close to an inflation target rate, which is normally specified by the government.
innovation: The process of invention and diffusion considered as a whole.
innovation rent: Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form, or marketing strategy.
innovation system: The relationships among private firms, governments, educational institutions, individual scientists, and other actors involved in the invention, modification, and diffusion of new technologies, and the way that these social interac­tions are governed by a combination of laws, policies, know­ledge, and social norms in force.
insolvent: An entity is this if the value of its assets is less than the value of its liabilities.
institution: The laws and informal rules that regulate social interactions among people and between people and the biosphere, sometimes also termed the rules of the game.
intellectual property rights: Patents, trademarks, and copyrights.
interest rate: The price of bringing buying power forward in time, by borrowing. Interest is the additional amount that the borrower promises to repay. The rate of interest is the amount of interest to be repaid per period, as a proportion of the loan.
interest rate (short-term): The price of borrowing base money. This is a nominal interest rate.
intergenerational elasticity: When comparing parents and grown offspring, the percentage difference in the second generation’s status that is associated with a 1% difference in the adult generation’s status.
intergenerational inequality: The extent to which differences in parental generations are passed on to the next generation, as measured by the intergenerational elasticity or the intergenerational correlation.
intergenerational mobility: Changes in the relative economic or social status between parents and children. Upward mobility occurs when the status of a child surpasses that of the parents. Downward mobility is the converse. A widely used measure of intergenerational mobility is the correlation between the positions of parents and children (for example, in their years of schooling or income). Another is the intergenerational elasticity.
intergenerational transmission of economic differences: The processes by which the economic status of the adult sons and daughters comes to resemble the economic status of the parents.
intertemporal choice model: A model representing decision making concerning borrowing, lending, and investing as ways of moving purchasing power forward (to the present) or backward (to the future) in time.
invention: The development of new methods of production and new products.
inventories: Inventories are goods held by a firm prior to sale or use, including raw materials, and partially-finished or finished goods intended for sale.
inventory investment: Increases in the inventories held by firms are a form of investment, since they are assets that will bring a return to the firm at a later date. Decreases in inventories correspond to negative inventory investment (a reduction in assets).
investment: Investment is expenditure undertaken in order to generate a return in future: for example, buying financial assets that will generate income in future, or a house that will provide accommodation, or capital goods to be used by a firm to produce output. In the national accounts, investment expenditure refers more specifically to fixed investment (gross fixed capital formation) together with inventory investment.
investment function (aggregate): A relationship that shows how investment spending in the economy as a whole depends on other variables, such as the interest rate and profit expectations. An equation that shows how investment spending in the economy as a whole depends on other variables, namely, the interest rate and profit expectations.
investment (I): Expenditure on newly produced capital goods (machinery and equipment) and buildings, including new housing.
invisible hand game: A game in which there is a single Nash equilibrium and where there is no other outcome in which both players would be better off or at least one better off and the other not worse off.
involuntary unemployment: A person who is seeking work, and willing to accept a job at the going wage for people of their level of skill and experience, but unable to secure employment is involuntarily unemployed.
irrational exuberance: A process by which assets become overvalued. The expression was first used by Alan Greenspan, then chairman of the US Federal Reserve Board, in 1996. It was popularized as an economic concept by the economist Robert Shiller.
isocost line: A line that represents all combinations that cost a given total amount.
isoprofit curve: A curve on which all points yield the same profit.
isototal benefits curve: The combinations of the probability of innovation and the total benefits to society from a firm’s innovation that yield the same total benefits.
joint surplus: The sum of the economic rents of all involved in an interaction.
Joule: A unit of energy or work, originally defined as the amount of energy necessary to lift a small apple vertically 1 metre.
labour discipline model: A model that explains how employers set wages so that employees receive an economic rent (called employment rent), which provides workers an incentive to work hard in order to avoid job termination.
labour discipline model: A model that explains how employers set wages so that employees receive an economic rent (called employment rent), which provides workers an incentive to work hard in order to avoid job termination.
labour force: The number of people in the population of working age who are, or wish to be, in work outside the household. They are either employed (including self-employed) or unemployed.
labour-intensive: Making greater use of labour as an input in production as compared with machines and other inputs.
labour market: The market in which employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side. In this market, employers offer wages to individuals who may agree to work under their direction. Economists say that employers are on the demand side of this market, while employees are on the supply side.
labour market equilibrium: The combination of the real wage and the level of employment determined by the intersection of the wage-setting and the price-setting curves. This is the Nash equilibrium of the labour market because neither employers nor workers could do better by changing their behaviour.
labour market matching: The way in which employers looking for additional employees (that is, with vacancies) meet people seeking a new job.
labour market power: A firm has labour market power (sometimes called monopsony power) if it can reduce the wage it needs to pay its workers by lowering the number of workers that it employs.
labour productivity: Total output divided by the number of hours or some other measure of labour input.
Law of One Price: The Law of One Price states that in equilibrium, identical goods or services will be traded at the same price by all buyers and sellers. Holds when a good is traded at the same price across all buyers and sellers. If a good were sold at different prices in different places, a trader could buy it cheaply in one place and sell it at a higher price in another.
learning by doing: This occurs when the output per unit of inputs increases with greater experience in producing a good or service.
lending rate (bank): The average interest rate charged by commercial banks to firms and households. This rate will typically be above the policy interest rate: the difference is known as the markup or spread on commercial lending. This is a nominal interest rate.
Leontief paradox: The unexpected finding by Wassily Leontief that exports from the US were labour-intensive and its imports capital-intensive, a result that contradicts what the economic theories predicted: namely that a country abundant in capital (like the US) would export goods that used a large quantity of capital in their production.
leverage: Leverage (or gearing) refers to the process of increasing investments or asset purchases by borrowing. There are several different, but closely related, measures of leverage of a household, a firm, or a bank. CORE uses the proportion of the investment financed by borrowing; in other words, the leverage ratio is the ratio of debt to assets.
leverage ratio (for banks or households): The value of assets divided by the equity stake in those assets.
leverage ratio (for non-bank companies): The value of total liabilities divided by total assets.
liability: Anything of value that is owed.
limit order: An announced price and quantity combination for an asset, either to be sold or bought.
linear regression line: The best-fitting line through a set of data.
liquid: See: liquidity.
liquidity: Ease of buying or selling a financial asset at a predictable price.
liquidity risk: The risk that an asset cannot be exchanged for cash rapidly enough to prevent a financial loss.
lock-in: A consequence of the network external effects that create winner-take-all competition. The competitive process results in an outcome that is difficult to change, even if users of the technology consider an alternative innovation superior.
logarithmic scale: A way of measuring a quantity based on the logarithm function, f(x) = log(x). The logarithm function converts a ratio to a difference: log (a/b) = log a – log b. This is very useful for working with growth rates. For instance, if national income doubles from 5 to 1 in a poor country and from 1, to 2, in a rich country, the absolute difference in the first case is 5 and in the second 1,, but log(1) – log(5) = .693, and log(2,) – log(1,) = .693. The ratio in each case is 2 and log(2) = .693.
long run: The term does not refer to a specific length of time, but instead to what is held constant and what can vary within a model. The short run refers to what happens while some variables (such as prices, wages, or capital stock) are held constant (taken to be exogenous). The long run refers to what happens when these variables are allowed to vary and be determined by the model (they become endogenous). A long-run cost curve, for example, refers to costs when the firm can fully adjust all of the inputs including its capital goods.
long-run equilibrium: An equilibrium that is achieved when variables that were held constant in the short run (for example, the number of firms in a market) are allowed to adjust, as people have time to respond the situation. An equilibrium that is achieved when variables that were held constant in the short run (for example, the number of firms in a market) are allowed to adjust, as people have time to respond the situation.
long run (model): The term does not refer to a period of time, but instead to what is exogenous. A long-run cost curve, for example, refers to costs when the firm can fully adjust all of the inputs including its capital goods; but technology and the economy’s institutions are exogenous.
Lorenz curve: A graphical representation of inequality of some quantity such as wealth or income. Individuals are arranged in ascending order by how much of this quantity they have, and the cumulative share of the total is then plotted against the cumulative share of the population. For complete equality of income, for example, it would be a straight line with a slope of one. The extent to which the curve falls below this perfect equality line is a measure of inequality.
low capacity utilization: When a firm or economy could increase output by increasing employment utilizing the existing capital goods.
marginal change: When two variables, x and y, are related to each other, the effect of a marginal change is the change in y that occurs in response to a small increase in x. If y is a continuous function of x, the marginal change in y is the rate of change of y with respect to x: that is, the derivative of the function.
marginal cost: The addition to total costs associated with producing one additional unit of output.
marginal external benefit: The marginal external benefit (MEB) is the beneft of an additional unit of a good for someone other than the decision-maker (or the sum of these benefits if several others are affected). The marginal social benefit is the sum of the MEB and the marginal private benefit to the decision-maker: MSB = MEB + MPB.
marginal external cost (MEC): The cost of producing an additional unit of a good that is incurred by anyone other than the producer of the good.
marginal private benefit (MPB): The benefit (in terms of profit, or utility) of producing or consuming an additional unit of a good for the individual who decides to produce or consume it, not taking into account any benefit received by others.
marginal private cost (MPC): The cost for the producer of producing an additional unit of a good, not taking into account any costs its production imposes on others.
marginal product: The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant.
marginal productivity of abatement expenditures: The marginal rate of transformation (MRT) of abatement costs into improved environment. It is the slope of the feasible frontier.
marginal propensity to consume (MPC): The change in consumption when disposable income changes by one unit.
marginal propensity to import: The change in total imports when aggregate income changes by one unit. The change in total imports associated with a change in total income.
marginal rate of substitution (MRS): The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve.
marginal rate of transformation (MRT): A measure of the trade-offs a person faces in what is feasible. Given the constraints (feasible frontier) a person faces, the MRT is the quantity of some good that must be sacrificed to acquire one additional unit of another good. At any point, it is the slope of the feasible frontier.
marginal revenue: The change in revenue obtained by increasing the quantity sold by one unit. The change in revenue obtained by increasing the quantity from Q to Q + 1. The increase in revenue obtained by increasing the quantity from Q to Q + 1.
marginal social benefit (MSB): The benefit (in terms of utility) of producing or consuming an additional unit of a good, taking into account both the benefit to the individual who decides to produce or consume it, and the benefit to anyone else affected by the decision.
marginal social cost (MSC): The cost of producing an additional unit of a good, taking into account both the cost for the producer and the costs incurred by others affected by the good's production. Marginal social cost is the sum of the marginal private cost and the marginal external cost.
marginal utility: The additional utility resulting from a one-unit increase of a given variable.
market: A way that people exchange goods and services by means of directly reciprocated transfers (unlike gifts), voluntarily entered into for mutual benefit (unlike theft, taxation), that is often impersonal (unlike transfers among friends, family).
market capitalization rate: The rate of return that is just high enough to induce investors to hold shares in a particular company. This will be high if the company is subject to a high level of systematic risk. The rate of return that is just high enough to induce investors to hold shares in a particular company. This will be high if the company is subject to a high level of systematic risk.
market clearing: A market clears when the amount of the good supplied is equal to the amount demanded.
market-clearing price: At this price there is no excess supply or excess demand.
market failure: When markets allocate resources in a Pareto-inefficient way.
market power: An attribute of a firm that can sell its product at a range of feasible prices, so that it can benefit by acting as a price-setter (rather than a price-taker).
market share: A firm’s proportion of the market in which its product is sold. It may be measured as its share of the total revenue in the market, or of the total quantity sold in the market.
matching market: A market for interactions between two distinct groups, in which the members have different characteristics from other members of their own group, and would benefit from matching with particular members of the other group. For example, firms and workers in the labour market, men and women in what is sometimes called the marriage market. Also known as a two-sided market. A market that matches members of two distinct groups of people. Each person in the market would benefit from being connected to the right member of the other group. Also known as: two-sided market.
maturity transformation: The practice of borrowing money short term and lending it long term. For example, a bank accepts deposits, which it promises to repay at short notice or no notice, and makes long-term loans (which can be repaid over many years).
mean: A summary statistic for a set of observations, calculated by adding all values in the set and dividing by the number of observations.
median: The middle number in a set of values, such that half of the numbers are larger than the median and half are smaller. Also known as: 50th percentile.
median voter: If voters can be lined up along a single more-versus-less dimension (such as preferring higher or lower taxes, more or less environmental protection), the median voter is the one ‘in the middle’—that is (if there is an odd number of voters in total), with an equal number preferring more and preferring less than what he or she does.
median voter model: An economic model of the location of businesses applied to the positions taken in electoral platforms when two parties compete that provides conditions under which, in order to maximize the number of votes they will receive, the parties will adopt positions that appeal to the median voter.
medium run (model): The term does not refer to a period of time, but instead to what is exogenous. In this case capital stock, technology, and institutions are exogenous. Output, employment, prices, and wages are endogenous.
menu costs: The resources used in setting and changing prices.
merchandise trade: Trade in tangible products that are physically shipped across borders.
merit goods: Goods and services that should be available to everyone, independently of their ability to pay.
minimum acceptable offer: In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. Generally applied in bargaining situations to mean the least favourable offer that would be accepted.
minimum wage: A minimum level of pay laid down by law or regulation, for workers in general or of some specified type. The intention of a minimum wage is to guarantee living standards for the low-paid. Many countries, including the UK and the US, enforce this with legislation.
missing market: A market in which there is some kind of exchange that, if implemented, would be mutually beneficial. This does not occur due to asymmetric or non-verifiable information.
momentum trading: Share trading strategy based on the idea that new information is not incorporated into prices instantly, so that prices exhibit positive correlation over short periods.
monetary policy: Central bank or government actions aimed at influencing economic activity through changes in interest rates or the prices of financial assets. Central bank (or government) actions aimed at influencing economic activity through changing interest rates or the prices of financial assets.
money: Money is something that facilitates exchange (called a medium of exchange) consisting of bank notes and bank deposits, or anything else that can be used to purchase goods and services, and is generally accepted by others as payment because others can use it for the same purpose. The ‘because’ is important and it distinguishes exchange facilitated by money from barter exchange, in which goods are directly exchanged without money changing hands.
money wage: The amount of money an employer pays to a worker. Also known as: nominal wage.
monopolistic competition: A market in which each seller has a unique product but there is competition among firms because firms sell products that are close substitutes for one another.
monopolized market: Market in which a single firm produces all the goods that are sold.
monopoly: A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller.
monopoly power: The power that a firm has to control its own price. The fewer close substitutes for the product are available, the greater the firm's price-setting power.
monopoly rents: A form of profits, which arise due to restricted competition in selling a firm's product.
monopsony power: A firm has labour market power (sometimes called monopsony power) if it can reduce the wage it needs to pay its workers by lowering the number of workers that it employs. It is sometimes called monopsony power because it applies, in particular, to a firm that is the only employer in a particular labour market.
moral hazard: This term originated in the insurance industry to express the problem that insurers face, namely, the person with home insurance may take less care to avoid fires or other damages to his home, thereby increasing the risk above what it would be in absence of insurance. This term now refers to any situation in which one party to an interaction is deciding on an action that affects the profits or wellbeing of the other but which the affected party cannot control by means of a contract, often because the affected party does not have adequate information on the action. It is also referred to as the 'hidden actions' problem.
mortgage-backed security (MBS): A financial asset that uses mortgages as collateral. Investors receive payments derived from the interest and principal of the underlying mortgages.
mortgage (or mortgage loan): A loan contracted by households and businesses to purchase a property without paying the total value at one time. Over a period of many years, the borrower repays the loan, plus interest. The debt is secured by the property itself, referred to as collateral.
multiplier: See: fiscal multiplier.
multiplier model: A model of aggregate demand that includes the multiplier process.
multiplier process: A mechanism through which the direct effect of an increase (or decrease) in aggregate spending is amplified through indirect effects that further increase (or decrease) aggregate output. A mechanism through which the direct and indirect effect of a change in autonomous spending affects aggregate output.
mutual gains: An outcome of an interaction among two or more people, in which all parties are better off as a result than they would have been without the interaction (or at least some parties are better off and none are worse off).
Nash equilibrium: A set of strategies, one for each player in the game, such that each player's strategy is a best response to the strategies chosen by everyone else.
national accounts: The system used for measuring overall output and expenditure in a country.
natural experiment: An empirical study exploiting naturally occurring statistical controls in which researchers do not have the ability to assign participants to treatment and control groups, as is the case in conventional experiments. Instead, differences in law, policy, weather, or other events can offer the opportunity to analyse populations as if they had been part of an experiment. The validity of such studies depends on the premise that the assignment of subjects to the naturally occurring treatment and control groups can be plausibly argued to be random.
natural logarithm: See: logarithmic scale.
natural monopoly: A production process in which the long-run average cost curve is sufficiently downward-sloping to make it impossible to sustain competition among firms in this market.
negative feedback: Feedback that counteracts (pushes back against) movement away from equilibrium.
negative feedback (process): A process whereby some initial change sets in motion a process that dampens the initial change.
net capital flows: The borrowing and lending tracked by the current account.
net income: Gross income minus depreciation.
net present value: The present value of a stream of future income minus the associated costs (whether the costs are in the present or the future).
net worth: Assets less liabilities.
network economies of scale: These exist when an increase in the number of users of an output of a firm implies an increase in the value of the output to each of them, because they are connected to each other.
network external effects: An external effect of one person’s action on another, occuring because the two are connected in a network.
New Deal: US President Franklin Roosevelt’s program, begun in 1933, of emergency public works and relief programs to employ millions of people. It established the basic structures for modern state social welfare programs, labour policies, and regulation.
no-shirking condition: The condition that must be satisfied by the wage to ensure that the worker’s pay-off from exerting the level of effort required by the employer is greater than or equal to the pay-off from shirking.
no-shirking wage: The wage that is just sufficient to motivate a worker to provide effort at the level specified by their employer.
nominal exchange rate: The number of units of the home currency that have to be exchanged to obtain one unit of a foreign currency—that is, the market exchange rate—is described as a nominal exchange rate to distinguish it from the real exchange rate, which is the relative price of foreign and domestic goods and services.
nominal interest rate: The price of bringing some spending power (in dollars or other nominal terms) forward in time. The policy rate and the lending rate quoted by commercial banks are examples of nominal interest rates.
nominal wage: The actual amount received in payment for work, in a particular currency.
non-compete contract: A contract of employment containing a provision or agreement by which the worker cannot leave to work for a competitor. This may reduce the reservation option of the worker, lowering the wage that the employer needs to pay.
non-excludable: A good is non-excludable if it is impossible to prevent anyone from having access to it.
non-excludable public good: A public good for which it is impossible to exclude anyone from having access.
non-rival good: A good that, if available to anyone, is available to everyone at no additional cost.
non-verifiable information: Information is verifiable if it can be verified by a court and hence used to enforce a contract.
normal good: A good for which demand increases when a person's income rises, holding prices unchanged.
normal profits: Normal profits are the returns on investment that the firm must pay to the shareholders to induce them to hold shares. The normal profit rate is equal to the opportunity cost of capital and is included in the firm’s costs. Any additional profit (revenue greater than costs) is called economic profit. A firm making normal profits is making zero economic profit. Corresponds to zero economic profit and means that the rate of profit is equal to the opportunity cost of capital.
offshoring: The relocation of part of a firm’s activities outside of the national boundaries in which it operates. It can take place within a multinational company or may involve outsourcing production to other firms.
Okun's coefficient: The change in the unemployment rate in percentage points predicted to be associated with a 1% change in GDP. For example, an Okun coefficient of -0.4 means that a fall in output of 1% is predicted to be associated with a rise in the unemployment rate of 0.4 percentage points. The change in the unemployment rate in percentage points predicted to be associated with a 1% change in the growth rate of GDP.
Okun's law: The empirical regularity that growth of GDP is negatively correlated with the rate of unemployment. The empirical regularity that changes in the rate of growth of GDP are negatively correlated with the rate of unemployment.
oligopoly: A market with a small number of sellers of the same good, giving each seller some market power.
one-shot game: A game that is played once and not repeated.
opportunity cost: The opportunity cost of some action A is the foregone benefit that you would have enjoyed if instead you had taken some other action B. This is called an *opportunity* cost because by choosing A you give up the opportunity of choosing B. It is called a *cost* because the choice of A costs you the benefit you would have experienced had you chosen B.
opportunity cost of capital: The opportunity cost of capital is the amount of income an investor could have received, per unit of investment spending, by investing elsewhere. The amount of income an investor could have received by investing the unit of capital elsewhere.
order book: A record of limit orders placed by buyers and sellers, but not yet fulfilled.
ownership: The right to use and exclude others from the use of something, and the right to sell the thing that is owned.
paradox of thrift: If a single individual consumes less, their savings will increase; but if everyone consumes less, the result may be lower rather than higher savings overall. This happens if the increase in the saving rate is unmatched by an increase in investment (or other source of aggregate demand such as government spending on goods and services). Then aggregate demand and income fall, so actual levels of saving do not increase. If a single individual consumes less, her savings will increase; but if everyone consumes less, the result may be lower rather than higher savings overall. The attempt to increase saving is thwarted if an increase in the saving rate is unmatched by an increase in investment (or other source of aggregate demand such as government spending on goods and services). The outcome is a reduction in aggregate demand and lower output so that actual levels of saving do not increase.
Pareto criterion: According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto efficient.
Pareto dominate: Allocation A Pareto dominates allocation B if at least one party would be better off with A than B, and nobody would be worse off.
Pareto efficiency curve: The set of all allocations that are Pareto efficient. Often referred to as the contract curve, even in social interactions in which there is no contract, which is why we avoid the term.
Pareto efficient: An allocation with the property that there is no alternative technically feasible allocation in which at least one person would be better off, and nobody worse off.
Pareto improvement: A change that benefits at least one person without making anyone else worse off.
Pareto inefficient: An allocation with the property that there is some alternative technically feasible allocation in which at least one person would be better off, and nobody worse off.
participation rate: The ratio of the number of people in the labour force to the population of working age.
patent: A right of exclusive ownership of an idea or invention, which lasts for a specified length of time. During this time it effectively allows the owner to be a monopolist or exclusive user.
pay-off: The benefit to each player associated with the joint actions of all the players.
payment service: Any service provided by a financial institution to allow one person or organization to pay another for a product or service.
payoff matrix: A table of the payoffs associated with every possible combination of strategies chosen by two or more players in a game.
percentile: A subset of observations, formed by ordering the full set of observations according to the values of a particular variable and then splitting the set into one hundred equally-sized groups. For example, the 1st percentile refers to the smallest 1% of values in a set of observations.
perfect competition: Perfect competition is the type of interaction between buyers and sellers that takes place in the equilibrium of a market when (i) there are many buyers and sellers of identical goods, and (ii) supply equals demand and all participants act as price-takers.
perfectly competitive: A market may be described as perfectly competitive if (i) there are many buyers and many sellers of identical goods, all acting independently, who are aware of prices and always choose the best price they can get, and (ii) the market is in competitive equilibrium, with supply equal to demand and all buyers and sellers acting as price-takers.
perfectly competitive equilibrium: Such an equilibrium occurs in a model in which all buyers and sellers are price-takers. In this equilibrium, all transactions take place at a single price. This is known as the law of one price. At that price, the amount supplied equals the amount demanded: the market clears. No buyer or seller can benefit by altering the price they are demanding or offering. They are both price-takers. All potential gains from trade are realized.
Phillips curve: An inverse relationship between the rate of inflation and the rate of unemployment. It is named after Bill Phillips, who observed the relationship empirically, but it can also be derived from a theoretical model of wage and price setting.
piece rate: Under a piece rate contract, a worker is paid a fixed amount for each unit (‘piece’) of the product made.
piece-rate work: A type of employment in which the worker is paid a fixed amount for each unit of the product that the worker produces.
Pigouvian subsidy: A government subsidy to encourage an economic activity that has positive external effects.
Pigouvian tax: A tax levied on activities that generate negative external effects so as to correct an inefficient market outcome.
policy (interest) rate: The interest rate set by the central bank, which applies to banks that borrow base money from each other, and from the central bank.
political accountability: Accountability achieved by political processes such as elections, oversight by an elected government, or consultation with affected citizens.
political institution: The rules of the game that determine who has power and how it is exercised in a society.
political rent: A payment or other benefit in excess of the individual's next best alternative (reservation position) that exists as a result of the individual's political position. The reservation position in this case refers to the individual's situation were they to lack a privileged political position.
political system: A set of principles, laws, and procedures that determine how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population.
politically feasible: Capable of being implemented given the existing political institutions.
polluter pays principle: A guide to environmental policy according to which those who impose negative environmental effects on others should be made to pay for the damages they impose, through taxation or other means.
population of working age: A statistical convention, which in many countries is all people aged between 15 and 64 years.
positional good: A good—such as high status, conspicuous consumption, or power—which, if enjoyed by one member of a community is experienced negatively by others. The more one person benefits from this good, the more others are harmed.
positive feedback (process): A process whereby some initial change sets in motion a process that magnifies the initial change.
postwar accord: An informal agreement (taking different forms in different countries) among employers, governments, and trade unions that created the conditions for rapid economic growth in advanced economies from the late 194s to the early 197s. Trade unions accepted the basic institutions of the capitalist economy and did not resist technological change in return for low unemployment, tolerance of unions and other rights, and a rise in real incomes that matched rises in productivity.
power: The ability to do (and get) the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions.
precautionary saving: An increase in saving to restore wealth to its target level.
predistribution policy: Government actions that affect the endowments people have and their value, including the distribution of market income and the distribution of privately held wealth. Examples include education, minimum wage, and anti-discrimination policies.
preference: Pro-and-con evaluations of the possible outcomes of the actions we may take that form the basis by which we decide on a course of action.
present value: The value today of a stream of future income or other benefits, when these are discounted using an interest rate or the person's own discount rate.
price-based environmental policy: A policy that uses a tax or subsidy to affect prices, with the goal of internalizing the external effects on the environment of an individual’s choices.
price discrimination: A selling strategy in which different prices for the same product are set for different buyers or groups of buyers, or per-unit prices vary depending on the number of units purchased.
price elasticity of demand: The percentage change in demand that would occur in response to a 1% increase in price. We express this as a positive number. Demand is elastic if this is greater than 1, and inelastic if less than 1.
price elasticity of supply: The percentage change in supply that would occur in response to a 1% increase in price. Supply is elastic if this is greater than 1, and inelastic if less than 1.
price gap: A difference in the price of a good in the exporting country and the importing country. It includes transportation costs and trade taxes. When global markets are in competitive equilibrium, these differences will be entirely due to trade costs.
price markup: The price minus the marginal cost, divided by the price. It is inversely proportional to the elasticity of demand for this good.
price-setting (PS) curve: The curve—arising from the price-setting decisions of firms in markets for goods and services (the product market)—that gives the real wage paid when firms choose their profit-maximizing price.
price-taker: Characteristic of producers and consumers who cannot benefit by offering or asking any price other than the market price in the equilibrium of a competitive market. They have no power to influence the market price.
primary deficit: The government deficit (its revenue minus its expenditure) excluding interest payments on its debt.
primary labour market: When the labour market is segmented into separate parts, a primary labour market is a segment where conditions for workers are relatively good, typically with trade union representation, high wages, and job security. A market in which workers are typically represented by trade unions, and enjoy high wages and job security.
primary markets:
principal-agent relationship: This is an asymmetrical relationship in which one party (the principal) benefits from some action or attribute of the other party (the agent) about which the principal's information is not sufficient to enforce in a complete contract.
prisoners' dilemma: A game in which the payoffs in the dominant strategy equilibrium are lower for each player, and also lower in total, than if neither player played the dominant strategy.
private good: A good that is rival (when one person consumes a unit of the good, that unit is not available to others) and excludable (people can be prevented from consuming it). A good that is both rival, and from which others can be excluded.
private property: Something is private property if the person possessing it has the right to exclude others from it, to benefit from the use of it, and to exchange it with others.
procedural judgements of fairness: An evaluation of an outcome based on how the allocation came about, and not on the characteristics of the outcome itself, (for example, how unequal it is).
process innovation: An innovation that allows a good or service to be produced at lower cost than its competitors.
procyclical: Tending to move in the same direction as aggregate output and employment over the business cycle.
producer surplus: The price at which a firm sells a good minus the minimum price at which it would have been willing to sell the good, summed across all units sold.
product innovation: An innovation that produces a new good or service at a cost that will attract buyers.
production function: A graphical or mathematical expression describing the amount of output that can be produced by any given amount or combination of input(s). The function describes differing technologies capable of producing the same thing.
economic profit: A firm's revenue minus its total costs (including the opportunity cost of capital).
profit margin: The difference between the price and the marginal cost.
progressive (policy): An expenditure or transfer that increases the incomes of poorer households by more than richer households, in percentage terms.
property rights: Legal protection of ownership, including the right to exclude others and to benefit from or sell the thing owned.
protectionist policy: Measures taken by a government to limit trade; in particular, to reduce the amount of imports in the economy. These are designed to protect local industries from external competition. They can take different forms, such as taxes on imported goods or import quotas.
prudential policy: A policy that is prudent in that it places a very high value on reducing the likelihood of a disastrous outcome, even if this is costly in terms of other objectives foregone. Such an approach is often advocated where there is fundamental uncertainty about the conditions under which a disastrous outcome would occur. A policy that places a very high value on reducing the likelihood of a disastrous outcome, even if this is costly in terms of other objectives foregone. Such an approach is often advocated where there is great uncertainty about the conditions under which a disastrous outcome would occur.
public bad: The negative equivalent of a public good. It is non-rival in the sense that a given individual's consumption of the public bad does not diminish others' consumption of it.
public good: A good for which use by one person does not reduce its availability to others.
public good game: Similar to a prisoners' dilemma game with more than two people; the dominant strategy is not to contribute to the public good.
public policy: A policy decided by the government.
purchasing power parity (PPP): A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies.
pure impatience: In a situation in which a person's endowment is the same amount of consumption this period and later, she would have this characteristic if she values an additional unit of consumption now over an additional unit later. It arises when a person is impatient to consume more now because she places less value on consumption in the future for reasons of myopia, weakness of will, or for other reasons.
quantitative easing (QE): Central bank purchases of financial assets aimed at reducing interest rates on those assets when conventional monetary policy is ineffective because the policy interest rate is at the zero lower bound.
quantity-based environmental policy: Policies that implement environmental objectives by using bans, caps, and regulations.
quasi-linear: A utility function is said to be quasi-linear if it depends linearly on the amount of one good, and non-linearly on another. The marginal rate of substitution between the two goods then depends only on the non-linear variable.
quota: A limit imposed by the government on the volume of imports allowed to enter the economy during a specific period of time.
race to the bottom: Self-destructive competition between national or regional governments, resulting in lower wages and less regulation to attract foreign investment in a globalized economy.
radical innovation: Innovations based on a broad range of knowledge from different sectors, recombining this to create new and very different products.
ratio scale: A scale that uses distances on a graph to represent ratios. For example, the ratio between 3 and 6, and between 6 and 12, is the same (the larger number is twice the smaller number). In a ratio scale chart, all changes by the same ratio are represented by the same vertical distance. This contrasts with a linear scale, where the distance between 3 and 6, and between 6 and 9, is the same (in this case, 3).
rationed goods: Goods that are allocated to buyers by a process other than price (such as queueing, or a lottery).
real GDP: An inflation-adjusted measure of the market value of the output of the economy in a given period. (GDP).
real interest rate: The price of bringing some real spending power forward in time.
real wage: The nominal wage, adjusted to take account of changes in prices between different time periods. It measures the amount of goods and services the worker can buy.
recession: The US National Bureau of Economic Research defines a recession as a period when output is declining. It is over once the economy begins to grow again. An alternative definition is a period when the level of output is below its normal level, even if the economy is growing. It is not over until output has grown enough to get back to normal. The latter definition has the problem that the ‘normal’ level is subjective. The US National Bureau of Economic Research defines it as a period when output is declining. It is over once the economy begins to grow again. An alternative definition is a period when the level of output is below its normal level, even if the economy is growing. It is not over until output has grown enough to get back to normal. The latter definition has the problem that the ‘normal’ level is subjective.
reciprocity: A preference concerning one's actions towards others that depends on an evaluation of the others' actions or character, for example, a preference to help those who have helped you or in some other way acted well (in your opinion), and to harm those who have acted poorly. It is considered a social preference.
redistribution policy: Taxes, monetary, and in-kind transfers of the government that result in a distribution of final income that differs from the distribution of market income.
regressive (policy): An expenditure or transfer that increases the incomes of richer households by more than poorer households, in percentage terms.
relationship-specific asset: An asset is something that is owned and has value. It is relationship-specific if it is only of value within an economic relationship (e.g. a contract for one firm to supply another). Relationship-specific assets include any knowledge or skills that are only valuable while a person remains employed in a particular firm.
relative price: The price of one good or service compared to another (usually expressed as a ratio of the two prices). The price of one good or service compared to another (usually expressed as a ratio).
remittances: Money sent home by international migrant workers to their families or others in the migrants’ home country. In countries which either supply or receive large numbers of migrant workers, this is an important international capital flow.
rent ceiling: The maximum legal price a landlord can charge for a rent.
repeated game: A game in which the same interaction (same payoffs, players, feasible actions) may occur more than once.
repugnant market: Buying or selling something that people believe ought not to be exchanged on a market.
research and development: Expenditures by a private or public entity to create new methods of production, products, or other economically relevant new knowledge.
reservation indifference curve: A curve that indicates allocations (combinations) that are as highly valued as one's reservation option.
reservation option: A person's next best alternative among all options in a particular transaction.
reservation price: The lowest price at which someone is willing to sell a good (keeping the good is the potential seller's reservation option).
reservation wage: What an employee would get in alternative employment, or from an unemployment benefit or other support, were he or she not employed in his or her current job.
reserves: Reserves (or reserve accounts) are deposits of banks with the central bank, which are classified as part of base money. Only banks can have these accounts and only reserves can be used to settle transactions with other banks. The central bank supplies reserves by buying assets from banks or by directly lending to them.
reserves (natural resource): The amount of a natural resource that is economically feasible to extract given existing technologies.
residual claimant: The person who receives the income left over from a firm or project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes).
resources (natural): The estimated total amount of a substance in the earth’s crust.
revealed preference: A way of studying preferences by reverse engineering the motives of an individual (her preferences) from observations about her or his actions.
reverse causality: If we are looking for evidence that one variable (x) causes another (y) and find that the variables are correlated, the explanation may be the reverse: that y causes x. For example, if we find that people who attend university earn more, does that mean that university increased their earning ability? Could it be that people with high earning potential are more likely to attend university? A two-way causal relationship in which A affects B and B also affects A.
risk: The term ‘risk’ is conventionally used in economics to describe cases in which we do not know which of two or more situations will occur in the future, but the probabilities of each occurring are known or can be reliably estimated.
risk aversion: A preference for certain over uncertain outcomes.
rival good: A good which, if consumed by one person, is not available to another.
saving: When consumption expenditure is less than net income, saving takes place and wealth rises.
scarcity: A good that is valued, and for which there is an opportunity cost of acquiring more.
Schumpeterian rents: Another, equivalent way to refer to innovation rents. Also known as: innovation rents. Profits in excess of the opportunity cost of capital that an innovator gets by introducing a new technology, organizational form or marketing strategy. Also known as: innovation rents.
search unemployment: Since workers differ from each other, and so do jobs, unemployed workers and firms with vacancies spend time searching for an employment match that suits them both. Unemployment caused by the search and matching process is called search unemployment.
secondary and primary markets: The primary market is where goods or financial assets are sold for the first time. For example, the initial sale of shares by a company to an investor (known as an initial public offering or IPO) is on the primary market. The subsequent trading of those shares on the stock exchange is on the secondary market. The terms are also used to describe the initial sale of tickets (primary market) and the secondary market in which they are traded.
secondary labour market: When the labour market is segmented into separate parts, a secondary labour market is a segment where conditions for workers are relatively poor, typically with low wages and short-term contracts or limited job security. This might be due to their age, or because they are discriminated against according to race or ethnic group. Workers typically on short-term contracts with limited wages and job security. This might be due to their age, or because they are discriminated against by race or ethnic group.
segmented labour market: A labour market with two or more distinct segments that function as separate labour markets, with limited mobility of workers from one segment to the other (including for reasons of racial, language, or other forms of discrimination). A labour market whose distinct segments function as separate labour markets with limited mobility of workers from one segment to the other (including for reasons of racial, language, or other forms of discrimination).
self-insurance: To maintain their consumption, households can use savings and borrowing to self-insure against a temporary fall in income or need for greater expenditure. Saving by a household in order to be able to maintain its consumption when there is a temporary fall in income or need for greater expenditure.
separation of ownership and control: The attribute of some firms by which managers are a separate group from the owners.
sequential game: A game in which all players do not choose their strategies at the same time, and players that choose later can see the strategies already chosen by the other players, for example the ultimatum game.
share: A part of the assets of a firm that may be traded. It gives the holder a right to receive a proportion of a firm's profit and to benefit when the firm's assets become more valuable.
shock: An exogenous change in some of the fundamental data or variables used in a model.
short run: The term does not refer to a specific length of time, but instead to what happens while some things (such as prices, wages, capital stock, technology, or institutions) are assumed to be held constant (they are assumed to be fixed, or exogenous). For example, the firm’s stock of capital goods may be fixed in the short run, but in the longer run the firm could vary it (by selling some, or buying more).
short-run equilibrium: An equilibrium that will prevail while certain variables (for example, the number of firms in a market) remain constant, but where we expect these variables to change when people have time to respond to the situation.
short run (model): The term does not refer to a period of time, but instead to what is exogenous: prices, wages, the capital stock, technology, institutions.
short selling: The sale of an asset borrowed by the seller, with the intention of buying it back at a lower price. This strategy is adopted by investors expecting the value of an asset to decrease. Also known as: shorting.
short side (of a market): The side (either supply or demand) on which the number of desired transactions is least (for example, employers are on the short side of the labour market, because typically there are more workers seeking work than there are jobs being offered). The opposite of short side is the long side.
short-termism: This subjective term refers to the case when the person making a judgement places too much weight on costs, benefits, and other things occurring in the near future than would be appropriate.
simultaneous game: A game in which players choose strategies simultaneously, for example the prisoners' dilemma.
social dilemma: A situation in which actions, taken independently by individuals in pursuit of their own private objectives, may result in an outcome that is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals.
social insurance: Expenditure by the government, financed by taxation, which provides protection against various economic risks (for example, loss of income due to sickness, or unemployment) and enables people to smooth incomes throughout their lifetime.
social interactions: A situation in which the actions taken by each person affect other people's outcomes as well as their own.
social norm: An understanding that is common to most members of a society about what people should do in a given situation when their actions affect others.
social preferences: A person with social preferences cares not only about how her action affects her personally, but also about how it affects other people.
solvent: A firm or individual for which net worth is positive or zero. For example, a bank whose assets are more than its liabilities (what it owes).
sovereign debt crisis: If a government is unable to repay its debt as required, and cannot negotiate a change in terms with the lender, it may default on some or all of the debt. A situation in which the government either defaults, or is expected to default, is described as a sovereign debt crisis. A situation in which government bonds come to be considered so risky that the government may not be able to continue to borrow. If so, the government cannot spend more than the tax revenue they receive.
specialization: This takes place when a country or some other entity produces a narrower range of goods and services than it consumes, acquiring the goods and services that it does not produce by trade.
speculation: Buying and selling assets in order to profit from an anticipated change in their price.
speculative finance: A strategy used by firms to meet payment commitments on liabilities using cash flow, although the firm cannot repay the principal in this way. Firms in this position need to 'roll over' their liabilities, usually by issuing new debt to meet commitments on maturing debt. Term coined by Hyman Minsky in his Financial Instability Hypothesis.
stable equilibrium: An equilibrium is stable if a small movement away from the equilibrium is self-correcting (leading to movement back toward the equilibrium). An equilibrium in which there is a tendency for the equilibrium to be restored after it is disturbed by a small shock.
stagflation: Persistent high inflation combined with high unemployment in a country’s economy.
statutory minimum wage: A minimum level of pay laid down by law, for workers in general or of some specified type. The intention of a minimum wage is to guarantee living standards for the low-paid. Many countries, including the UK and the US, enforce this with legislation. Also known as: minimum wage.
stock: A quantity measured at a point in time, such as a firm’s stock of capital goods, or the amount of carbon dioxide in the atmosphere. Its units do not depend on time. A quantity measured at a point in time. Its units do not depend on time.
stock exchange: A financial marketplace where shares (also known as stocks) and other financial assets are traded. It has a list of companies whose shares are traded there.
stock variable: A quantity measured at a point in time. Its units do not depend on time.
strategic complements: For two activities A and B: the more that A is performed, the greater the benefits of performing B, and the more that B is performed the greater the benefits of performing A.
strategic interaction: A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that the actions of others affect them).
strategic substitutes: For two activities A and B: the more that A is performed, the less the benefits of performing B, and the more that B is performed the less the benefits of perfoming A.
strategy: An action (or a course of action) that a person may take when that person is aware of the mutual dependence of the results for herself and for others. The outcomes depend not only on that person's actions, but also on the actions of others.
structural unemployment: The level of unemployment at the Nash equilibrium of the labour and product market model.
subprime borrower: An individual with a low credit rating and a high risk of default.
subprime mortgage: A residential mortgage issued to a high-risk borrower, for example, a borrower with a history of bankruptcy and delayed repayments.
subsistence level: The level of living standards (measured by consumption or income) below which the population will decline. The level of living standards (measured by consumption or income) such that the population will not grow or decline.
substantive judgements of fairness: Judgements based on the characteristics of the allocation itself, not how it was determined.
substitutes: Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other.
substitution effect: The effect for example, on the choice of consumption of a good that is only due to changes in the price or opportunity cost, given the new level of utility.
supply curve: The curve that shows the number of units of output that would be produced at any given price. For a market, it shows the total quantity that all firms together would produce at any given price.
supply shock: An unexpected or exogenous change in supply. In macroeconomics a supply shock means a change on the supply side of the economy, such as a rise or fall in oil prices or an improvement in technology. In microeconomics it refers to an exogenous shift in the supply curve for a particular good.
supply side (aggregate economy): How labour and capital are used to produce goods and services. It uses the labour market model (also referred to as the wage-setting curve and price-setting curve model).
supply-side policies: Economic policies that are designed to improve the functioning of the economy by increasing productivity and international competitiveness, and reducing costs for producers. They include cutting taxes on profits, tightening conditions for the receipt of unemployment benefits, changing legislation to make it easier to fire workers, and the reform of competition policy to reduce monopoly power. A set of economic policies designed to improve the functioning of the economy by increasing productivity and international competitiveness, and by reducing profits after taxes and costs of production. Policies include cutting taxes on profits, tightening conditions for the receipt of unemployment benefits, changing legislation to make it easier to fire workers, and the reform of competition policy to reduce monopoly power. Also known as: supply-side reforms.
supply side: The supply side of the economy consists of the activities that produce the economy’s output, including the markets for labour and capital. In a microeconomic model of the market for a particular good it refers to the decisions of the sellers who supply the good to the market.
surplus: See: joint surplus. The sum of the economic rents of all involved in an interaction. Also known as: total gains from exchange or trade.
systematic risk: A risk that affects all assets in the market, so that it is not possible for investors to reduce their exposure to the risk by holding a combination of different assets. Also known as: undiversifiable risk. A risk that affects all assets in the market, so that it is not possible for investors to reduce their exposure to the risk by holding a combination of different assets. Also known as: undiversifiable risk.
systemic risk: A risk that threatens the financial system itself.
tacit knowledge: Knowledge made up of the judgements, know-how, and other skills of those participating in the innovation process. The type of knowledge that cannot be accurately written down. Knowledge made up of the judgments, know-how, and other skills of those participating in the innovation process. The type of knowledge that cannot be accurately written down.
tangency: When a line touches a curve, but does not cross it.
target wealth: The level of wealth that a household aims to hold, based on its economic goals (or preferences) and expectations. We assume that households try to maintain this level of wealth in the face of changes in their economic situation, as long as it is possible to do so.
tariff: A tax on a good imported into a country.
tax: A compulsory payment to the government levied, for example, on workers' incomes (income taxes) and firms' profits (profit taxes) or included in the price paid for goods and services (value added or sales taxes).
tax incidence: The effect of a tax on the surplus of buyers, sellers, or both. The effect of a tax on the welfare of buyers, sellers, or both.
Taylorism: Innovation in management that seeks to reduce labour costs, for example by dividing skilled jobs into separate less-skilled tasks so as to lower wages.
technically feasible: An allocation within the limits set by technology and biology.
technological progress: A change in technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of the output.
technology: A process taking a set of materials and other inputs, including the work of people and capital goods (such as machines), to produce an output.
terms of trade: A country’s terms of trade are measured by the ratio of the export price to the import price. When the price it receives for exports falls relative to the price it pays for imports, we say that its terms of trade have deteriorated.
tipping point: A tipping point is an unstable equilibrium at the boundary between two regions. A small movement into either of the regions causes a movement further into the same region, away from the equilibrium. An unstable equilibrium at the boundary between two regions characterized by distinct movements in some variable. If the variable takes a value on one side, the variable moves in one direction; on the other, it moves in the other direction.
tipping point (environmental): A state of the environment beyond which some process (typically a degradation) becomes self-reinforcing, because of positive feedback processes. On one side, processes of environmental degradation are self-limiting. On the other side, positive feedbacks lead to self-reinforcing, runaway environmental degradation.
too big to fail: Said to be a characteristic of large banks, whose central importance in the economy ensures they will be saved by the government if they are in financial difficulty. The bank thus does not bear all the costs of its activities and is therefore likely to take bigger risks.
total surplus: The total gains from trade received by all parties involved in the exchange. It is measured as the sum of the consumer and producer surpluses.
trade balance: The value of exports minus the value of imports. Also known as: net exports. Value of exports minus the value of imports. Also known as: net exports.
trade costs: The transport costs, tariffs or other factors incurred in trading between markets in two countries that mean that, for affected goods, the law of one price will not hold across each market.
trade deficit: If a country’s imports exceed its exports, the trade balance (X – M) is negative, and we say that it has a trade deficit. The size of the deficit is M – X (the negative of the trade balance). A country’s negative trade balance (it imports more than it exports).
trade surplus: If a country’s exports exceed its imports, the trade balance (X – M) is positive. We say that it has a trade surplus of X – M. A country’s positive trade balance (it exports more than it imports).
trade union: An organization consisting predominantly of employees, the principal activities of which include the negotiation of rates of pay and conditions of employment for its members.
trademark: A logo, a name, or a registered design typically associated with the right to exclude others from using it to identify their products.
tragedy of the commons: A social dilemma in which self-interested individuals acting independently deplete a common resource, lowering the payoffs of all.
transaction costs: Costs that impede the bargaining process or the agreement of a contract. They include costs of acquiring information about the good to be traded, and costs of enforcing a contract.
trilemma of the world economy: The likely impossibility that any country, in a globalized world, can simultaneously maintain deep market integration (across borders), national sovereignty, and democratic governance. First suggested by Dani Rodrik, an economist.
ultimatum game: An interaction in which the first player proposes a division of a 'pie' with the second player, who may either accept, in which case they each get the division proposed by the first person, or reject the offer, in which case both players receive nothing.
uncovered interest parity: When interest rates and expected depreciation of the exchange rate are such that the expected rates of return on domestic and foreign assets are equal, we say that the uncovered interest parity (UIP) condition holds.
unemployment: A situation in which a person who is able and willing to work is not employed.
unemployment benefit: A government transfer received by an unemployed person.
unemployment rate: The ratio of the number of the unemployed to the total labour force. (Note that the employment rate and unemployment rate do not sum to 100%, as they have different denominators.)
union voice effect: The positive effect on labour effort (and hence labour productivity) of trade union members' sense that they have a say (a voice) in how the firm is run.
unit cost: Total cost divided by number of units produced.
unstable equilibrium: An equilibrium is unstable if, when a shock disturbs the equilibrium, there is a subsequent tendency to move even further away from the equilibrium. An equilibrium such that, if a shock disturbs the equilibrium, there is a subsequent tendency to move even further away from the equilibrium.  An equilibrium such that, if a shock disturbs the equilibrium, there is a subsequent tendency to move even further away from the equilibrium.
utility: A numerical indicator of the value that one places on an outcome, such that higher-valued outcomes will be chosen over lower-valued ones when both are feasible.
utility function: A utility function is a mathematical representation of a person’s preferences for one or more goods. It gives a numerical value to the amount of utility the person obtains from each possible combination of goods.
value added: The value of output minus the value of all inputs (called intermediate goods). For a production process this is the value of output minus the value of all inputs (called intermediate goods). The capital goods and labour used in production are not intermediate goods. The value added is equal to profits before taxes plus wages.
variable costs: Costs of production that vary with the number of units produced.
Veblen effect: A negative external effect that arises from the consumption of a positional good. Examples include the negative external effects imposed on others by the consumption of luxury housing, clothing, or vehicles.
verifiable information: Information that can be used to enforce a contract.
wage inflation: An increase in the level of the nominal wage, usually measured as the percentage increase over one year. An increase in the nominal wage. Usually measured over a year.
wage labour: A system in which producers are paid for the time they work for their employers.
wage labour contract: See: wage labour, contract.
wage-price spiral: This occurs if an initial increase in wages in the economy is followed by an increase in the price level, which is followed by an increase in wages and so on. It can also begin with an initial increase in the price level.
wage-setting (WS) curve: The curve—arising from the wage-setting decisions of firms in the labour market—that gives the real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well.
wage subsidy: A government payment either to firms or employees, to raise the wage received by workers or lower the wage costs paid by firms, with the objective of increasing hiring and workers' incomes.
weakness of will: The inability to commit to a course of action (dieting or foregoing some other present pleasure, for example) that one will regret later. It differs from impatience, which may also lead a person to favour pleasures in the present, but not necessarily act in a way that one regrets.
wealth: Stock of things owned or value of that stock. It includes the market value of a home, car, any land, buildings, machinery, or other capital goods that a person may own, and any financial assets, such as bank deposits, shares, bonds, or loans made to others. Debts to others are subtracted from wealth—for example, the mortgage owed to the bank.
welfare state: A set of government policies designed to provide improvements in the welfare of citizens by assisting with income smoothing (for example, unemployment benefits and pensions).
willingness to accept (WTA): The reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high.
willingness to pay (WTP): An indicator of how much a person values a good, measured by the maximum amount he or she would pay to acquire a unit of the good.
winner-take-all competition: Firms entering a market first can often dominate the entire market, at least temporarily.
worker-owned cooperative: A form of business in which a substantial fraction of the capital goods are owned by employees rather than being owned by those who are not involved in production in the firm; worker-owners typically elect a manager to make day-to-day decisions.
worker's best response function (to wage): The amount of work that a worker chooses to perform as her best response to each wage that the employer may offer.
WS/PS model: Model of the aggregate economy that combines wage-setting (WS) and price-setting (PS) decisions. Where the WS and PS curves intersect is the Nash equilibrium and determines structural unemployment and the real wage.
yield: The implied rate of return that the buyer gets on their money when they buy a bond at its market price.
zero economic profit: A rate of profit equal to the opportunity cost of capital.
zero lower bound: This refers to the fact that the nominal interest rate cannot be negative, thereby setting a floor on the nominal interest rate that can be set by the central bank at zero. This refers to the fact that the nominal interest rate cannot be negative, thus setting a floor on the nominal interest rate that can be set by the central bank at zero.
zero sum game: A game in which the payoff gains and losses of the individuals sum to zero, for all combinations of strategies they might pursue.