Glossary

abatement

Practices to limit or reverse environmental damages (TE1, TESA). See also: abatement policy.

abatement policy

A policy designed to reduce environmental damages (TE1, TESA). Introduced in TE1 20.2 Climate change. See also: abatement.

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, TE1 1.8 The gains from specialization, TE1 18.5 Specialization, factor endowments, and trade between countries. See also: comparative advantage.

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 (ESPP, TE1, TESA).

acyclical

No tendency to move either in the same or opposite direction to aggregate output and employment over the business cycle (TE1, TESA). Introduced in TE1 16.3 Job flows, worker flows, and the Beveridge curve.

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 (TE1, TESA). Introduced in TE1 16.5 New technology, wages, and unemployment in the long run.

administratively feasible

Policies for which the government has sufficient information and staff for implementation (ESPP, TE1, TESA). Introduced in TE1 22.10 Democracy makes a difference, ESPP 12.7 Spending by democratic governments: Priorities of a nation.

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. Example: The problem of asymmetric information in insurance. If the price is sufficiently high, the only people who will seek to purchase medical insurance are people who know they are ill (but the insurer does not). This will lead to further price increases to cover costs. Also referred to as the ‘hidden attributes’ problem (the state of already being ill is the hidden attribute), to distinguish it from the ‘hidden actions’ problem of moral hazard. The problem faced by parties to an exchange in which the terms offered by one party will cause some exchange partners to drop out. An example is the problem of asymmetric information in insurance: if the price is sufficiently high, the only people who will seek to purchase medical insurance are people who know they are ill (but the insurer does not). This will lead to further price increases to cover costs. Also referred to as the ‘hidden attributes’ problem (the state of already being ill is the hidden attribute), to distinguish it from the ‘hidden actions’ problem of moral hazard (ESPP, TE1, TESA). Introduced in TE1 12.6 Missing markets: Insurance and lemons, TESA 12.5 Public goods, ESPP 11.11 Public goods, common pool resources, and market failure. See also: incomplete contract, moral hazard, asymmetric information.

adverse selection, hidden attributes

A hidden-attributes or adverse-selection problem occurs when some characteristic of a product or service being exchanged is not known to the other parties. For example, someone purchasing health insurance knows their own health status, but the insurance company does not. The lack of information affects the price at which the uninformed party is willing to buy or sell, and this can lead to an ‘adverse selection’ of goods in the market: for example, only the least healthy people wanting to buy health insurance (Micro, Macro). Introduced in Micro 10.10 Asymmetric information: Hidden attributes and adverse selection, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 12.6 Missing markets: Insurance and lemons, TESA 12.5 Public goods, ESPP 11.11 Public goods, common pool resources, and market failure.

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 (Macro, TE1, TESA). Introduced in Macro 3.3 GDP as expenditure: The components of GDP, Macro Unit 3 Aggregate demand and the multiplier model, TE1 13.4 Measuring the aggregate economy: The components of GDP, TE1 14.1 The transmission of shocks: The multiplier process, TE1 17.1 Three economic epochs, TESA 13.4 Measuring the aggregate economy: The components of GDP, TESA 14.1 The transmission of shocks: The multiplier process. See also: consumption, investment, government spending, exports, imports.

aggregate output

The total output in an economy, across all sectors and regions (TE1, TESA). Introduced in TE1 13.3 Measuring the aggregate economy, TESA 13.3 Measuring the aggregate economy.

allocation

In an economic interaction, an allocation is a particular distribution of goods or other things of value to all participants. 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). A description of who does what, the consequences of their actions, and who gets what as a result (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro 5.2 Institutions and power, TE1 5.2 Evaluating institutions and outcomes: The Pareto criterion, TESA 5.2 Evaluating institutions and outcomes: The Pareto criterion, ESPP 3.2 Goals of public policy.

altruism

Altruism is a social preference: a person who is willing to bear a cost to benefit somebody else is said to be altruistic. The willingness to bear a cost in order to help another person. Altruism is a social preference. The willingness to bear a cost in order to benefit somebody else (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 4.1 Climate negotiations: Conflicts and common interests, TE1 Unit 4 Social interactions, TE1 13.5 How households cope with fluctuations, TESA Unit 4 Social interactions, TESA 13.5 How households cope with fluctuations, ESPP 2.8 Social preferences and the public good. See also: social preferences.

antitrust policy

Government policy and laws to limit monopoly power and prevent cartels. Also known as: competition policy (ESPP, TE1, TESA). Introduced in TESA 7.9 Price-setting, market power, and public policy, ESPP 7.6 Gains from trade.

appreciation, nominal appreciation

If the number of units of the home currency that have to be exchanged to obtain one unit of a foreign currency decreases, the home currency is said to have appreciated relative to the foreign currency. This is sometimes described as a nominal appreciation; it corresponds to an decrease in the conventional measure of the nominal exchange rate (Macro). Introduced in Macro 5.14 Monetary policy and the exchange rate, Macro 7.2 Exchange rate regimes, monetary policy, and inflation. See also: exchange rate, real appreciation.

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. The practice of buying a good at a low price in a 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 (ESPP, TE1, TESA). Introduced in TE1 10.9 The central bank, the money market, and interest rates, TE1 18.1 Globalization and deglobalization in the long run, TESA 10.9 The central bank, the money market, and interest rates, ESPP 10.2 Assets, money, banks, and the financial system. See also: price gap.

artificially scarce

A good is artificially scarce if it is non-rival (can be supplied to more users at no additional cost) but some users are excluded from using it, either directly or because the price is greater than their willingness to pay (Micro, Macro). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions. See also: excludable public good.

artificially scarce good

A public good for which it is possible to exclude some people from enjoying. Also known as: club good. A public good that it is possible to exclude some people from enjoying. Also known as: club good (ESPP, TE1, TESA). Introduced in TE1 12.5 Public goods, TESA 12.5 Public goods, ESPP 11.11 Public goods, common pool resources, and market failure. See also: public good.

asset

An asset is something that is owned and has value. Anything of value that is owned (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 6.3 Other people’s money: The separation of ownership and control, Macro 6.2 Bilateral debt: Marco and Julia, Macro 8.1 Collapse of Lehman Brothers (2007–2009), Macro 8.4 Assets and price bubbles, TE1 10.7 Assets, liabilities, and net worth, TE1 11.5 The value of an asset: Basics, TESA 10.7 Assets, liabilities, and net worth, TESA 11.4 The value of an asset: Basics, ESPP 9.8 Borrowing may allow investing: Julia’s best hope. See also: balance sheet, liability.

asset price bubble

An asset price bubble is an episode in which the market price of an asset rises substantially and continuously over time, fuelled by expectations of future price increases (that is, people want to hold the asset because they believe that its price will be higher in future). Eventually the bubble bursts and the price drops suddenly. A sustained and significant rise in the price of an asset, fuelled by expectations of future price increases. Sustained and significant rise in the price of an asset fuelled by expectations of future price increases (Macro, ESPP, TE1, TESA). Introduced in Macro 8.4 Assets and price bubbles, TE1 11.7 Asset market bubbles, TESA 11.6 Asset market bubbles, ESPP 10.10 Asset market bubbles.

asset prices

Asset prices is a general term used to refer to the prices of both financial assets (like shares or bonds) and real assets (such as housing, land, gold, or works of art) (Macro). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro Unit 5 Macroeconomic policy: Inflation and unemployment. See also: asset.

asymmetric information

Information that is relevant to all the parties in an economic interaction, but is known by some and not by others. Information that is relevant to the parties in an economic interaction, but is known by some but not by others (ESPP, TE1, TESA). Introduced in TE1 Unit 6 The firm: Owners, managers, and employees, TE1 12.4 Property rights, contracts, and market failures, TE1 14.5 The multiplier model: Including the government and net exports, TE1 22.13 Administrative infeasibility, TESA 6.1 Firms, markets, and the division of labour, TESA 12.4 Property rights, contracts, and market failures, TESA 14.5 The multiplier model: Including the government and net exports, ESPP 6.2 Firms, markets, and the division of labour, ESPP 11.10 Property rights, contracts, and market failures. See also: adverse selection, moral hazard.

asymmetric information, asymmetry of information

Information that is relevant to the parties in an economic interaction, but is known by some but not by others (Micro, Macro). Introduced in Micro Unit 6 The firm and its employees, Micro Unit 10 Market successes and failures: The societal effects of private decisions, Micro Unit 10 Market successes and failures: The societal effects of private decisions, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 Unit 6 The firm: Owners, managers, and employees, TE1 12.4 Property rights, contracts, and market failures, TE1 14.5 The multiplier model: Including the government and net exports, TE1 22.13 Administrative infeasibility, TESA 6.1 Firms, markets, and the division of labour, TESA 12.4 Property rights, contracts, and market failures, TESA 14.5 The multiplier model: Including the government and net exports, ESPP 6.2 Firms, markets, and the division of labour, ESPP 11.10 Property rights, contracts, and market failures. See also: adverse selection, moral hazard.

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 (Macro, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 17.12 The economy as teacher. See also: paradox of thrift.

autocracy

A form of government in which a single ruler (or body of rulers) monopolizes governmental powers (Macro). Introduced in Macro 10.5 The advance of democracy and its stalling.

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 (Macro, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 14.5 The multiplier model: Including the government and net exports, TESA 14.5 The multiplier model: Including the government and net exports.

automation

The use of machines that are substitutes for labour (TE1, TESA). Introduced in TE1 19.7 Putting the model to work: Explaining changes in inequality.

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 (Macro, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 14.2 The multiplier model, TESA 14.1 The transmission of shocks: The multiplier process.

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 (Macro, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, TE1 14.2 The multiplier model, TESA 14.1 The transmission of shocks: The multiplier process.

autonomous investment

In a model of investment demand, autonomous investment is planned investment expenditure that does not depend on other variables in the model (such as income, or the interest rate) (Macro). Introduced in Macro 3.8 The multiplier model: Including the government and net exports.

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 (Micro, Macro, TE1, TESA). Introduced in Micro 7.4 Production and costs: The cost function for Beautiful Cars, Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, TESA 7.8 Costs and Output.

average product

The average product of an input is total output divided by the total amount of the input. For example, the average product of a worker (also known as labour productivity) is total output divided by the number of workers employed to produce it. 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) (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 1 Prosperity, inequality, and planetary limits, Micro Unit 2 Technology and incentives, Micro Unit 5 The rules of the game: Who gets what and why, Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, Macro 9.3 Capital goods and technology, TE1 2.7 Malthusian economics: Diminishing average product of labour, TE1 3.1 Labour and production, TE1 Average and marginal productivity, TESA 3.2 Labour and production, TESA 3.1.1 Average and marginal productivity, ESPP 4.8 Hours of work and economic growth, ESPP 8.5 The product market and the price-setting curve (firms and customers).

average product of labour

Total output divided by by the number of units of labor employed (TESA). Introduced in TESA 2.7 Malthusian Economics: Modelling output growth.

bail-in

A bail-in resolution is a way of allocating losses to a bank’s shareholders and potentially to some of its creditors. The bail-in procedure follows a legal order of priorities in terms of liability. The first step is to ‘write down’ the bank’s equity capital to reflect the losses incurred: that is, to reduce the value of the shareholders’ equity. If these funds are insufficient, other liabilities, such as bonds, are written down or converted into equity (Macro). Introduced in Macro 8.10 Addressing instability of the financial system.

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 (TE1, TESA).

balance sheet

A record of all the current assets and liabilities, and the net worth, of an economic actor such as a household, bank, firm, or government. A record of the assets, liabilities, and net worth of an economic actor such as a household, bank, firm, or government (Macro, ESPP, TE1, TESA). Introduced in Macro 6.2 Bilateral debt: Marco and Julia, Macro 8.1 Collapse of Lehman Brothers (2007–2009), Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 10.7 Assets, liabilities, and net worth, TESA 10.7 Assets, liabilities, and net worth, ESPP 10.3 Money and banks. See also: net worth, liability.

bank

A firm that creates money in the form of bank deposits in the process of supplying credit (ESPP, TE1, TESA). Introduced in TE1 10.8 Banks, money, and the central bank, TESA 10.8 Banks, money, and the central bank, ESPP 10.2 Assets, money, banks, and the financial system.

bank bailout

The government buys an equity stake in a bank or some other intervention to prevent it from failing (TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom.

bank money

Money in the form of deposits in commercial banks. The bank allows bank deposits, created for example when the bank makes a loan, to be used as a means of exchange, debiting the buyer’s deposit and crediting the seller with a new deposit. Money in the form of bank deposits created by commercial banks when they extend credit to firms and households (Macro, ESPP, TE1, TESA). Introduced in Macro 6.5 Introducing money, ESPP 10.2 Assets, money, banks, and the financial system.

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) (Macro, ESPP, TE1, TESA). Introduced in Macro 6.4 Introducing a bank, TE1 10.8 Banks, money, and the central bank, TESA 10.8 Banks, money, and the central bank, ESPP 10.4 Banks, profits, and the creation of money.

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 (Macro, TE1, TESA). Introduced in Macro Unit 4 Inflation and unemployment, TE1 15.3 Inflation, the business cycle, and the Phillips curve, TESA 15.3 Inflation, the business cycle, and the Phillips curve.

bargaining power

The extent of a person or firm’s advantage in securing a larger share of the economic rents made possible by an interaction. The extent of a person’s advantage in securing a larger share of the economic rents made possible by an interaction (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.3 Economies of scale and the cost advantages of large-scale production, Micro Unit 7 The firm and its customers, TE1 5.1 Institutions and power, TE1 16.3 Job flows, worker flows, and the Beveridge curve, TE1 18.5 Specialization, factor endowments, and trade between countries, TESA 5.1 Institutions and power, ESPP 5.2 Institutions: The rules of the game.

barriers to entry, entry barriers

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 (Micro, Macro). Introduced in Micro Unit 8 Supply and demand: Markets with many buyers and sellers.

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. Also known as: high-powered money. Cash and the balances held by commercial banks in their accounts at the central bank, known as reserves. Also known as: legal tender, high-powered money (ESPP, TE1, TESA). Introduced in ESPP 10.2 Assets, money, banks, and the financial system.

base money, monetary base, high-powered money

Base money (also called the monetary base and sometimes high-powered money) consists of the cash held by households, firms, and banks, together with the balances held by commercial banks in their reserve accounts at the central bank (Macro). Introduced in Macro 7.4 The ultimate Fix economy: A country within a common currency area, Macro 7.10 Why do some countries still end up with high and volatile inflation?, ESPP 10.2 Assets, money, banks, and the financial system.

behavioural experiment

An experiment designed to study some aspect of human behaviour (ESPP). Introduced in ESPP 2.8 Social preferences and the public good.

best-fit line, line of best fit, best-fit curve

In a scatterplot of two variables x (on the horizontal axis) and y (vertical axis), we can summarize the relationship between y and x by estimating a line of best fit to the set of points. The best-fit line uses the data to predict the average value of y for each value of x. The line slopes upward if x and y are positively correlated, and downward if they are negatively correlated. A best-fit straight line is called a linear regression line; it is also possible to estimate a best-fit curve (Macro). Introduced in Macro 5.1 ‘It’s the economy, stupid’: Government popularity, inflation, and unemployment.

best response

In game theory, a player’s best response is the strategy that will bring about the player’s most-preferred outcome, given the strategies adopted by the other players. In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 4.3 Best responses in the rice–cassava game: Nash equilibrium, TE1 4.2 Equilibrium in the invisible hand game, TESA 4.2 Equilibrium in the invisible hand game, ESPP 2.5 When self-interest works: The invisible hand.

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 (TE1, TESA). Introduced in TE1 16.3 Job flows, worker flows, and the Beveridge curve.

biodiversity loss (rate of)

Proportion of species that become extinct every year (TE1, TESA). Introduced in TE1 20.8 Environmental dynamics.

biological survival constraint

This shows all the points that are ‘biologically feasible’ (TE1, TESA). See also: biologically feasible.

biologically feasible

An allocation that is capable of sustaining the survival of those involved is biologically feasible (ESPP, TE1, TESA). Introduced in TE1 5.5 Technically feasible allocations, TESA 5.5 Technically feasible allocations, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela.

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets, TE1 11.5 The value of an asset: Basics, TESA 11.4 The value of an asset: Basics.

bond market

A financial market in which people buy and sell bonds that have been issued by governments or companies (Macro). Introduced in Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets. See also: bond.

box and whisker plot

A graphic display of the range and quartiles of a distribution, where the first and third quartile form the ‘box’ and the maximum and minimum values form the ‘whiskers’ (DE). Introduced in DE 6. Measuring management practices Working in Excel, DE Getting started in R, DE 6. Measuring management practices Working in Google Sheets, DE Part 6.1 Looking for patterns in the survey data, DE 10. Characteristics of banking systems around the world Working in Excel, DE Part 10.1 Summarizing the data, DE Part 10.1 Summarizing the data, DE Part 10.1 Summarizing the data.

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 (TE1, TESA). Introduced in TE1 17.4 The golden age of high growth and low unemployment.

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 (TE1, TESA). See also: legal tender, bank money.

budget constraint

An equation that represents all combinations of goods and services one could acquire that would exactly exhaust one’s budgetary resources. An equation that represents all combinations of goods and services that one could acquire that exactly exhaust one’s budgetary resources (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.4 The feasible set, TE1 3.7 Income and substitution effects on hours of work and free time, TE1 Optimal allocation of free time: an example, TESA 3.8 Income and substitution effects on hours of work and free time, TESA 3.5.1 Optimal allocation of free time: MRT meets MRS.

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 (Macro, DE, TE1, TESA). Introduced in Macro 3.5 Growth and fluctuations, TE1 13.1 Growth and fluctuations, TESA Unit 13 Economic fluctuations and unemployment, DE Introduction. See also: short-run equilibrium.

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 (TE1, TESA). Introduced in TE1 20.5 Cap and trade environmental policies.

capacity constrained, capacity-constrained

A situation in which a firm has more orders for its output than it can fill (Macro, TE1, TESA). Introduced in Macro Unit 4 Inflation and unemployment, TE1 15.12 Another reason for rising inflation at low unemployment, TESA 15.10 Demand shocks and demand-side policies. See also: low capacity utilization.

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’ (Macro). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, Macro 3.11 Why is investment volatile?.

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 (TE1, TESA). Introduced in TE1 13.7 Why is investment volatile?, TE1 14.2 The multiplier model, TESA 13.7 Why is investment volatile?, TESA 14.1 The transmission of shocks: The multiplier process.

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 (Macro). Introduced in Macro 6.4 Introducing a bank.

capital controls, exchange controls

Capital controls (sometimes called exchange controls) are government regulations that limit the extent to which investors based in the home country are permitted to buy foreign assets (Macro).

capital gain

If the market value of an asset increases, the owner of an asset receives a capital gain equal to the difference between the current and previous market prices (Macro). Introduced in Macro 6.9 Introducing financial markets, Macro 8.4 Assets and price bubbles.

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. 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. The equipment, buildings, raw materials, and other inputs used in producing goods and services, including where applicable any patents or other intellectual property that is used (ESPP, TE1, TESA). Introduced in TE1 1.6 Capitalism defined: Private property, markets, and firms, TE1 16.1 Technological progress and living standards, TESA 1.6 Capitalism defined: Private property, markets, and firms, ESPP 1.4 Economic growth.

capital goods, capital

Capital goods (sometimes shortened to ‘capital’) are the durable and costly non-labour inputs used in production (e.g. machinery, equipment, buildings). They do not include some essential inputs (e.g. air, water, knowledge) that are used in production at zero cost to the user (Micro, Macro). Introduced in Micro 1.8 Capitalist institutions, Micro 6.3 Other people’s money: The separation of ownership and control, Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets, Macro 9.3 Capital goods and technology, TE1 1.6 Capitalism defined: Private property, markets, and firms, TE1 16.1 Technological progress and living standards, TESA 1.6 Capitalism defined: Private property, markets, and firms, ESPP 1.4 Economic growth.

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 \(K/N\) (Macro). Introduced in Macro 9.3 Capital goods and technology.

capital intensity (of production)

The amount of capital goods per worker (TE1, TESA). Introduced in Macro 9.3 Capital goods and technology.

capital-intensive

Making greater use of capital goods (for example machinery and equipment) as compared with labour and other inputs (TE1, TESA). Introduced in TE1 16.1 Technological progress and living standards. See also: labour-intensive.

capital productivity

Output per unit of capital good (TE1, TESA). See also: labour productivity.

capitalism

An economic system in which the main form of economic organization is the firm, where the private owners of capital goods hire labour to produce goods and services to be sold in markets with the intent of making a profit. The main economic institutions in a capitalist economic system are private property, markets, and firms. 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. An economic system in which private property, markets, and firms play an important role (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.8 Capitalist institutions, Macro 10.5 The advance of democracy and its stalling, TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms, ESPP 1.4 Economic growth.

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 (TESA). Introduced in TESA Unit 6 The firm: Owners, managers, and employees.

capitalist revolution

Rapid improvements in technology combined with the emergence of a new economic system (ESPP, TE1, TESA). Introduced in TE1 1.10 Varieties of capitalism: Institutions, government, and the economy, ESPP 1.10 Varieties of capitalism: Growth and stagnation.

caring labour

Labour which is undertaken out of affection or a sense of responsibility for other people, with no expectation of immediate pecuniary reward (TESA). Introduced in TESA 3.1 Work and its forms.

cartel

A group of firms that collude (work together) to set output and/or prices in order to raise their joint profits. A group of firms that collude in order to increase their joint profits (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 8.8 Application: Market dynamics in the oil market, TE1 7.10 Price-setting, competition, and market power, TE1 18.6 Winners and losers from trade and specialization, TESA 7.9 Price-setting, market power, and public policy, ESPP 7.6 Gains from trade.

casual labour

People who are employed on a temporary, rather than a permanent or regular basis (TESA). Introduced in TESA 3.1 Work and its forms, TESA Unit 6 The firm: Owners, managers, and employees.

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 (Macro, TE1, TESA). Introduced in Macro 9.3 Capital goods and technology, TE1 17.4 The golden age of high growth and low unemployment. See also: convergence.

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 (TE1, TESA). Introduced in TE1 19.2. Accidents of birth: Another lens to study inequality.

causal, causality, causation

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 (Micro, Macro). Introduced in Micro 1.10 Capitalism, causation, and history’s hockey stick, Macro 5.1 ‘It’s the economy, stupid’: Government popularity, inflation, and unemployment, TE1 1.9 Capitalism, causation and history’s hockey stick, TESA 1.8 Capitalism, causation and history’s hockey stick, ESPP 3.1 Introduction, DE Part 1.3 Carbon emissions and the environment, DE Part 1.2 Variation in temperature over time, DE Part 1.3 Carbon emissions and the environment, DE Part 1.3 Carbon emissions and the environment. See also: natural experiment, correlation.

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 (ESPP, TE1, TESA). Introduced in TE1 1.9 Capitalism, causation and history’s hockey stick, TESA 1.8 Capitalism, causation and history’s hockey stick, ESPP 3.1 Introduction. See also: natural experiment, correlation.

causation

A direction from cause to effect, establishing that a change in one variable produces a change in another. While a correlation gives an indication of whether two variables move together (either in the same or opposite directions), causation means that there is a mechanism that explains this association. Example: We know that higher levels of CO2 in the atmosphere lead to a greenhouse effect, which warms the Earth’s surface. Therefore we can say that higher CO2 levels are the cause of higher surface temperatures (DE). Introduced in DE Part 1.3 Carbon emissions and the environment, DE Part 1.2 Variation in temperature over time, DE Part 1.3 Carbon emissions and the environment, DE Part 1.3 Carbon emissions and the environment.

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. The only bank that can create a country’s legal tender. Usually part of the government. Commercial banks have accounts at this bank, holding legal tender (ESPP, TE1, TESA). Introduced in TE1 10.8 Banks, money, and the central bank, TESA 10.8 Banks, money, and the central bank, ESPP 10.4 Banks, profits, and the creation of money. See also: base money.

central bank independence

A central bank is described as independent if it controls the operation of monetary policy (subject to the objectives of monetary policy set by the government) (Macro). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment.

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 (Micro, Macro). Introduced in Micro 8.1 How the American Civil War rocked global cotton 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’. 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’ (Micro, Macro, ESPP, TE1, TESA).

civil liberties

Civil liberties refer to freedom of speech, religion, and association with others, freedom of the press and other media, freedom from arbitrary detention, and other guarantees by a country’s laws and social norms that protect the members of society against the misuse of government power (Macro). Introduced in Macro 10.3 Democracy as a political institution.

club good

See: artificially scarce good, public good (ESPP, TE1, TESA). Introduced in ESPP 11.11 Public goods, common pool resources, and market failure. See also: artificially scarce good, public good.

co-insurance

A co-insurance scheme enables households to pool savings so that individual households can maintain consumption when they experience a temporary fall in income or the need for greater expenditure. 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 (Macro, ESPP, TE1, TESA). Introduced in Macro 3.10 Shocks to households and the limits to smoothing consumption, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 13.5 How households cope with fluctuations, TE1 14.5 The multiplier model: Including the government and net exports, TE1 16.3 Job flows, worker flows, and the Beveridge curve, TESA 13.5 How households cope with fluctuations, TESA 14.5 The multiplier model: Including the government and net exports.

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 (TE1, TESA). Introduced in TE1 21.2 Innovation systems. See also: tacit knowledge.

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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, Micro 10.9 Hidden actions and risk: Market failure in insurance and credit markets, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro 6.11 Household investments: Housing and financial assets, Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 Unit 10 Banks, money, and the credit market, TE1 12.7 Incomplete contracts and external effects in credit markets, TESA Unit 10 Banks, money, and the credit market, TESA 12.7 Incomplete contracts and external effects in credit markets, ESPP 9.8 Borrowing may allow investing: Julia’s best hope, ESPP 10.6 The business of banking and bank balance sheets.

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 (TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom.

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. Physical goods traded in a manner similar to stocks. 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 (ESPP, TE1, TESA). Introduced in TE1 11.7 Asset market bubbles, TESA 11.6 Asset market bubbles, ESPP 10.9 Changing supply and demand for a financial asset. See also: share.

commodity markets

Markets in which natural resources (such as oil, or silver) and agricultural products (such as wheat, coffee, or cotton) are bought and sold, typically in large quantities by institutional investors and producers (Macro). Introduced in Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets.

commodity money

In an economy without a well-developed banking system, people may use a particular commodity such as gold, as money. The commodity is typically a basic good that is widely valued, but can also act as a means of exchange, a store of value, and a unit of account (Macro). Introduced in Macro 6.5 Introducing money. See also: money.

common currency area

A group of countries that use the same currency. This means there is just one monetary policy for the group. Also known as: currency union (TE1, TESA). Introduced in TE1 15.8 Monetary policy, TESA 15.8 Monetary policy.

common currency area, currency union, monetary union

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 (Macro). Introduced in Macro 7.2 Exchange rate regimes, monetary policy, and inflation, Macro 7.4 The ultimate Fix economy: A country within a common currency area, TE1 15.8 Monetary policy, TESA 15.8 Monetary policy.

common-pool resource

A resource that is rival or partially rival (more people using it reduces the benefits to others) but non-excludable within a community of users. All members of the community are able (and in some cases have a legal right) to use it, but outsiders can be excluded. A rival good that one cannot prevent others from enjoying. Also known as: common property resource (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 12.5 Public goods, TESA 12.5 Public goods, ESPP 11.11 Public goods, common pool resources, and market failure. See also: rival good.

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, TE1 1.8 The gains from specialization, TE1 18.4 Specialization and the gains from trade among nations. See also: absolute advantage.

competition policy

Government policy and laws to limit monopoly power and prevent cartels. Also known as: antitrust policy (ESPP, TE1, TESA). Introduced in TE1 7.10 Price-setting, competition, and market power, TESA 7.9 Price-setting, market power, and public policy, ESPP 7.6 Gains from trade.

competition policy, antitrust policy

Government policies and laws to limit market power and prevent cartels, or to otherwise regulate the process of competition, are collectively known as competition policy or antitrust policy (Micro, Macro). Introduced in Micro 7.12 Influencing market power, and competition policy, TE1 7.10 Price-setting, competition, and market power, TESA 7.9 Price-setting, market power, and public policy, ESPP 7.6 Gains from trade.

competitive equilibrium

A market is in competitive equilibrium if the quantity supplied is equal to the quantity demanded at the prevailing price, and all buyers and sellers are price-takers, so that no-one can benefit from attempting to trade at a different price. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 8 Supply and demand: Markets with many buyers and sellers, TE1 8.2 The market and the equilibrium price, TESA 8.2 The market and the equilibrium price, ESPP 7.9 Buying and selling: Demand and supply in a competitive market.

complements

Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other (ESPP, TE1, TESA). Introduced in TE1 21.3 External effects: Complements, substitutes, and coordination. See also: substitutes.

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 (Micro, Macro). Introduced in Micro Unit 8 Supply and demand: Markets with many buyers and sellers.

compound annual growth rate (CAGR)

The average annual compound growth rate over a given time period (TE1).

concave, concave function

A function, \(f(x)\), is said to be concave if its second derivative is negative for all values of x (Micro, Macro). Introduced in Micro Unit 5 The rules of the game: Who gets what and why, TE1 3.1 Labour and production, TE1 16.1 Technological progress and living standards, TE1 Concave and convex functions, TESA 3.1.3 Concave and convex functions.

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) (TE1, TESA). Introduced in TE1 3.1 Labour and production, TE1 16.1 Technological progress and living standards, TE1 Concave and convex functions, TESA 3.1.3 Concave and convex functions.

conditional mean

An average of a variable, taken over a subgroup of observations that satisfy certain conditions, rather than all observations (DE). Introduced in DE Part 3.1 Before-and-after comparisons of retail prices, DE Getting started in R, DE Part 3.1 Before-and-after comparisons of retail prices, DE Getting started in Python, DE Part 9.1 Households that did not get a loan, DE Part 9.1 Households that did not get a loan, DE Part 9.1 Households that did not get a loan, DE Part 9.1 Households that did not get a loan.

confidence interval

A range of values centred around the sample mean value, with a corresponding percentage (usually 9%, 95%, or 99%). When we use a sample to calculate a 95% confidence interval, there is a probability of .95 that we will get an interval containing the true value of interest (DE). Introduced in DE Part 6.2 Do management practices differ between countries?, DE Part 6.2 Do management practices differ between countries?, DE Part 6.2 Do management practices differ between countries?, DE Part 6.2 Do management practices differ between countries?.

conflict of interest

The situation that arises in an interaction if, in order for one party to gain more, another party must do less well. The situation which arises if in order for one party to gain more from the interaction, another party must do less well (Micro, Macro, ESPP). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro 9.8 Conflicts over the gains made possible by borrowing and lending, Micro Unit 10 Market successes and failures: The societal effects of private decisions, Macro 1.6 Wage setting and unemployment (WS curve), ESPP 9.3 Borrowing: Bringing consumption forward in time.

congestible public goods

If a public good becomes partially rival as more people use it, it may be described as a congestible public good (Micro, Macro). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions.

conspicuous consumption

The purchase of goods and services to publicly display one’s social and economic status. The purchase of goods or services to publicly display one’s social and economic status (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.10 Application: Work hours, free time, and inequality, TE1 3.9 Explaining our working hours: Changes over time, TESA 3.10 Explaining our working hours: Changes over time, ESPP 4.10 Applying the model: Explaining differences between countries.

constant prices

To compare the value of goods and services bought or sold at different times we need to allow for changes in the value of the currency in which they are measured (inflation or deflation). To do this, we choose a base year, and then calculate the value of goods and services in other years using the prices in the base year: that is, at 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 (Macro, ESPP, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, TE1 1.2 Measuring income and living standards, TESA 1.2 Measuring income and living standards, ESPP 1.3 How did we get here? The hockey stick in real incomes. See also: purchasing power parity.

constant returns to scale

When production exhibits constant returns to scale, increasing all of the inputs to a production process by the same proportion increases output by the same proportion. 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. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, Micro 7.3 Economies of scale and the cost advantages of large-scale production, Macro 9.3 Capital goods and technology, TE1 7.1 Breakfast cereal: Choosing a price, TESA 7.3 Profits, costs, and the isoprofit curve, ESPP 7.1 Introduction. See also: increasing returns to scale, decreasing returns to scale.

constrained choice problem

A problem in which a decision-maker chooses the values of one or more variables to achieve an objective (such as maximizing profit, or utility) subject to a constraint that determines the feasible set (such as the demand curve, or budget constraint). 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.5 Decision-making and scarcity, Micro Unit 7 The firm and its customers, Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 3.5 Decision making and scarcity, TE1 7.5 Setting price and quantity to maximize profit, TESA 3.6 Decision making and scarcity, ESPP 4.7 Decision making and scarcity, ESPP 6.9 The employer sets the wage to minimize the cost per unit of effort. See also: constrained optimization problem.

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) (ESPP, TE1, TESA). Introduced in TE1 Optimal allocation of free time: MRT meets MRS, TESA 3.5.1 Optimal allocation of free time: MRT meets MRS, ESPP 7.14 Conclusion.

consumer durables

Consumer goods with a life expectancy of more than three years such as home furniture, cars, and fridges (ESPP, TE1, TESA).

consumer good

Any good that can be bought by consumers, including both short-lived goods and long-lived goods, which are called consumer durables (Micro, Macro). Introduced in Micro 3.3 Goods and preferences.

consumer price index (CPI)

A measure of the general level of prices that consumers have to pay for goods and services, including consumption taxes (Macro, ESPP, TE1, TESA). Introduced in Macro 1.4 Measuring the macroeconomy: Nominal wages, prices, and real wages, Macro 4.2 Measuring the economy: Inflation, TE1 13.8 Measuring the economy: Inflation, TESA 13.8 Measuring the economy: Inflation, ESPP 8.2 Measuring the economy: Employment and unemployment.

consumer surplus

Each consumer who buys a good receives a surplus equal to their willingness to pay minus the price. The term ‘consumer surplus’ normally refers to the sum of these surpluses across all consumers. The consumer’s willingness to pay for a good minus the price at which the consumer bought the good, summed across all units sold (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, TE1 7.7 Gains from trade, TESA 7.6 Gains from trade, ESPP 7.6 Gains from trade.

consumption

Expenditure on consumer goods. Consumer goods include both short-lived goods and services and long-lived goods, which are called consumer durables (Micro, Macro). Introduced in Micro 3.2 A problem of choice and scarcity, Macro 3.3 GDP as expenditure: The components of GDP.

consumption (C)

Expenditure on both short-lived goods and services and long-lived goods, which are called consumer durables. Expenditure on consumer goods including both short-lived goods and services and long-lived goods, which are called consumer durables (ESPP, TE1, TESA). Introduced in Micro 3.2 A problem of choice and scarcity, Macro 3.3 GDP as expenditure: The components of GDP. See also: 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 (Macro, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, TE1 14.1 The transmission of shocks: The multiplier process, TESA 14.1 The transmission of shocks: The multiplier process. See also: disposable income, autonomous consumption.

consumption good

A good or service that satisfies the needs of consumers over a short period (ESPP, TE1, TESA). Introduced in TE1 3.2 Preferences, TESA 3.3 Preferences, ESPP 4.4 Making decisions when there are trade-offs.

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 (Micro, Macro, ESPP). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 3.9 Why is consumption relatively smooth?, ESPP 9.4 Reasons to borrow: Smoothing and impatience.

contingent valuation

A survey-based technique used to assess the value of non-market resources. Also known as: stated-preference model (DE, TE1, TESA). Introduced in TE1 20.6 The measurement challenges of environmental policy, DE Introduction.

contract

A legal document or understanding that specifies a set of actions that parties to the contract must undertake (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 Unit 6 The firm: Owners, managers, and employees, TE1 Unit 12 Markets, efficiency, and public policy, TESA 6.1 Firms, markets, and the division of labour, TESA Unit 12 Markets, efficiency, and public policy, ESPP 6.2 Firms, markets, and the division of labour.

convergence

If a country where GDP is initially low experiences catch-up growth until its growth path is similar to that in high-income countries, this is described as convergence (Macro). Introduced in Macro 9.3 Capital goods and technology. See also: catch-up growth.

convex, convex function

A function, \(f(x)\), is said to be convex if its second derivative is positive for all values of x (Micro, Macro). Introduced in Micro Unit 5 The rules of the game: Who gets what and why.

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 (Micro, Macro). Introduced in Micro 3.3 Goods and preferences, Micro Unit 5 The rules of the game: Who gets what and why.

cooperation

Participating in a common project that is intended to produce mutual benefits (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 4.9 Cooperation, negotiation, conflicts of interest, and social norms, TESA 4.9 Cooperation, negotiation, conflicts of interest, and social norms, ESPP 2.7 Free riding and the provision of public goods.

cooperative firm

A firm that is mostly or entirely owned by its workers, who hire and fire the managers (ESPP, TE1, TESA). Introduced in TE1 6.9 Another kind of business organization, ESPP 6.13 Another kind of business organization: Cooperative firms.

cooperative firm, worker-owned cooperative

A cooperative is a business organization whose members together own the assets of the organization; they share the income resulting from their activities and jointly determine how the organization will be run. A worker-owned cooperative is a firm that is mostly or entirely owned by its workers, who hire and fire the managers (Micro, Macro). Introduced in Micro Unit 6 The firm and its employees, TE1 6.9 Another kind of business organization, ESPP 6.13 Another kind of business organization: Cooperative firms.

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 (Micro, Macro, TE1, TESA). Introduced in Micro 4.13 Coordination games and conflicts of interest, Macro 3.11 Why is investment volatile?, TE1 14.9 Fiscal policy and the rest of the world, TESA 14.9 Fiscal policy and the rest of the world.

copyright

Ownership rights over the use and distribution of an original work (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 12.5 Public goods, TE1 21.6 Intellectual property rights, TESA 12.5 Public goods, ESPP 3.9 Unintended consequences of a redistributive tax, ESPP 11.11 Public goods, common pool resources, and market failure.

correlation

Two variables in a sample of data are said to be correlated if we observe that they tend to change together. If high values of one variable (e.g. people’s earnings) commonly occur along with high values of another variable (e.g. years of education) the variables are positively correlated. When high values of one variable (e.g. ice cream sales) are associated with low values of the other variable (e.g. number of people wearing winter coats) there is a negative correlation. If variables are correlated, it doesn’t mean that there is a causal relationship between them: higher ice cream sales might not have caused fewer people to wear winter coats. 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. A measure of how closely related two variables are. Two variables are correlated if 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. Correlation can be positive or negative. It is negative when high values of one variable are observed with low values of the other. Correlation does not mean that there is a causal relationship between the variables. Example: When the weather is hotter, purchases of ice cream are higher. Temperature and ice cream sales are positively correlated. On the other hand, if purchases of hot beverages decrease when the weather is hotter, we say that temperature and hot beverage sales are negatively correlated (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Micro 1.2 History’s hockey stick, Macro 5.1 ‘It’s the economy, stupid’: Government popularity, inflation, and unemployment, Macro 10.6 Democracy makes a difference, TE1 Unit 13 Economic fluctuations and unemployment, TESA Unit 13 Economic fluctuations and unemployment, DE Part 1.3 Carbon emissions and the environment, DE Part 1.2 Variation in temperature over time, DE Part 1.3 Carbon emissions and the environment, DE Part 1.3 Carbon emissions and the environment. See also: causality, correlation coefficient.

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. A numerical measure, ranging between 1 and −1, of how closely associated two variables are—whether they tend to rise and fall together, or move in opposite directions. A positive coefficient indicates that when one variable takes a high (low) value, the other tends to be high (low) too, and a negative coefficient indicates that when one variable is high the other is likely to be low. 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 indicates that knowing one of the variables provides no information about the value of the other (ESPP, DE, TE1, TESA). Introduced in DE Part 1.3 Carbon emissions and the environment, DE Part 1.2 Variation in temperature over time, DE Part 1.3 Carbon emissions and the environment, DE Part 1.3 Carbon emissions and the environment, DE Part 8.2 Visualizing the data, DE Part 8.2 Visualizing the data, DE Part 8.2 Visualizing the data, DE Getting started in Python. See also: correlation, causality.

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) (Micro, Macro). Introduced in Micro 7.4 Production and costs: The cost function for Beautiful Cars.

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 (Micro, Macro, TE1, TESA). Introduced in Micro 8.7 Short-run and long-run equilibria, TE1 8.6 Changes in supply and demand.

countercyclical

Tending to move in the opposite direction to aggregate output and employment over the business cycle (TE1, TESA). Introduced in TE1 16.3 Job flows, worker flows, and the Beveridge curve.

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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 2.6 Modelling a dynamic economy: Innovation and profit, Macro 9.3 Capital goods and technology, TE1 2.5 Modelling a dynamic economy: Innovation and profit, TE1 16.1 Technological progress and living standards, TESA 2.5 Modelling a dynamic economy: Innovation and profit, ESPP 1.7 The capitalist revolution.

credit-constrained, credit constrained

A description of individuals who are able to borrow only on unfavourable terms (ESPP, DE, TE1, TESA). Introduced in TE1 10.12 Credit market constraints: A principal–agent problem, TE1 12.7 Incomplete contracts and external effects in credit markets, TESA 10.12 Credit market constraints: A principal–agent problem, TESA 12.7 Incomplete contracts and external effects in credit markets, ESPP 9.8 Borrowing may allow investing: Julia’s best hope. See also: credit-excluded.

credit constraints

Credit constraints are restrictions on the amounts or terms on which individuals can borrow (Macro). Introduced in Macro 3.10 Shocks to households and the limits to smoothing consumption, Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption.

credit-excluded, credit excluded

A description of individuals who are unable to borrow on any terms (ESPP, DE, TE1, TESA). Introduced in TE1 10.12 Credit market constraints: A principal–agent problem, TE1 12.7 Incomplete contracts and external effects in credit markets, TESA 10.12 Credit market constraints: A principal–agent problem, TESA 12.7 Incomplete contracts and external effects in credit markets, ESPP 9.8 Borrowing may allow investing: Julia’s best hope. See also: credit-constrained.

credit market constrained

A description of individuals who are limited in how much they can borrow or can borrow only on unfavourable terms (Micro, Macro). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth. See also: credit market excluded.

credit market excluded

A description of individuals who are unable to borrow on any terms (Micro, Macro). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 3.10 Shocks to households and the limits to smoothing consumption. See also: credit market constrained.

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 (TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom.

credit rationing

The process by which those with less wealth borrow on unfavourable terms, compared to those with more wealth (ESPP, TE1, TESA). Introduced in TE1 10.12 Credit market constraints: A principal–agent problem, TESA 10.12 Credit market constraints: A principal–agent problem, ESPP 9.8 Borrowing may allow investing: Julia’s best hope.

Cronbach's alpha

A measure used to assess the extent to which a set of items is a reliable or consistent measure of a concept. This measure ranges from –1, with meaning that all of the items are independent of one another, and 1 meaning that all of the items are perfectly correlated with each other (DE). Introduced in DE Part 11.1 Summarizing the data, DE Getting started in R, DE Learning objectives for this part, DE Getting started in Python.

cross-sectional data

Data that is collected from participants at one point in time or within a relatively short time frame. In contrast, time series data refers to data collected by following an individual (or firm, country, etc.) over a course of time. Example: Data on degree courses taken by all the students in a particular university in 216 is considered cross-sectional data. In contrast, data on degree courses taken by all students in a particular university from 199 to 216 is considered time series data (DE). Introduced in DE Part 4.1 GDP and its components as a measure of material wellbeing, DE Part 4.1 GDP and its components as a measure of material wellbeing, DE Part 4.1 GDP and its components as a measure of material wellbeing, DE Part 4.1 GDP and its components as a measure of material wellbeing.

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. 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 (ESPP, TE1, TESA). Introduced in TE1 4.8 Behavioural experiments in the lab and in the field, TE1 14.7 The multiplier and economic policymaking, TESA 4.8 Behavioural experiments in the lab and in the field, TESA 14.7 The multiplier and economic policymaking, ESPP 3.9 Unintended consequences of a redistributive tax.

crowding out, crowded out

There are two quite distinct uses of the term. One is a negative effect that is observed when economic incentives displace people’s ethical or social motivations. In studies of individual behaviour, incentives may have a crowding out effect on social preferences. The 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 (Micro, Macro). Introduced in Micro 4.9 Using experiments to study economic behaviour, Macro 5.7 The size of the multiplier and the impact of fiscal policy, TE1 4.8 Behavioural experiments in the lab and in the field, TE1 14.7 The multiplier and economic policymaking, TESA 4.8 Behavioural experiments in the lab and in the field, TESA 14.7 The multiplier and economic policymaking, ESPP 3.9 Unintended consequences of a redistributive tax.

current account (CA)

The sum of all payments made to a country minus all payments made by the country (TE1, TESA). See also: current account deficit, current account surplus.

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 (TE1, TESA). Introduced in TE1 18.2 Globalization and investment. See also: current account, current account surplus.

current account surplus

The excess of the combined value of its exports and net earnings from assets abroad over the value of its imports (TE1, TESA). Introduced in TE1 18.2 Globalization and investment. See also: current account, current account deficit.

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 (DE). Introduced in DE Part 1: Collecting and preparing the data, DE Part 2: Links between female labour supply and the macroeconomy, DE Part 1: Collecting and preparing the data.

cyclical unemployment

The additional unemployment above the equilbrium level that is caused by a fall in aggregate demand associated with the business cycle. Also known as: demand-deficient unemployment. The increase in unemployment above equilibrium unemployment caused by a fall in aggregate demand associated with the business cycle. Also known as: demand-deficient unemployment (Macro, ESPP, TE1, TESA). Introduced in Macro 4.7 The business cycle model: Aggregate demand, the supply side, and inflation, TE1 9.7 How changes in demand for goods and services affect unemployment, TE1 14.10 Aggregate demand and unemployment, TESA 9.7 How changes in demand for goods and services affect unemployment, TESA 14.10 Aggregate demand and unemployment, ESPP 8.16 Structural and cyclical unemployment: The role of demand. See also: equilibrium unemployment.

deadweight loss

A measure of the total loss of surplus (that is, potential gains from trade) relative to the maximum available in the market. A loss of total surplus relative to a Pareto-efficient allocation (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, Micro 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting, TE1 7.7 Gains from trade, TE1 8.4 Market supply and equilibrium, TESA 7.6 Gains from trade, ESPP 7.6 Gains from trade.

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 1% of values in a set of observations. 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 (Macro, ESPP, DE). Introduced in Macro 2.2 Measuring the economy: Inequality, Macro 9.1 The transformation of China’s economy and living standards, ESPP Figures, ESPP 1.2 Affluence and income inequality. See also: percentile.

decile, decile groups

Deciles split a set of observations into ten equally-sized groups. The full set of observations is ordered according to a particular variable (e.g. income). The first decile group is the observations in the bottom 1% (e.g. the 1% with the lowest incomes), the second is the next lowest 1%, and the tenth or top decile group is the highest 1%. The deciles are the cutoff values that separate the groups; the first decile is the cutoff between the first and second decile groups, and so on (Micro). Introduced in Micro 1.4 Inequality in global income, Macro 2.2 Measuring the economy: Inequality, Macro 9.1 The transformation of China’s economy and living standards, ESPP Figures, ESPP 1.2 Affluence and income inequality.

decoupling

In most countries, GDP growth has been accompanied by rising carbon emissions. Some countries have recently experienced growth in GDP while reducing carbon emissions; this is referred to as ‘decoupling’ (Macro). Introduced in Macro 9.12 Planetary limits and sustainable growth.

decreasing returns to scale

These occur when doubling all of the inputs to a production process less than doubles the output. Also known as: diseconomies of scale (ESPP, TE1, TESA). Introduced in ESPP 7.1 Introduction. See also: increasing returns to scale.

decreasing returns to scale, diseconomies of scale, decreasing returns

When production exhibits decreasing returns to scale, increasing all of the inputs to a production process by the same proportion increases output by a lower proportion. 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 (Micro, Macro). Introduced in Micro 7.3 Economies of scale and the cost advantages of large-scale production, ESPP 7.1 Introduction, TE1 7.1 Breakfast cereal: Choosing a price, TESA Unit 7 The firm and its customers. See also: increasing returns to scale, constant returns to scale.

default

A borrower who fails to repay a loan, or repays less than is required under the contract, is said to default on the loan. More generally, any failure to meet the terms of a contract can be described as a default (Macro). Introduced in Macro 6.4 Introducing a bank.

default premium

If there is a risk that borrower will default on a loan, the lender may still be prepared to lend if the interest rate is higher than it would be without this risk. The difference between the two rates is the default premium (Macro). Introduced in Macro 6.4 Introducing a bank.

default risk

The risk that credit given as loans will not be repaid (ESPP, TE1, TESA). Introduced in TE1 10.8 Banks, money, and the central bank, TESA 10.8 Banks, money, and the central bank, ESPP 10.4 Banks, profits, and the creation of money.

deflation

A decrease in the general price level (Macro, ESPP, DE, TE1, TESA). Introduced in Macro 4.1 Cost of living crisis, TE1 13.8 Measuring the economy: Inflation, TE1 15.1 What’s wrong with inflation?, TE1 17.2 The Great Depression, positive feedbacks, and aggregate demand, TESA 13.8 Measuring the economy: Inflation, TESA 15.1 What’s wrong with inflation?. See also: inflation.

degrowth

The proponents of degrowth argue that production and consumption in richer countries should be reduced and redistributed to poorer countries, to protect the planet and distribute resources more fairly (Macro). Introduced in Macro 9.12 Planetary limits and sustainable growth.

demand curve

A demand curve shows the number of units of a good that buyers would wish to buy at any given price. Also known as: demand function. The curve that gives the quantity consumers will buy at each possible price (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, TE1 7.1 Breakfast cereal: Choosing a price, TESA 7.2 The demand curve and willingness to pay, ESPP 7.1 Introduction.

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 (Macro, TE1, TESA). Introduced in Macro 3.7 The multiplier model: Aggregate demand shocks cause business cycle fluctuations, Macro 4.8 The business cycle model: Demand and supply shocks, and inflation expectations, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 15.7 Supply shocks and inflation, TESA 15.7 Supply shocks and inflation. See also: supply shock.

demand side

The side of a market on which those participating are offering money in return for some other good or service (for example, those purchasing bread) (TE1, TESA). Introduced in TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms. See also: supply side.

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 (TE1, TESA). Introduced in TE1 14.10 Aggregate demand and unemployment, TE1 17.6 The end of the golden age, TESA 14.10 Aggregate demand and unemployment, TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms. See also: supply side (aggregate economy).

demand side, 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 (Macro). Introduced in Macro 1.2 The economy as a whole, Macro Unit 3 Aggregate demand and the multiplier model, TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms. See also: supply side.

democracy

A political system that ideally gives equal political power to all citizens, and which is defined by individual rights such as freedom of speech, assembly, and the press; and fair elections in which virtually all adults are eligible to vote, and the government leaves office if it loses. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.12 Varieties of capitalism: Institutions, government, and politics, Macro 10.3 Democracy as a political institution, TE1 1.10 Varieties of capitalism: Institutions, government, and the economy, TE1 Unit 22 Economics, politics, and public policy, TESA 1.9 Varieties of capitalism: Institutions, government, and the economy, ESPP 1.4 Economic growth, ESPP 12.2 The limits of markets: Repugnant markets and merit goods.

democratic accountability

Political accountability by means of elections and other democratic processes (TE1, TESA). Introduced in TE1 22.9 Varieties of democracy. See also: accountability, political accountability.

demographic transition

A slowdown in population growth as a fall in death rate is more than balanced by a fall in birth rates (TE1, TESA).

depreciation

The loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence) (Macro, ESPP, TE1, TESA). Introduced in Macro 7.2 Exchange rate regimes, monetary policy, and inflation, TE1 10.1 Money and wealth, TE1 20.6 The measurement challenges of environmental policy, TESA 10.1 Money and wealth, ESPP 9.2 Income, consumption, and wealth.

depreciation (of a currency), nominal depreciation

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 (Macro). Introduced in Macro 5.14 Monetary policy and the exchange rate, Macro 7.2 Exchange rate regimes, monetary policy, and inflation, TE1 10.1 Money and wealth, TE1 20.6 The measurement challenges of environmental policy, TESA 10.1 Money and wealth, ESPP 9.2 Income, consumption, and wealth. See also: exchange rate, real depreciation.

depreciation (of an asset)

The loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence) (Micro). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 7.2 Exchange rate regimes, monetary policy, and inflation, TE1 10.1 Money and wealth, TE1 20.6 The measurement challenges of environmental policy, TESA 10.1 Money and wealth, ESPP 9.2 Income, consumption, and wealth.

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 (TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom. See also: collateralized debt obligation.

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. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.12 Varieties of capitalism: Institutions, government, and politics, Macro 9.6 Barriers to growth, TE1 1.10 Varieties of capitalism: Institutions, government, and the economy, TESA 1.9 Varieties of capitalism: Institutions, government, and the economy, ESPP 1.8 Capitalism and growth: Cause and effect?.

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 (ESPP). Introduced in ESPP 3.1 Introduction.

differences-in-differences

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 (DE). Introduced in DE Introduction.

differentiated product

A product produced by a single firm that has some unique characteristics compared to similar products of other firms (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.5 Demand, elasticity, and revenue, TE1 7.4 Demand and isoprofit curves: Beautiful Cars, TESA 7.2 The demand curve and willingness to pay, ESPP 7.1 Introduction.

diffusion

The spread of the invention throughout the economy (TE1, TESA). Introduced in TE1 21.1 The innovation process: Invention and diffusion. See also: diffusion gap.

diffusion gap

The lag between the first introduction of an innovation and its general use (TE1, TESA). Introduced in TE1 16.5 New technology, wages, and unemployment in the long run. See also: diffusion.

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, TE1 2.7 Malthusian economics: Diminishing average product of labour, TESA 2.7 Malthusian Economics: Modelling output growth.

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 (ESPP, TE1, TESA). Introduced in ESPP 4.4 Making decisions when there are trade-offs.

diminishing marginal returns to consumption

The value to the individual of an additional unit of consumption declines, the more consumption the individual has. Also known as: diminishing marginal utility (ESPP, TE1, TESA). Introduced in TE1 10.3 Impatience and the diminishing marginal returns to consumption, TESA 10.2 Borrowing: Bringing consumption forward in time, ESPP 9.4 Reasons to borrow: Smoothing and impatience.

diminishing marginal utility

If the value to the individual of an additional unit of some good declines the more that is consumed, holding constant the amount of other goods, we say that the good 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. Also known as: diminishing marginal returns to consumption (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth.

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 (TE1, TESA). Introduced in TE1 3.1 Labour and production, TESA 3.2 Labour and production.

discount rate

A measure of someone’s impatience: how much the person values an additional unit of consumption now relative to an additional unit of consumption later. It is equal to the slope of the indifference curve for consumption now and consumption later, minus one. Also known as: subjective 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. Also known as: subjective discount rate. A measure of the person’s impatience: how much the person values an additional unit of consumption now relative to an additional unit of consumption later. It is the slope of the person’s indifference curve for consumption now and consumption later, minus one. Also known as: subjective discount rate (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, TE1 20.9 Why is addressing climate change so difficult?, ESPP 9.4 Reasons to borrow: Smoothing and impatience.

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 (TE1, TESA). Introduced in TE1 20.9 Why is addressing climate change so difficult?.

diseconomies of scale

These occur when doubling all of the inputs to a production process less than doubles the output. Also known as: decreasing returns to scale (ESPP, TE1, TESA). Introduced in TE1 7.1 Breakfast cereal: Choosing a price, TESA Unit 7 The firm and its customers, ESPP 7.1 Introduction. See also: economies of scale.

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 (ESPP, TESA). Introduced in TESA 8.5 Changes in supply and demand, ESPP 7.12 Changes in supply and demand.

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) (TE1, TESA).

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 8 Supply and demand: Markets with many buyers and sellers, TE1 Market equilibration through rent-seeking, TESA Unit 11 Rent-seeking, price-setting, and market dynamics.

disinflation

A decrease in the rate of inflation (Macro, ESPP, DE, TE1, TESA). Introduced in Macro 4.1 Cost of living crisis, TE1 15.1 What’s wrong with inflation?, TESA 15.1 What’s wrong with inflation?. See also: inflation, deflation.

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 (Macro, ESPP, TE1, TESA). Introduced in Macro 2.2 Measuring the economy: Inequality, TE1 1.2 Measuring income and living standards, TE1 5.12 Measuring economic inequality, TESA 1.2 Measuring income and living standards, TESA 5.12 Measuring economic inequality, ESPP 5.9 Measuring economic inequality, ESPP 9.2 Income, consumption, and wealth.

distributionally neutral

A policy that is neither progressive or regressive so that it does not alter the distribution of income (TE1, TESA). Introduced in TE1 19.10 Redistribution: Taxes and transfers. See also: progressive (policy), regressive (policy).

disutility of effort

The degree to which doing some task (effort) is unpleasant (ESPP). Introduced in ESPP 6.4 Other people’s money: The separation of ownership and control.

diversify, diversification

An individual, bank, or company that holds risky assets can reduce the overall risk to their wealth by diversifying: that is, holding a diverse range of risky assets. Although some of their assets will generate low (or negative) profits, the profits on others will be high, with the result that they make a reasonable profit on average (Macro). Introduced in Macro 6.4 Introducing a bank.

division of labour

The specialization of producers to carry out different tasks in the production process. The specialization of producers to carry out different tasks in the production process. Also known as: specialization (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, TE1 4.1 Social interactions: Game theory, TE1 Unit 6 The firm: Owners, managers, and employees, TESA 4.1 Social interactions: Game theory, TESA 6.1 Firms, markets, and the division of labour, ESPP 1.4 Economic growth, ESPP 6.2 Firms, markets, and the division of labour.

dominant strategy

A strategy is dominant if it yields the highest pay-off for the player, no matter what strategies the other players choose. Strategy that yields the highest payoff for a player, no matter what the other players do. Action that yields the highest payoff for a player, no matter what the other players do (Micro, Macro, ESPP, TE1, TESA). Introduced in TE1 4.2 Equilibrium in the invisible hand game, TESA 4.2 Equilibrium in the invisible hand game, ESPP 2.5 When self-interest works: The invisible hand.

dominant strategy equilibrium

A dominant strategy equilibrium is a Nash equilibrium in which the strategies of all players are dominant stategies. An outcome of a game in which every player plays his or her dominant strategy (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 4.2 Equilibrium in the invisible hand game, TE1 20.9 Why is addressing climate change so difficult?, TESA 4.2 Equilibrium in the invisible hand game, ESPP 2.5 When self-interest works: The invisible hand.

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 (TE1, TESA).

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 (TE1, TESA). Introduced in TE1 2.4 Modelling a dynamic economy: Technology and costs, TE1 20.2 Climate change, TESA 2.4 Modelling a dynamic economy: Technology and costs.

dual economy

The existence of two sectors within an economy: one made up of capitalist firms and the other, the informal sector, made up of own account work, work in families and other productive activities not involving employers hiring workers (TESA). Introduced in TESA Unit 6 The firm: Owners, managers, and employees.

dummy variable (indicator variable)

A variable that takes the value 1 if a certain condition is met, and otherwise (DE). Introduced in DE Part 1.2 Variation in temperature over time, DE Part 7.1 Drawing supply and demand diagrams, DE Part 7.2 Interpreting supply and demand curves, DE Part 7.1 Drawing supply and demand diagrams, DE Part 7.1 Drawing supply and demand diagrams, DE Part 9.1 Households that did not get a loan, DE Part 9.1 Households that did not get a loan, DE Part 1: Collecting and preparing the data, DE Part 1: Collecting and preparing the data, DE Part 1: Collecting and preparing the data.

earnings

Wages, salaries, and other income from labour (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, TE1 10.1 Money and wealth, TESA 10.1 Money and wealth, ESPP 9.2 Income, consumption, and wealth.

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 (ESPP, TE1, TESA). Introduced in TE1 22.1 The government as an economic actor, ESPP 12.3 The government as an economic actor. See also: accountability, political accountability.

economic cost

The direct costs of an action (including monetary costs and costs of effort, for example), plus the opportunity cost. The out-of-pocket cost of an action, plus the opportunity cost (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, TE1 3.3 Opportunity costs, TESA 3.4 Opportunity costs, ESPP 4.3 Decision making, trade-offs, and opportunity costs.

economic dynamics

Economic dynamics refers to the process of change in an economy, especially changes occurring when the economy is not in equilibrium (Macro). Introduced in Macro 8.1 Collapse of Lehman Brothers (2007–2009).

economic feasibility

For a policy to be economically feasible, its desired outcome must be a Nash equilibrium, in which private economic actors have no incentive to undo the desired effects (Macro). Introduced in Macro 10.12 Economic infeasibility.

economic inequality

Differences among members of a society in some economic attribute such as wealth, income, or wages (ESPP). Introduced in ESPP 1.11 Capitalism, inequality, and democracy.

economic profit

A firm’s revenue minus its total costs (including the opportunity cost of capital) (ESPP, TE1, TESA). Introduced in TE1 7.4 Demand and isoprofit curves: Beautiful Cars, ESPP 8.9 Declining competition and increasing inequality in the US.

economic rent

Economic rent is the difference between the net benefit (monetary or otherwise) that an individual receives from a chosen action, and the net benefit from the next best alternative (or reservation option). 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) (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, Micro Unit 4 Strategic interactions and social dilemmas, Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 6 The firm and its employees, Micro Unit 7 The firm and its customers, Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 2.3 Basic concepts: Prices, costs, and innovation rents, TE1 3.3 Opportunity costs, TE1 4.10 Dividing a pie (or leaving it on the table), TE1 5.6 Allocations imposed by force, TE1 7.7 Gains from trade, TESA 2.3 Basic concepts: Prices, costs, and innovation rents, TESA 3.4 Opportunity costs, TESA 4.10 Dividing a pie (or leaving it on the table), TESA 5.6 Allocations imposed by force, TESA 7.6 Gains from trade, ESPP 4.3 Decision making, trade-offs, and opportunity costs, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela, ESPP 7.6 Gains from trade. See also: 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 twentieth 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 nineteenth century), and capitalism (most of the world’s economies today). 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 2th 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). The institutions that organize the production and distribution of goods and services in an entire economy (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.8 Capitalist institutions, TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms, ESPP 1.4 Economic growth.

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 (ESPP, TE1, TESA). Introduced in TE1 22.10 Democracy makes a difference, ESPP 12.7 Spending by democratic governments: Priorities of a nation.

economically inactive

People in the population of working age who are neither employed nor actively looking for paid work are classified as economically inactive. Those working in the home raising children, for example, are not considered as being in the labour force, so they are classified this way (Macro). Introduced in Macro 1.3 Measuring the macroeconomy: Output, employment, unemployment, and inactivity.

economics

Economics is the study of how people interact with each other and with their natural environment in producing and acquiring their livelihoods, and how this changes over time and differs across societies. The study of how people interact with each other and with their natural surroundings in providing their livelihoods, and how this changes over time (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.13 Economics, the economy, and the biosphere, Micro 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1 1.11 Economics and the economy, TESA 1.11 Economics and the economy, ESPP 1.4 Economic growth, ESPP 2.14 The economy and economics.

economies of agglomeration

The advantages that firms may enjoy when they are located close to other firms in the same or related industries (TE1, TESA). See also: economies of scale.

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 (ESPP, TE1, TESA). Introduced in TE1 1.8 The gains from specialization, TE1 7.1 Breakfast cereal: Choosing a price, TE1 18.4 Specialization and the gains from trade among nations, TE1 21.2 Innovation systems, TESA Unit 7 The firm and its customers, ESPP 7.1 Introduction, ESPP 11.3 Markets, specialization, and the division of labour. See also: diseconomies of 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 (Micro, Macro, TE1, TESA). Introduced in Micro 7.4 Production and costs: The cost function for Beautiful Cars, TE1 7.3 Production: The cost function for Beautiful Cars.

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 (TE1, TESA). Introduced in TE1 17.1 Three economic epochs.

efficiency unit

A unit of effort is sometimes called an efficiency unit (ESPP). Introduced in ESPP 6.9 The employer sets the wage to minimize the cost per unit of effort.

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 (ESPP, TE1, TESA). Introduced in TE1 6.7 Wages, effort, and profits in the labour discipline model, TESA 6.7 Wages, effort, and profits in the labour discipline model, ESPP 6.9 The employer sets the wage to minimize the cost per unit of effort. See also: labour discipline model, employment rent.

employment contract

A system in which producers are paid for the time they work for their employers (Micro, Macro). Introduced in Micro Unit 6 The firm and its employees.

employment protection legislation

Laws making job dismissal more costly (or impossible) for employers (TE1, TESA). Introduced in TE1 16.5 New technology, wages, and unemployment in the long run.

employment rate

The employment rate is the fraction of the population of working age that is employed. The ratio of the number of employed to the population of working age (Macro, ESPP, TE1, TESA). Introduced in Macro 1.3 Measuring the macroeconomy: Output, employment, unemployment, and inactivity, TE1 9.2 Measuring the economy: Employment and unemployment, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 8.2 Measuring the economy: Employment and unemployment. See also: 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 (ESPP). Introduced in ESPP 6.4 Other people’s money: The separation of ownership and control, ESPP 8.15 Looking backward: Baristas and bread markets.

employment rent

The economic rent a worker receives when the net value of their job exceeds the net value of their next best alternative (that is, being unemployed). The economic rent a worker receives when the net value of their job exceeds the net value of their next best alternative (that is, being unemployed). Also known as: cost of job loss. 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). Also known as: cost of job loss (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 6 The firm and its employees, Micro Unit 6 The firm and its employees, Macro 1.6 Wage setting and unemployment (WS curve), Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 6.4 Employment rents, TE1 Unit 9 The labour market: Wages, profits, and unemployment, TESA 6.4 Employment rents, TESA Unit 9 The labour market: Wages, profits, and unemployment, ESPP 6.7 Employment rents, ESPP 8.2 Measuring the economy: Employment and unemployment. See also: economic rent.

endogenous

Endogenous means ‘generated by the model’. In an economic model, a variable is endogenous if its value is determined by the workings of the model (rather than being set by the modeller). Produced by the workings of a model rather than coming from outside the model (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, Micro 7.4 Production and costs: The cost function for Beautiful Cars, TE1 Great economists Friedrich Hayek, TESA Unit 11 Rent-seeking, price-setting, and market dynamics, DE Part 7.1 Drawing supply and demand diagrams, DE Part 7.2 Interpreting supply and demand curves, DE Part 7.1 Drawing supply and demand diagrams, DE Part 7.1 Drawing supply and demand diagrams. See also: exogenous.

endogenous growth

Growth in aggregate output (GDP) which occurs as a result of intentional actions by economic agents, such as investment to raise the capital stock, or R&D to develop a better production process. This contrasts with exogenous growth, which occurs as a result of unintentional effects such as ‘learning by doing’ (Macro). Introduced in Macro 9.8 How poor countries get stuck at low growth and how they can grow rapidly.

endowment

A person’s endowments are the things they have that enable them to receive income. They include physical wealth (for example: land, housing, machinery); financial wealth (for example: savings, stocks/shares, bonds); intellectual property (for example: patents, copyrights); knowledge, skills, abilities, and experience that affect labour income; citizenship and rights to work. They can include characteristics such as nationality, gender, race, and social class, if these affect their income. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 5.11 The distribution of income: Endowments, technology, and institutions, TE1 19.5 Endowments, technology, and institutions, ESPP 5.9 Measuring economic inequality, ESPP 12.12 The distributional impact of public policies: Early childhood education. See also: human capital.

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 (Micro, Macro). Introduced in Micro 6.6 Getting the work done: Contracts, principals, and agents.

entitlement

Entitlements are resources that a person can command given the rights and opportunities provided by his or her society (TESA). Introduced in TESA Unit 2 Technology, population, and growth.

entrepreneur

A person who creates or is an early adopter of new technologies, organizational forms, and other opportunities (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 2.6 Modelling a dynamic economy: Innovation and profit, TE1 2.5 Modelling a dynamic economy: Innovation and profit, TESA 2.5 Modelling a dynamic economy: Innovation and profit, ESPP 1.7 The capitalist revolution.

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) (TE1, TESA).

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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 1 Prosperity, inequality, and planetary limits, Micro Unit 2 Technology and incentives, Micro 4.3 Best responses in the rice–cassava game: Nash equilibrium, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, Macro 8.2 Tipping points, instability, and lock-in, TE1 2.2 Economic models: How to see more by looking at less, TE1 8.2 The market and the equilibrium price, TE1 20.8 Environmental dynamics, TESA 2.2 Economic models: How to see more by looking at less, TESA 8.2 The market and the equilibrium price, ESPP 2.5 When self-interest works: The invisible hand, ESPP 4.1 Introduction, ESPP 7.9 Buying and selling: Demand and supply in a competitive market.

equilibrium (of a market)

A state of a market in which there is no tendency for the quantities bought and sold, or the market price, to change, unless there is some change in the underlying costs, preferences, or other determinants of the behaviour of market actors (TE1, TESA). Introduced in TE1 8.2 The market and the equilibrium price, TESA 8.2 The market and the equilibrium price, Micro Unit 1 Prosperity, inequality, and planetary limits, Micro Unit 2 Technology and incentives, Micro 4.3 Best responses in the rice–cassava game: Nash equilibrium, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, Macro 8.2 Tipping points, instability, and lock-in, TE1 2.2 Economic models: How to see more by looking at less, TE1 20.8 Environmental dynamics, TESA 2.2 Economic models: How to see more by looking at less, ESPP 2.5 When self-interest works: The invisible hand, ESPP 4.1 Introduction, ESPP 7.9 Buying and selling: Demand and supply in a competitive market.

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 (Micro, Macro). Introduced in Micro Unit 8 Supply and demand: Markets with many buyers and sellers. See also: market-clearing price.

equilibrium rent

Rent in a market that is in equilibrium. Also known as: stationary or persistent rents (TE1, TESA). Introduced in TE1 11.11 The role of economic rents, TESA 11.10 The role of economic 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. 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 where neither employers nor workers could do better by changing their behaviour (ESPP, TE1, TESA). Introduced in TE1 9.6 Wages, profits, and unemployment in the whole economy, TESA 9.6 Wages, profits, and unemployment in the whole economy, ESPP 8.6 Wages, profits, and unemployment in the aggregate economy. See also: involuntary unemployment, cyclical unemployment, wage-setting curve, price-setting curve, inflation-stabilizing rate of unemployment.

equity

Shares (stocks) in a business are known collectively as equity. The total value of the equity held by the shareholders is equal to the net worth of the business, and an individual shareholder’s equity in the business is the total value of the shares they own. The term equity is also used more generally for a share of ownership of any asset, and for the net worth of any household, business, or project. There is a second entirely different use of the term, meaning fairness, as in ‘an equitable division of the pie’. An individual’s own investment in a project. This is recorded in an individual’s or firm’s balance sheet as net worth. An individual’s own investment in a project. This is recorded in an individual’s or firm’s balance sheet as net worth. An entirely different use of the term is synonymous with fairness (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, Micro Unit 9 Lenders and borrowers and differences in wealth, Micro 10.9 Hidden actions and risk: Market failure in insurance and credit markets, Macro 6.4 Introducing a bank, Macro 8.1 Collapse of Lehman Brothers (2007–2009), Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 10.10 The business of banking and bank balance sheets, TE1 12.7 Incomplete contracts and external effects in credit markets, TE1 14.3 Household target wealth, collateral, and consumption spending, TESA 10.10 The business of banking and bank balance sheets, TESA 12.7 Incomplete contracts and external effects in credit markets, TESA 14.3 Household target wealth, collateral, and consumption spending, ESPP 9.8 Borrowing may allow investing: Julia’s best hope, ESPP 10.6 The business of banking and bank balance sheets. See also: 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 (Micro, Macro, TE1, TESA). Introduced in Micro 2.6 Modelling a dynamic economy: Innovation and profit, TE1 2.5 Modelling a dynamic economy: Innovation and profit, TESA 2.5 Modelling a dynamic economy: Innovation and profit.

excess demand

A situation in which the quantity of a good demanded is greater than the quantity supplied at the current price (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 8.1 How the American Civil War rocked global cotton prices, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, Macro 8.5 Modelling a house price bubble and collapse, TE1 Unit 8 Supply and demand: Price-taking and competitive markets, TESA Unit 8 Supply and demand: Price-taking and competitive markets, ESPP 7.9 Buying and selling: Demand and supply in a competitive market, ESPP 11.5 Prices as messages. See also: excess supply.

excess supply

A situation in which the quantity of a good supplied is greater than the quantity demanded at the current price (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 8 Supply and demand: Markets with many buyers and sellers, Macro 8.5 Modelling a house price bubble and collapse, TE1 8.2 The market and the equilibrium price, TE1 9.6 Wages, profits, and unemployment in the whole economy, TESA 8.2 The market and the equilibrium price, TESA 9.6 Wages, profits, and unemployment in the whole economy, ESPP 7.9 Buying and selling: Demand and supply in a competitive market, ESPP 8.6 Wages, profits, and unemployment in the aggregate economy. See also: excess demand.

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 (Macro, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, Macro 7.2 Exchange rate regimes, monetary policy, and inflation, TE1 14.5 The multiplier model: Including the government and net exports, TE1 15.9 The exchange rate channel of monetary policy, TESA 14.5 The multiplier model: Including the government and net exports, TESA 15.9 The exchange rate channel of monetary policy.

excludable, excludability

A good is excludable if (at zero or low cost) a potential user may be denied access to the good (Micro, Macro). Introduced in Micro 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting. See also: non-rival.

excludable public good, club good

A good that is non-rival (can be supplied to more users at no additional cost) but excludable (it is possible to prevent people from using it) may be called an excludable public good, or a club good (Micro, Macro). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, ESPP 11.11 Public goods, common pool resources, and market failure.

exogenous

Exogenous means ‘generated outside the model’. In an economic model, a variable is exogenous if its value is set by the modeller, rather than being determined by the workings of the model itself. Coming from outside the model rather than being produced by the workings of the model itself (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, Micro 7.4 Production and costs: The cost function for Beautiful Cars, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, Macro Unit 3 Aggregate demand and the multiplier model, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 8.6 Changes in supply and demand, TE1 Great economists Friedrich Hayek, TE1 14.5 The multiplier model: Including the government and net exports, TESA 8.5 Changes in supply and demand, TESA Unit 11 Rent-seeking, price-setting, and market dynamics, TESA 14.5 The multiplier model: Including the government and net exports, ESPP 7.12 Changes in supply and demand, DE Part 7.1 Drawing supply and demand diagrams, DE Part 7.1 Drawing supply and demand diagrams, DE Part 7.1 Drawing supply and demand diagrams, DE Part 7.1 Drawing supply and demand diagrams. See also: endogenous.

exogenous growth

Growth in aggregate output (GDP) which occurs as a result of independent, unintentional effects such as ‘learning by doing’. This contrasts with endogenous growth, which occurs as a result of intentional actions by economic agents (Macro). Introduced in Macro 9.8 How poor countries get stuck at low growth and how they can grow rapidly.

exogenous shock

An exogenous shock (for example a demand shock or a supply shock) is a change in one or more of the exogenous variables in a model—that is, variables that are othewise held constant by the modeller. A sharp change in external conditions affecting a model (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 8 Supply and demand: Markets with many buyers and sellers, Macro Unit 3 Aggregate demand and the multiplier 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 (Macro, TE1, TESA). Introduced in Macro Unit 4 Inflation and unemployment, TE1 15.6 Expected inflation and the Phillips curve, TESA 15.6 Expected inflation and the Phillips curve. See also: inflation.

exports

Goods and services produced in a particular country and sold to households, firms, and governments in other countries (Macro). Introduced in Macro 3.2 Measuring the aggregate economy: Gross domestic product.

exports (X)

Goods and services produced in a particular country and sold to households, firms and governments in other countries (TE1, TESA). Introduced in Macro 3.2 Measuring the aggregate economy: Gross domestic product.

expropriation risk

The probability that an asset will be taken from its owner by the government or some other actor (TE1, TESA). Introduced in TE1 14.4 Investment spending, TE1 16.4 Investment, firm entry, and the price-setting curve in the long run, TESA 14.3 Household target wealth, collateral, and consumption spending.

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. Also known as: external economy (ESPP, TE1, TESA). Introduced in TE1 12.3 External effects: Policies and income distribution, TESA 12.3 External effects: Policies and income distribution, ESPP 11.9 External effects: Government policies and income distribution. See also: external effect.

external benefit, positive externality, external economy

A positive external effect: that is, a positive effect of an economic decision on other people, that is not taken into account by the decision-maker. It may be described as an external benefit, a positive externality, or an external economy (Micro, Macro). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 12.3 External effects: Policies and income distribution, TESA 12.3 External effects: Policies and income distribution, ESPP 11.9 External effects: Government policies and income distribution, TE1 12.4 Property rights, contracts, and market failures, TESA 12.4 Property rights, contracts, and market failures, ESPP 11.10 Property rights, contracts, and market failures. See also: external effect.

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. Also known as: external diseconomy (ESPP, TE1, TESA). Introduced in ESPP 11.7 Market failure: External effects of pollution. See also: external effect.

external cost, negative externality, external diseconomy

A negative external effect: that is, a negative effect of an economic decision on other people, that is not taken into account by the decision-maker. It may be described as an external cost, or a negative externality, or an external diseconomy (Micro, Macro). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, Micro Unit 10 Market successes and failures: The societal effects of private decisions, ESPP 11.7 Market failure: External effects of pollution, TE1 12.4 Property rights, contracts, and market failures, TESA 12.4 Property rights, contracts, and market failures, ESPP 11.10 Property rights, contracts, and market failures. See also: external effect.

external diseconomy

A negative effect of a production, consumption, or other economic decision, that is not specified as a liability in a contract. Also known as: external cost, negative externality (ESPP, TE1, TESA). Introduced in TE1 12.4 Property rights, contracts, and market failures, TESA 12.4 Property rights, contracts, and market failures, ESPP 11.10 Property rights, contracts, and market failures. See also: external effect.

external economy

A positive effect of a production, consumption, or other economic decision, that is not specified as a benefit in a contract. Also known as: external benefit, positive externality. A positive effect of a production, consumption, or other economic decision, that is not specified as a benefit in a contract. Also known as: external benefit, positive externality (ESPP, TE1, TESA). Introduced in TE1 12.4 Property rights, contracts, and market failures, TESA 12.4 Property rights, contracts, and market failures, ESPP 11.10 Property rights, contracts, and market failures. See also: external effect.

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. Also known as: externality. A positive or negative effect of a production, consumption, or other economic decision on another person or people that is not specified as a benefit or liability in a contract. It is called an external effect because the effect in question is outside the contract. Also known as: externality (ESPP, TE1, TESA). Introduced in TE1 12.1 Market failure: External effects of pollution, TE1 21.2 Innovation systems, TESA 12.1 Market failure: External effects of pollution, ESPP 1.12 Capitalism, growth and environmental sustainability, ESPP 2.1 Introduction, ESPP 4.10 Applying the model: Explaining differences between countries, ESPP 10.13 The role of banks in the crisis, ESPP 11.7 Market failure: External effects of pollution. See also: incomplete contract, market failure, external benefit, external cost.

external effect, externality

An external effect occurs when a person’s action confers a benefit or imposes a cost on others and this cost or benefit is not taken into account by the individual taking the action. External effects are also called externalities (Micro, Macro). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, Micro 10.1 Bananas, fish, and cancer, Micro Unit 10 Market successes and failures: The societal effects of private decisions, Macro 8.10 Addressing instability of the financial system, Macro 9.6 Barriers to growth, Macro 9.12 Planetary limits and sustainable growth, Macro 10.2 Government as an economic actor, TE1 12.1 Market failure: External effects of pollution, TE1 21.2 Innovation systems, TESA 12.1 Market failure: External effects of pollution, ESPP 1.12 Capitalism, growth and environmental sustainability, ESPP 2.1 Introduction, ESPP 4.10 Applying the model: Explaining differences between countries, ESPP 10.13 The role of banks in the crisis, ESPP 11.7 Market failure: External effects of pollution.

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 (Micro, Macro). Introduced in Micro Unit 1 Prosperity, inequality, and planetary limits, Micro Unit 2 Technology and incentives, Macro 9.4 How much does capital accumulation contribute to the growth rate of living standards?.

factors of production

The labour, machinery and equipment (usually referred to as capital), land, and other inputs to a production process (TE1, TESA). Introduced in TE1 2.7 Malthusian economics: Diminishing average product of labour, TESA 2.7 Malthusian Economics: Modelling output growth.

fairness

A way to evaluate an allocation based on one’s conception of justice (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro Unit 5 The rules of the game: Who gets what and why, Macro 10.2 Government as an economic actor, TE1 4.9 Cooperation, negotiation, conflicts of interest, and social norms, TE1 14.8 The government’s finances, TESA 4.9 Cooperation, negotiation, conflicts of interest, and social norms, TESA 14.8 The government’s finances, ESPP 3.3 Fairness and efficiency in the ultimatum game.

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) (Macro, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 14.5 The multiplier model: Including the government and net exports, TESA 14.5 The multiplier model: Including the government and net exports. See also: paradox of thrift.

feasible frontier

The curve or line made of points that defines the maximum feasible quantity of one good for a given quantity of the other. The curve made of points that defines the maximum feasible quantity of one good for a given quantity of the other (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.4 The feasible set, Micro Unit 5 The rules of the game: Who gets what and why, Micro 9.3 Borrowing: Bringing consumption forward in time to the present, Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 3.4 The feasible set, TESA 3.5 The feasible set, ESPP 4.6 The feasible set, ESPP 9.3 Borrowing: Bringing consumption forward in time, ESPP 10.6 The business of banking and bank balance sheets. See also: feasible set.

feasible set

All of the combinations of goods or outcomes that a decision-maker could choose, given the economic, physical, or other constraints that they face. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.4 The feasible set, Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 6 The firm and its employees, Micro 9.3 Borrowing: Bringing consumption forward in time to the present, Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 3.4 The feasible set, TE1 15.4 Inflation and unemployment: Constraints and preferences, TESA 3.5 The feasible set, TESA 15.4 Inflation and unemployment: Constraints and preferences, ESPP 4.6 The feasible set. See also: feasible frontier.

fertility rate

The average number of children per woman (TESA). Introduced in TESA 2.10 Escaping from Malthusian stagnation.

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 (TE1, TESA).

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 (Macro, TE1, TESA). Introduced in Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 14.3 Household target wealth, collateral, and consumption spending, TE1 17.8 Before the financial crisis: Households, banks, and the credit boom, TESA 14.3 Household target wealth, collateral, and consumption spending.

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 (ESPP, TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom, ESPP 10.12 Banks, housing, and the global financial crisis.

financial intermediary

An economic agent, such as a bank or pension fund, that borrows from savers and simultaneously lends to borrowers. Intermediation provides an alternative to bilateral loan contracts as a way of channelling savings from people who want to lend to those who want to borrow (Macro). Introduced in Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets.

fire sale

The sale of something at a very low price because of the seller’s urgent need for money (Macro, TE1, TESA). Introduced in Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 17.11 The role of banks in the crisis.

firm

An economic organization in which private owners of capital goods hire and direct labour to produce goods and services for sale on markets to make a profit. Economic organization in which private owners of capital goods hire and direct labour to produce goods and services for sale on markets to make a profit (Micro, Macro, TE1, TESA). Introduced in Micro 1.8 Capitalist institutions, TE1 Unit 6 The firm: Owners, managers, and employees.

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 (Micro, Macro, TE1, TESA). Introduced in Micro 6.4 Finding jobs and filling vacancies, TE1 Unit 6 The firm: Owners, managers, and employees, TESA 6.1 Firms, markets, and the division of labour. See also: relationship-specific asset.

firms

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 (ESPP). Introduced in ESPP 1.7 The capitalist revolution, ESPP 6.2 Firms, markets, and the division of labour, Micro 1.8 Capitalist institutions, TE1 Unit 6 The firm: Owners, managers, and employees.

first copy costs

The fixed costs of the production of a knowledge-intensive good or service (TE1, TESA). Introduced in TE1 21.4 Economies of scale and winner-take-all competition.

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 (ESPP, TE1, TESA). Introduced in TE1 22.13 Administrative infeasibility, ESPP 12.9 Administrative feasibility: Information and capacities.

fiscal multiplier

The total (direct and indirect) change in output caused by an initial change in government spending (TE1, TESA). See also: fiscal stimulus, fiscal policy, aggregate demand.

fiscal policy

Changes in taxes or government spending in order to stabilize the economy (TE1, TESA). Introduced in TE1 9.7 How changes in demand for goods and services affect unemployment, TE1 14.5 The multiplier model: Including the government and net exports, TESA 9.7 How changes in demand for goods and services affect unemployment, TESA 14.5 The multiplier model: Including the government and net exports. See also: fiscal stimulus, fiscal multiplier, aggregate demand.

fiscal policy, discretionary 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 (Macro). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 9.7 How changes in demand for goods and services affect unemployment, TE1 14.5 The multiplier model: Including the government and net exports, TESA 9.7 How changes in demand for goods and services affect unemployment, TESA 14.5 The multiplier model: Including the government and net exports. See also: aggregate demand.

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 (TE1, TESA). Introduced in TE1 14.5 The multiplier model: Including the government and net exports, TESA 14.5 The multiplier model: Including the government and net exports. See also: fiscal multiplier, fiscal policy, 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 (Macro, ESPP, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 15.1 What’s wrong with inflation?, TESA 15.1 What’s wrong with inflation?, ESPP 9.6 Storing or lending allows smoothing and moving consumption to the future.

fixed costs

Costs of production that do not vary with the number of units produced (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.3 Economies of scale and the cost advantages of large-scale production, TE1 7.3 Production: The cost function for Beautiful Cars, TESA Unit 7 The firm and its customers, ESPP 7.1 Introduction.

fixed exchange rate

A country’s exchange rate is fixed if it is managed by the central bank or the government, and either held constant over time or kept within a narrow range of values. A country in a common currency zone effectively has a permanently fixed exchange rate relative to all other countries in the zone (Macro). Introduced in Macro 7.2 Exchange rate regimes, monetary policy, and inflation. See also: exchange rate, flexible exchange rate.

fixed exchange rate regime, target exchange rate regime

In a fixed exchange rate regime (or more accurately, a target exchange rate regime), the objective of monetary policy is to hold the exchange rate constant at a particular value, or within a narrow range of values, against one or more other currencies (Macro). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment.

fixed investment, gross fixed capital formation

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 (Micro, Macro). Introduced in Macro 3.3 GDP as expenditure: The components of GDP, Macro 9.5 Investment and saving. See also: investment.

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 (Micro, Macro). Introduced in Micro Unit 2 Technology and incentives.

flexible exchange rate

A country’s exchange rate is flexible if it can change in response to trading in the foreign exchange markets, rather than being held constant by the government or central bank (Macro). Introduced in Macro 7.2 Exchange rate regimes, monetary policy, and inflation. See also: exchange rate, fixed exchange rate.

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, Micro Unit 9 Lenders and borrowers and differences in wealth, TE1 2.2 Economic models: How to see more by looking at less, TE1 10.1 Money and wealth, TE1 16.2 The job creation and destruction process, TESA 2.2 Economic models: How to see more by looking at less, TESA 10.1 Money and wealth. See also: stock.

flow variable

A quantity measured per unit of time, such as annual income or hourly wage (ESPP). Introduced in ESPP 9.2 Income, consumption, and wealth. See also: stock variable.

foreign direct investment (FDI)

Ownership and substantial control over assets in a foreign country (TE1, TESA). Introduced in TE1 18.2 Globalization and investment. See also: foreign portfolio investment.

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 (TE1, TESA). Introduced in TE1 18.2 Globalization and investment. See also: foreign direct investment.

free ride

Benefiting from the contributions of others to some cooperative project without contributing oneself (ESPP, TE1, TESA). Introduced in TE1 Unit 4 Social interactions, TE1 6.2 Other people’s money: The separation of ownership and control, TESA Unit 4 Social interactions, TESA 6.2 Other people’s money: The separation of ownership and control, ESPP 2.2 Two types of social interaction, ESPP 6.4 Other people’s money: The separation of ownership and control.

free rider, free riding, free ride

Someone who benefits from the contributions of others to some cooperative project without contributing themselves is said to be free riding, or to be a free rider (Micro, Macro). Introduced in Micro 4.1 Climate negotiations: Conflicts and common interests, Micro 6.3 Other people’s money: The separation of ownership and control, Micro 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting, Macro 9.12 Planetary limits and sustainable growth, TE1 Unit 4 Social interactions, TE1 6.2 Other people’s money: The separation of ownership and control, TESA Unit 4 Social interactions, TESA 6.2 Other people’s money: The separation of ownership and control, ESPP 2.2 Two types of social interaction, ESPP 6.4 Other people’s money: The separation of ownership and control.

frequency table

A record of how many observations in a dataset have a particular value, range of values, or belong to a particular category (DE). Introduced in DE Part 1.2 Variation in temperature over time, DE Part 1.2 Variation in temperature over time, DE Part 1.2 Variation in temperature over time, DE Part 1.2 Variation in temperature over time.

fundamental value

See: fundamental value of a share (TE1, TESA). See also: fundamental value of a share.

fundamental value of a share

The share price based on anticipated future earnings and the level of risk. The share price based on anticipated future earnings and the level of systematic risk, which can be interpreted as a measure of the benefit today of holding the asset now and in the future (ESPP, TE1, TESA). Introduced in TE1 11.5 The value of an asset: Basics, TE1 Price bubbles, TESA 11.4 The value of an asset: Basics, TESA 11.8.1 Price bubbles, ESPP 10.10 Asset market bubbles.

gains from exchange

The benefits that each party gains from a transaction compared to how they would have fared without the exchange. Also known as: gains from trade (ESPP, TE1, TESA). Introduced in TE1 5.6 Allocations imposed by force, TE1 7.7 Gains from trade, TE1 8.8 The model of perfect competition, TESA 5.6 Allocations imposed by force, TESA 7.6 Gains from trade, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela, ESPP 7.6 Gains from trade. See also: economic rent.

gains from trade, gains from exchange

The benefits that each party gains from a transaction compared to how they would have fared without the transaction (Micro, Macro). Introduced in Micro 1.8 Capitalist institutions, Micro 5.7 Case 2: A take-it-or-leave-it contract, Micro Unit 7 The firm and its customers, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, TE1 5.6 Allocations imposed by force, TE1 7.7 Gains from trade, TE1 8.8 The model of perfect competition, TESA 5.6 Allocations imposed by force, TESA 7.6 Gains from trade, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela, ESPP 7.6 Gains from trade.

game

A model of strategic interaction that describes the players, the feasible strategies, the order of play, the information that the players have, and their pay-offs. A model of strategic interaction that describes the players, the feasible strategies, the information that the players have, and their payoffs (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 4.1 Social interactions: Game theory, TESA 4.1 Social interactions: Game theory, ESPP 2.4 Social interactions as games, ESPP 6.8 Work effort and wages: The labour discipline model. See also: game theory.

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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 Unit 4 Social interactions, TESA Unit 4 Social interactions, ESPP 2.4 Social interactions as games. See also: game.

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 (Macro, TE1, TESA). Introduced in Macro 4.2 Measuring the economy: Inflation, TE1 13.8 Measuring the economy: Inflation, TESA 13.8 Measuring the economy: Inflation.

gender division of labour

The ways men and women differ in how they spend their (paid and unpaid) work time. The ways men and women differ in how they spend their work time (Micro, Macro, ESPP). Introduced in Micro 3.11 Explaining our working hours: Gender and working time, ESPP 4.10 Applying the model: Explaining differences between countries.

general equilibrium

General equilibrium analysis studies what happens in two or more markets, taking into account that what happens in one market affects, and is affected by, what happens in the other(s) (Macro). Introduced in Macro 1.9 Studying the economy as a whole: Macroeconomics. See also: partial equilibrium.

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 (TE1, TESA). Introduced in TE1 Unit 2 Technology, population, and growth, TE1 21.1 The innovation process: Invention and diffusion, TESA Unit 2 Technology, population, and growth.

geometric mean

A summary measure calculated by multiplying N numbers together and then taking the Nth root of this product. The geometric mean is useful when the items being averaged have different scoring indices or scales, because it is not sensitive to these differences, unlike the arithmetic mean. For example, if education ranged from to 2 years and life expectancy ranged from to 85 years, life expectancy would have a bigger influence on the HDI than education if we used the arithmetic mean rather than the geometric mean. Conversely, the geometric mean treats each criteria equally. Example: Suppose we use life expectancy and mean years of schooling to construct an index of wellbeing. Country A has life expectancy of 4 years and a mean of 6 years of schooling. If we used the arithmetic mean to make an index, we would get (4 + 6)/2 = 23. If we used the geometric mean, we would get (4 × 6)1/2 = 15.5. Now suppose life expectancy doubled to 8 years. The arithmetic mean would be (8 + 6)/2 = 43, and the geometric mean would be (8 × 6)1/2 = 21.9. If, instead, mean years of schooling doubled to 12 years, the arithmetic mean would be (4 + 12)/2 = 26, and the geometric mean would be (4 × 12)1/2 = 21.9. This example shows that the arithmetic mean can be ‘unfair’ because proportional changes in one variable (life expectancy) have a larger influence over the index than changes in the other variable (years of schooling). The geometric mean gives each variable the same influence over the value of the index, so doubling the value of one variable would have the same effect on the index as doubling the value of another variable (DE). Introduced in DE Part 4.1 GDP and its components as a measure of material wellbeing, DE Part 4.1 GDP and its components as a measure of material wellbeing, DE Part 4.2 The HDI as a measure of wellbeing, DE Part 4.2 The HDI as a measure of wellbeing.

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 (ESPP). Introduced in ESPP 6.4 Other people’s money: The separation of ownership and control.

Gini coefficient

A measure of inequality of a 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). It is the average difference in, say, income between every pair of individuals in the population relative to the mean income, multiplied by one-half. Other than for small populations, a close approximation to the Gini coefficient can be calculated from a Lorenz curve diagram. 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) (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 2.2 Measuring the economy: Inequality, Macro 10.4 Political preferences and electoral competition: The median voter model, TE1 5.12 Measuring economic inequality, TESA 5.12 Measuring economic inequality, ESPP 5.9 Measuring economic inequality, ESPP 8.9 Declining competition and increasing inequality in the US, DE Introduction. See also: Lorenz curve.

global financial crisis

This began in 27 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 (ESPP, TE1, TESA). Introduced in TE1 Unit 17 The Great Depression, golden age, and global financial crisis, ESPP 9.8 Borrowing may allow investing: Julia’s best hope.

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 (TE1, TESA). Introduced in TE1 20.2 Climate change. See also: abatement policy.

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 (TE1, TESA). Introduced in TE1 Unit 18 The nation and the world economy.

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 (TE1, TESA). Introduced in TE1 18.1 Globalization and deglobalization in the long run. See also: globalization.

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 (TE1, TESA). Introduced in TE1 17.3 Policymakers in the Great Depression. See also: Great Depression.

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 (TE1, TESA). Introduced in TE1 Unit 17 The Great Depression, golden age, and global financial crisis.

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’ (Micro, Macro). Introduced in Micro 3.3 Goods and preferences, Micro Unit 5 The rules of the game: Who gets what and why.

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 (Macro, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, Macro 4.4 Inflation, unemployment, and conflicting claims on output, TE1 14.2 The multiplier model, TESA 14.1 The transmission of shocks: The multiplier process. See also: aggregate demand.

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 (ESPP, TE1, TESA). Introduced in TE1 22.3 Political competition affects how the government will act, ESPP 12.5 Competition can limit political rent-seeking.

government

Within a given territory, the government is the only body that can legitimately use force (or threats of force) to control the behaviour of citizens. Also known as: the state. 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. Also known as: state (Macro, ESPP, TE1, TESA). Introduced in Macro 10.2 Government as an economic actor, TE1 22.1 The government as an economic actor, ESPP 1.4 Economic growth, ESPP 12.3 The government as an economic actor.

government bond

A financial asset where the government 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 financial instrument issued by governments that promises to pay flows of money at specific intervals (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, TE1 10.9 The central bank, the money market, and interest rates, TE1 11.5 The value of an asset: Basics, TESA 10.9 The central bank, the money market, and interest rates, TESA 11.4 The value of an asset: Basics, ESPP 10.4 Banks, profits, and the creation of money.

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) (TE1, TESA). Introduced in TE1 14.5 The multiplier model: Including the government and net exports, TESA 14.5 The multiplier model: Including the government and net exports. See also: government budget deficit, government budget surplus.

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 (Macro, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 14.5 The multiplier model: Including the government and net exports, TESA 14.5 The multiplier model: Including the government and net exports. See also: government budget balance, government budget surplus.

government budget surplus

When the government budget balance is positive (TE1, TESA). Introduced in TE1 14.5 The multiplier model: Including the government and net exports, TESA 14.5 The multiplier model: Including the government and net exports. See also: government budget balance, government budget deficit.

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 (TE1, TESA). Introduced in TE1 14.8 The government’s finances, TESA 14.8 The government’s finances.

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) (ESPP, TE1, TESA). Introduced in TE1 22.1 The government as an economic actor, ESPP 12.3 The government as an economic actor. See also: political accountability.

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 (Macro). Introduced in Macro 3.3 GDP as expenditure: The components of GDP. See also: government transfers.

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 (TE1, TESA). Introduced in Macro 3.3 GDP as expenditure: The components of GDP. See also: government transfers.

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 (Macro, TE1, TESA). Introduced in Macro 3.3 GDP as expenditure: The components of GDP, TE1 13.4 Measuring the aggregate economy: The components of GDP, TESA 13.4 Measuring the aggregate economy: The components of GDP. See also: government spending (G).

Great Depression

The period of a sharp fall in output and employment in many countries in the 193s (TE1, TESA). Introduced in TE1 14.3 Household target wealth, collateral, and consumption spending, TE1 Unit 17 The Great Depression, golden age, and global financial crisis, TESA 14.3 Household target wealth, collateral, and consumption spending.

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 (DE, TE1, TESA). Introduced in TE1 Unit 14 Unemployment and fiscal policy, TE1 15.10 Demand shocks and demand-side policies, TE1 17.1 Three economic epochs, TESA Unit 14 Unemployment and fiscal policy, TESA 15.10 Demand shocks and demand-side policies, DE Part 1: Collecting and preparing the data, DE Part 2: Links between female labour supply and the macroeconomy, DE Part 1: Collecting and preparing the data.

great recession

The prolonged recession that followed the global financial crisis of 28 (TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom.

green adjustment

Accounting adjustment made to conventional measures of national income to include the value of natural capital (TE1, TESA). Introduced in TE1 20.6 The measurement challenges of environmental policy.

green growth

Growth in GDP would be ‘green’ if output were produced using technologies based on renewable environmental resources; in particular renewable energy rather than fossil fuels (Macro). Introduced in Macro 9.12 Planetary limits and sustainable growth.

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 (TE1, TESA). Introduced in TE1 20.2 Climate change.

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. GDP combines in a single number all the output (or production) carried out by the firms, non-profit institutions, and government bodies within a government’s territory. Output of intermediate goods that are inputs to final production is excluded to prevent double counting. Household production is part of GDP if it is sold. GDP is measured monthly, quarterly, and annually. 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. A measure of the market value of the output of the economy in a given period (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.2 History’s hockey stick, Macro 3.1 The ‘great recession’: Hardship at home and at work, Macro 3.2 Measuring the aggregate economy: Gross domestic product, TE1 1.2 Measuring income and living standards, TE1 13.1 Growth and fluctuations, TESA 1.2 Measuring income and living standards, TESA Unit 13 Economic fluctuations and unemployment.

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 (ESPP). Introduced in ESPP 1.3 How did we get here? The hockey stick in real incomes.

gross income

Income net of taxes paid. Includes depreciation (ESPP, TE1, TESA). See also: income, net income.

gross unemployment benefit replacement rate

The proportion of a worker’s previous gross (pre-tax) wage that is received (gross of taxation) when unemployed (TE1, TESA). Introduced in TE1 16.9 Technological change, labour markets, and trade unions.

growth dynamics curve

The growth dynamics curve is a graph of the relationship between the growth rate in period \(t\) (on the horizontal axis) and the growth rate in period \(t+1\) (on the vertical axis). A point where the graph crosses the 45-degree line represents an equilibrium growth rate: once the economy reaches this rate of growth, it will remain there unless there is an unexpected shock (Macro). Introduced in Macro 9.8 How poor countries get stuck at low growth and how they can grow rapidly.

growth dynamics model

A growth dynamics model is an economic model of the process by which a variable changes (grows) over time, in which the growth rate in one period depends in a systematic way on the growth rate in previous periods (Macro). Introduced in Macro 9.8 How poor countries get stuck at low growth and how they can grow rapidly.

hawk-dove game

A coordination game in which the players want to coordinate on the opposite action from their opponent, and in each of the Nash equilibria, (Hawk, Dove) and (Dove, Hawk), the Hawk obtains the higher pay-off; but both players choosing Hawk is the worst outcome for both. A game in which there is conflict (when hawks meet), sharing (when doves meet), and taking (by a hawk when it meets a dove) (Micro, Macro, ESPP, TESA). Introduced in TESA 4.14 Conflicts of interest in the global climate change problem, Micro 4.14 Modelling the global climate change problem, ESPP 2.13 Conflicts of interest in the global climate change problem.

hedge finance

Financing used by firms to fulfil contractual payment obligations using cashflow. Term coined by Hyman Minsky in his Financial Instability Hypothesis (ESPP, TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom. See also: speculative finance.

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 (TE1, TESA). Introduced in TE1 20.6 The measurement challenges of environmental policy.

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. For example, the employer cannot know (or cannot verify) how hard the worker she has employed is actually working. Also known as: moral hazard (ESPP, TE1, TESA). Introduced in TE1 6.10 Principals and agents: Interactions under incomplete contracts, TE1 12.6 Missing markets: Insurance and lemons, TE1 14.5 The multiplier model: Including the government and net exports, TESA 6.10 Principals and agents: Interactions under incomplete contracts, TESA 12.5 Public goods, TESA 14.5 The multiplier model: Including the government and net exports, ESPP 6.15 Principals and agents: Interactions under incomplete contracts, ESPP 11.11 Public goods, common pool resources, and market failure. See also: hidden attributes (problem of).

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. Example: an individual purchasing health insurance knows her own health status, but the insurance company does not. Also known as: adverse selection. 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. An example is that the individual purchasing health insurance knows her own health status, but the insurance company does not. Also known as: adverse selection (ESPP, TE1, TESA). Introduced in TE1 12.6 Missing markets: Insurance and lemons, TE1 14.5 The multiplier model: Including the government and net exports, TESA 12.5 Public goods, TESA 14.5 The multiplier model: Including the government and net exports, ESPP 11.11 Public goods, common pool resources, and market failure. See also: hidden actions (problem of).

hockey stick growth

For most of history, living standards changed little from year to year. In the last two centuries, many countries have shifted to a pattern in which incomes (as measured by GDP) tend to increase year on year, at an average rate of 2% or more. This is known as hockey stick growth because the shape of the graph of GDP over time resembles an ice hockey stick: almost flat for a long period, then a sudden kink upwards. We see hockey stick growth in other variables too: for example, atmospheric carbon dioxide (Macro). Introduced in Macro 9.2 Measuring economic growth: Ratio scales and growth rates. See also: GDP.

Hodrick-Prescott (HP) filter

A mathematical tool used by macroeconomists to estimate the cyclical and trend components of time series data. Its main purpose is to fit a smooth curve (the trend) through the time series, where the trend reacts more to long-term fluctuations than to short-term fluctuations (the latter will mostly affect the cyclical component). The HP filter uses a parameter λ (‘lambda’) to dictate how sensitive this trend is to short-term fluctuations. This lambda needs to be chosen depending on the frequency of the data; popular values are λ = 6.25 for annual and λ = 16, for quarterly data (DE). Introduced in DE Part 1: Collecting and preparing the data, DE Part 2: Links between female labour supply and the macroeconomy, DE Part 1: Collecting and preparing the data.

homo economicus

Latin for ‘economic man’, used to describe an economic actor who is assumed to make decisions entirely in pursuit of their own self-interest. Latin for ‘economic man’, used to describe an economic actor who is assumed to make decisions entirely in pursuit of their own of self-interest. Latin for ‘economic man’, referring to an actor assumed to adopt behaviours based on an amoral calculation of self-interest (Micro, Macro, ESPP).

human capital

The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. Investment in human capital, through education, training, and socialization can increase the stock. Human capital is part of an individual’s endowment. 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. The stock of knowledge, skills, behavioural attributes, and personal characteristics that determine the labour productivity or labour earnings of an individual. Investment in this through education, training, and socialization can increase the stock, and such investment is one of the sources of economic growth. Part of an individual’s endowments (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 5.11 The distribution of income: Endowments, technology, and institutions, Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 6.2 Bilateral debt: Marco and Julia, TE1 10.1 Money and wealth, TE1 14.3 Household target wealth, collateral, and consumption spending, TE1 19.5 Endowments, technology, and institutions, TESA 10.1 Money and wealth, TESA 14.3 Household target wealth, collateral, and consumption spending, ESPP 9.2 Income, consumption, and wealth. See also: endowment.

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 (TE1, TESA). Introduced in TE1 18.9 Globalization and anti-globalization. See also: globalization.

hyperinflation

Economists usually define hyperinflation as a monthly inflation rate of more than 5%. In such situations, a unit of currency loses more than 99% of its real spending power within a year (Macro). Introduced in Macro 7.1 Chainsaws, government spending, and inflation, Macro 7.7 Exchange rate regimes and inflation outcomes in the world.

hypothesis test

A test in which a null (default) and an alternative hypothesis are posed about some characteristic of the population. Sample data is then used to test how likely it is that these sample data would be seen if the null hypothesis was true (DE). Introduced in DE Part 2.3 How did changing the rules of the game affect behaviour?, DE Part 2.3 How did changing the rules of the game affect behaviour?, DE Part 2.3 How did changing the rules of the game affect behaviour?, DE Part 2.3 How did changing the rules of the game affect behaviour?.

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 (TE1, TESA). Introduced in TE1 11.5 The value of an asset: Basics, TESA 11.4 The value of an asset: Basics.

impatience

A preference for consuming something sooner rather than later. Impatience may by situational (because the person has little now and will have more later); or intrinsic, in which case they would prefer to consume more now rather than the same amounts now and later. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, ESPP 9.4 Reasons to borrow: Smoothing and impatience.

imports

Goods and services produced in other countries and purchased by domestic households, firms, and the government (Macro). Introduced in Macro 3.2 Measuring the aggregate economy: Gross domestic product.

imports (M)

Goods and services produced in other countries and purchased by domestic households, firms, and the government (TE1, TESA). Introduced in Macro 3.2 Measuring the aggregate economy: Gross domestic product.

imputed rent

The rent that the owner of a house could receive from renting it to a tenant, rather than living in it (Macro). Introduced in Macro 6.11 Household investments: Housing and financial assets.

in-kind transfers

Public expenditure in the form of free or subsidized services for households rather than in the form of cash transfers (TE1, TESA). Introduced in TE1 19.10 Redistribution: Taxes and 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 (ESPP, TE1, TESA). Introduced in TE1 9.2 Measuring the economy: Employment and unemployment, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 8.2 Measuring the economy: Employment and unemployment.

incentive

An economic reward or punishment, which influences the benefits and costs of alternative courses of action. Economic reward or punishment, which influences the benefits and costs of alternative courses of action (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, Micro 5.2 Institutions and power, Micro 6.6 Getting the work done: Contracts, principals, and agents, TE1 2.3 Basic concepts: Prices, costs, and innovation rents, TE1 5.1 Institutions and power, TESA 2.3 Basic concepts: Prices, costs, and innovation rents, TESA 5.1 Institutions and power, ESPP 8.6 Wages, profits, and unemployment in the aggregate economy.

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 (TE1, TESA). Introduced in TE1 16.9 Technological change, labour markets, and trade unions.

income

In general, income refers to any flow of resources (goods, or money) that an individual (or other economic actor) receives over time. It is the amount received per period. It could include labour earnings, profits, rent from property, or interest on assets. Your income is the maximum amount that you could consume per period and leave your wealth unchanged. 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. Also known as: disposable income. The amount of profit, interest, rent, labour earnings, and other payments (including transfers from the government) received, 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. Also known as: disposable income (Macro, ESPP, TE1, TESA). Introduced in TE1 10.1 Money and wealth, TESA 10.1 Money and wealth, ESPP 9.2 Income, consumption, and wealth. See also: pre-tax income.

income, 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 (Micro). Introduced in Micro 3.2 A problem of choice and scarcity, Micro 3.12 Explaining our working hours: Differences between countries, Micro Unit 9 Lenders and borrowers and differences in wealth, TE1 10.1 Money and wealth, TESA 10.1 Money and wealth, ESPP 9.2 Income, consumption, and wealth, Macro 2.2 Measuring the economy: Inequality, TE1 1.2 Measuring income and living standards, TE1 5.12 Measuring economic inequality, TESA 1.2 Measuring income and living standards, TESA 5.12 Measuring economic inequality, ESPP 5.9 Measuring economic inequality.

income effect

The effect that an increase in income has on an individual’s demand for a good (the amount that the person chooses to buy) because it expands the feasible set of purchases. When the price of a good changes, this has an income effect because it expands or shrinks the feasible set, and it also has a substitution 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. The effect that the additional income would have if there were no change in the price or opportunity cost (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.6 Hours of work and technological progress, Micro 3.7 Income and substitution effects on hours of work and free time, Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 10.8 Scope for political rent-seeking under different political systems, TE1 3.7 Income and substitution effects on hours of work and free time, TE1 20.7 Dynamic environmental policies: Future technologies and lifestyles, TE1 22.3 Political competition affects how the government will act, TESA 3.8 Income and substitution effects on hours of work and free time, ESPP 4.9 Applying the model: Explaining changes in working hours, ESPP 8.6 Wages, profits, and unemployment in the aggregate economy. See also: substitution effect.

income elasticity of demand

The percentage change in demand that would occur in response to a 1% increase in the individual’s income (ESPP, TE1, TESA). Introduced in TE1 11.4 Prices, rent-seeking, and market dynamics at work: Oil prices, TESA 8.6 The world oil market, ESPP 7.13 The world oil market.

income net of depreciation

Disposable income minus depreciation (ESPP). Introduced in ESPP 9.2 Income, consumption, and wealth. See also: disposable income, gross income, depreciation.

incomplete contract

A contract that does not specify, in a way that can be enforced by a court, every aspect of the exchange that affects the interests of parties to the exchange (or of others). 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). 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 others) (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Micro Unit 6 The firm and its employees, Micro 6.6 Getting the work done: Contracts, principals, and agents, Micro Unit 10 Market successes and failures: The societal effects of private decisions, Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 6.3 Other people’s labour, TE1 9.12 Looking backward: Baristas and bread markets, TE1 12.4 Property rights, contracts, and market failures, TESA 6.3 Other people’s labour, TESA 9.12 Looking backward: Baristas and bread markets, TESA 12.4 Property rights, contracts, and market failures, ESPP 6.4 Other people’s money: The separation of ownership and control, ESPP 8.15 Looking backward: Baristas and bread markets, ESPP 11.10 Property rights, contracts, and market failures.

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. Also known as: economies of scale (ESPP, TE1, TESA). Introduced in TESA Unit 7 The firm and its customers, ESPP 7.1 Introduction. See also: decreasing returns to scale, constant returns to scale.

increasing returns to scale, economies of scale, increasing returns

When production exhibits increasing returns to scale, increasing all of the inputs to a production process by the same proportion increases the output by a higher proportion. 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 (Micro, Macro). Introduced in Micro Unit 2 Technology and incentives, Micro 7.3 Economies of scale and the cost advantages of large-scale production, TESA Unit 7 The firm and its customers, ESPP 7.1 Introduction, TE1 1.8 The gains from specialization, TE1 7.1 Breakfast cereal: Choosing a price, TE1 18.4 Specialization and the gains from trade among nations, TE1 21.2 Innovation systems, ESPP 11.3 Markets, specialization, and the division of labour. See also: decreasing returns to scale, constant returns to scale.

incremental innovation

Innovation that improves an existing product or process cumulatively (TE1, TESA).

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 (DE, TE1, TESA). Introduced in TESA Unit 2 Technology, population, and growth, DE Introduction.

indifference curve

A curve that joins together all the combinations of goods that provide a given level of utility to the individual. A curve of the points which indicate the combina­tions of goods that provide a given level of utility to the individual (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.3 Goods and preferences, Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 6 The firm and its employees, Micro Unit 7 The firm and its customers, Micro 9.3 Borrowing: Bringing consumption forward in time to the present, Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 3.2 Preferences, TE1 Indifference curves and the marginal rate of substitution, TESA 3.3 Preferences, TESA 3.2.1 Indifference curves and the marginal rate of substitution, ESPP 4.4 Making decisions when there are trade-offs, ESPP 9.3 Borrowing: Bringing consumption forward in time, ESPP 10.6 The business of banking and bank balance sheets.

Industrial Revolution

A wave of technological advances and organizational changes that began in Britain in the eighteenth century; it transformed an agricultural and craft-based economy into a commercial and industrial economy. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.5 The continuous technological revolution, Micro 3.9 Explaining our working hours: Changes over time, TE1 1.4 The permanent technological revolution, TE1 Unit 2 Technology, population, and growth, TESA 1.4 The permanent technological revolution, TESA Unit 2 Technology, population, and growth, ESPP 1.4 Economic growth.

industry

Goods-producing business activity: agriculture, mining, manufacturing, and construction. Manufacturing is the most important component (TE1, TESA). Introduced in TE1 16.10 Changes in institutions and policies.

inequality aversion

A preference for more equal outcomes and a dislike of outcomes in which some individuals (even if they include oneself) receive more than others. A dislike of outcomes in which some individuals receive more than others. It is considered a social preference (Micro, Macro, ESPP, TE1, TESA). Introduced in TE1 4.9 Cooperation, negotiation, conflicts of interest, and social norms, TE1 19.4 How much inequality is too much (or too little)?, TESA 4.9 Cooperation, negotiation, conflicts of interest, and social norms, ESPP 2.8 Social preferences and the public good. See also: social preferences

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 (TE1, TESA). Introduced in TE1 18.10 Trade and growth.

inferior good

A good whose consumption decreases when income increases (holding prices constant) (ESPP). Introduced in ESPP 4.9 Applying the model: Explaining changes in working hours.

inflation

An increase in the general price level in the economy, usually measured as the percentage increase in prices over the last year. An increase in the general price level in the economy. Usually measured over a year (Macro, ESPP, DE, TE1, TESA). Introduced in Macro 4.1 Cost of living crisis, TE1 13.8 Measuring the economy: Inflation, TE1 15.1 What’s wrong with inflation?, TESA 13.8 Measuring the economy: Inflation, TESA 15.1 What’s wrong with inflation?, ESPP 1.3 How did we get here? The hockey stick in real incomes, DE Part 12.1 Inequality, DE Getting started in R, DE Part 12.1 Inequality, DE Getting started in Python. See also: deflation, disinflation.

inflation-adjusted price

Price that takes into account the change in the overall price level (TE1, TESA). Introduced in TE1 Unit 20 Economics of the environment.

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. Also known as: non-accelerating rate of unemployment, stable inflation rate of unemployment (ESPP, TE1, TESA). Introduced in TE1 15.6 Expected inflation and the Phillips curve, TESA 15.6 Expected inflation and the Phillips curve. See also: equilibrium unemployment.

inflation-stabilizing unemployment rate

The unemployment rate (at supply-side equilibrium) at which inflation is constant. Originally known as the ‘natural rate’ of unemployment. Also known as: structural unemployment rate, non-accelerating rate of unemployment (NAIRU) (Macro). Introduced in Macro Unit 4 Inflation and unemployment. See also: structural unemployment.

inflation target, inflation targeting

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 (Macro). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 Unit 15 Inflation, unemployment, and monetary policy, TESA Unit 15 Inflation, unemployment, and monetary policy.

inflation targeting

Monetary policy regime where the central bank changes interest rates to influence aggregate demand in order to keep the economy close to an inflation target, which is normally specified by the government (TE1, TESA). Introduced in TE1 Unit 15 Inflation, unemployment, and monetary policy, TESA Unit 15 Inflation, unemployment, and monetary policy.

innovation

The process of invention and diffusion considered as a whole (TE1, TESA). Introduced in TE1 21.1 The innovation process: Invention and diffusion.

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 (Micro, Macro). Introduced in Micro 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, Macro 9.3 Capital goods and technology, Macro 10.7 Modelling a self-interested political elite: Rent-seeking.

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: Schumpeterian rents (TE1, TESA). Introduced in TE1 Market equilibration through rent-seeking, TE1 16.1 Technological progress and living standards, TE1 21.1 The innovation process: Invention and diffusion, TESA Unit 11 Rent-seeking, price-setting, and market dynamics, Micro 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, Macro 9.3 Capital goods and technology, Macro 10.7 Modelling a self-interested political elite: Rent-seeking.

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 (TE1, TESA). Introduced in TE1 21.1 The innovation process: Invention and diffusion.

insolvent

An entity is this if the value of its assets is less than the value of its liabilities (ESPP, TE1, TESA). Introduced in TE1 10.10 The business of banking and bank balance sheets, TESA 10.10 The business of banking and bank balance sheets, ESPP 9.8 Borrowing may allow investing: Julia’s best hope, ESPP 10.6 The business of banking and bank balance sheets. See also: solvent.

institution

An institution is a set of laws and informal rules that regulate social interactions among people, and between people and the biosphere; sometimes also termed ‘the rules of the game’. 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. The laws and social customs governing the way people interact in society (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.8 Capitalist institutions, Micro 5.2 Institutions and power, Macro 9.7 Institutions (rules of the game) and catching up, TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms, ESPP 1.4 Economic growth, ESPP 5.2 Institutions: The rules of the game.

intellectual property rights

Patents, trademarks, and copyrights (TE1, TESA). See also: patent, trademark, copyright.

interest rate

The price of bringing some spending power forward in time. The price of bringing some buying power forward in time (ESPP, TE1, TESA). Introduced in TE1 10.2 Borrowing: Bringing consumption forward in time, TESA 10.2 Borrowing: Bringing consumption forward in time, ESPP 9.3 Borrowing: Bringing consumption forward in time. See also: nominal interest rate, real interest rate.

interest rate, rate of interest

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 (Micro, Macro). Introduced in Micro 9.3 Borrowing: Bringing consumption forward in time to the present, Macro 3.8 The multiplier model: Including the government and net exports, Macro 6.2 Bilateral debt: Marco and Julia, TE1 10.2 Borrowing: Bringing consumption forward in time, TESA 10.2 Borrowing: Bringing consumption forward in time, ESPP 9.3 Borrowing: Bringing consumption forward in time. See also: nominal interest rate, real interest rate.

interest rate (short-term)

The price of borrowing base money. This is a nominal interest rate (ESPP, TE1, TESA). Introduced in TE1 10.9 The central bank, the money market, and interest rates, TESA 10.9 The central bank, the money market, and interest rates, ESPP 10.4 Banks, profits, and the creation of money, TE1 10.2 Borrowing: Bringing consumption forward in time, TESA 10.2 Borrowing: Bringing consumption forward in time, ESPP 9.3 Borrowing: Bringing consumption forward in time.

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 (TE1, TESA). Introduced in TE1 19.2. Accidents of birth: Another lens to study inequality. See also: intergenerational inequality, intergenerational mobility, intergenerational transmission of economic differences.

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 (TE1, TESA). Introduced in TE1 19.2. Accidents of birth: Another lens to study inequality. See also: intergenerational elasticity, intergenerational mobility, intergenerational transmission of economic differences.

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 (TE1, TESA). Introduced in TE1 19.2. Accidents of birth: Another lens to study inequality. See also: intergenerational elasticity, intergenerational transmission of economic differences.

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 (TE1, TESA). Introduced in TE1 19.2. Accidents of birth: Another lens to study inequality. See also: intergenerational elasticity, intergenerational mobility.

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 (Micro, Macro). Introduced in Micro 9.3 Borrowing: Bringing consumption forward in time to the present.

invention

The development of new methods of production and new products (TE1, TESA). Introduced in TE1 21.1 The innovation process: Invention and diffusion.

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 (Micro, Macro). Introduced in Macro 3.3 GDP as expenditure: The components of GDP.

inventory

Goods held by a firm prior to sale or use, including raw materials, and partially-finished or finished goods intended for sale (TE1, TESA). Introduced in TE1 13.4 Measuring the aggregate economy: The components of GDP, TESA 13.4 Measuring the aggregate economy: The components of GDP.

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) (Micro, Macro). Introduced in Macro 3.3 GDP as expenditure: The components of GDP. See also: investment, inventories.

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 (Micro, Macro). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth. See also: fixed investment, 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 (Macro, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, TE1 14.4 Investment spending, TESA 14.3 Household target wealth, collateral, and consumption spending. See also: interest rate, economic profit.

investment (I)

Expenditure on newly produced capital goods (machinery and equipment) and buildings, including new housing (ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth.

invisible hand

The invisible hand is a phrase used by Adam Smith to describe the way that markets can be a decentralized method of organizing the economy that (under the right conditions) could result in an allocation of goods and services that benefited most participants even if all of those involved were entirely self interested (Macro). Introduced in Macro 10.3 Democracy as a political institution.

invisible hand game

A game in which there is a single Nash equilibrium that is Pareto efficient may be called an 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 (Micro, Macro, ESPP). Introduced in Micro 4.3 Best responses in the rice–cassava game: Nash equilibrium, ESPP 2.5 When self-interest works: The invisible hand. See also: Nash equilibrium, Pareto efficient.

involuntary unemployment

A person is involuntarily unemployed if they are 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. 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 (Micro, Macro, ESPP). Introduced in Micro 6.11 Putting the wage-setting model to work: Wages, employment, and the rate of unemployment, Macro 1.8 Equilibrium and disequilibrium in the WS–PS model, ESPP 6.10 Why there is always involuntary unemployment, ESPP 8.6 Wages, profits, and unemployment in the aggregate economy.

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 (ESPP, TE1, TESA). Introduced in TE1 11.7 Asset market bubbles, TESA 11.6 Asset market bubbles, ESPP 10.10 Asset market bubbles.

isocost line

A line that represents all combinations of inputs that cost a given total amount. A line that represents all combinations that cost a given total amount (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, TE1 2.4 Modelling a dynamic economy: Technology and costs, TESA 2.4 Modelling a dynamic economy: Technology and costs, ESPP 6.9 The employer sets the wage to minimize the cost per unit of effort.

isoprofit curve

A curve that joins together the combinations of prices and quantities of a good that provide equal profits to a firm. A curve on which all points yield the same profit (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 6 The firm and its employees, Micro Unit 7 The firm and its customers, TESA 7.3 Profits, costs, and the isoprofit curve, ESPP 7.1 Introduction.

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 (TE1, TESA). Introduced in TE1 21.7 Optimal patents: Balancing the objectives of invention and diffusion.

jobless recovery

A macroeconomic phenomenon in which employment grows slowly (or not at all) during a post-recession economic recovery, thereby making the recovery ‘jobless’. One example is from the US, where recoveries have been jobless from the 199s onwards (DE). Introduced in DE Part 1: Collecting and preparing the data, DE Part 2: Links between female labour supply and the macroeconomy, DE Part 1: Collecting and preparing the data.

joint surplus

The sum of the economic rents of all involved in an economic interaction. The sum of the economic rents of all involved in an interaction. Also known as: gains from exchange. The sum of the economic rents of all involved in an interaction. Also known as: total gains from exchange or trade (Micro, Macro, ESPP, TE1). Introduced in Micro 5.7 Case 2: A take-it-or-leave-it contract, Micro Unit 7 The firm and its customers, TE1 5.6 Allocations imposed by force, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela.

Joule

A unit of energy or work, originally defined as the amount of energy necessary to lift a small apple vertically 1 metre (TE1, TESA).

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 (ESPP, TE1, TESA). Introduced in TE1 6.7 Wages, effort, and profits in the labour discipline model, TESA 6.7 Wages, effort, and profits in the labour discipline model, ESPP 6.8 Work effort and wages: The labour discipline model, ESPP 8.2 Measuring the economy: Employment and unemployment. See also: employment rent, efficiency wages.

labour discipline problem, labour discipline model

Employers face a labour discipline problem when they need to give employees an incentive to ensure that they work hard and well. In the labour discipline model, they do this by setting wages that include an economic rent (employment rent), which will be lost if the job is terminated (Micro, Macro). Introduced in Micro 6.9 Getting employees to work hard: The labour discipline model, Micro Unit 6 The firm and its employees, TE1 6.7 Wages, effort, and profits in the labour discipline model, TESA 6.7 Wages, effort, and profits in the labour discipline model, ESPP 6.8 Work effort and wages: The labour discipline model, ESPP 8.2 Measuring the economy: Employment and unemployment. See also: employment rent.

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. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Macro 1.3 Measuring the macroeconomy: Output, employment, unemployment, and inactivity, TE1 9.2 Measuring the economy: Employment and unemployment, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 8.2 Measuring the economy: Employment and unemployment. See also: unemployment rate, employment rate, participation rate.

labour-intensive

Making greater use of labour as an input in production as compared with machines and other inputs (TE1, TESA). See also: capital-intensive.

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 (Micro, Macro, TE1, TESA). Introduced in Micro 1.8 Capitalist institutions, TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms. See also: labour force.

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 (TE1, TESA). Introduced in TE1 9.6 Wages, profits, and unemployment in the whole economy, TESA 9.6 Wages, profits, and unemployment in the whole economy. See also: equilibrium unemployment, inflation-stabilizing rate of unemployment.

labour market matching

The way in which employers looking for additional employees (that is, with vacancies) meet people seeking a new job (TE1, TESA). Introduced in TE1 16.3 Job flows, worker flows, and the Beveridge curve.

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 (Micro, Macro). Introduced in Micro Unit 6 The firm and its employees, Micro Unit 6 The firm and its employees, Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages. See also: monopsony power

labour productivity

Total output divided by the number of hours or some other measure of labour input (ESPP, TE1, TESA). Introduced in TE1 9.4 The firm’s hiring decision, TE1 16.1 Technological progress and living standards, TESA 9.4 The firm’s hiring decision, ESPP 8.5 The product market and the price-setting curve (firms and customers).

labour productivity, productivity of labour

A measure of the effectiveness of the labour input in a production process. Typically it is total output divided by the number of units of labour (e.g. hours, or workers) used to produce it, or in other words the average product of labour (Micro, Macro). Introduced in Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, Macro 9.3 Capital goods and technology, TE1 9.4 The firm’s hiring decision, TE1 16.1 Technological progress and living standards, TESA 9.4 The firm’s hiring decision, ESPP 8.5 The product market and the price-setting curve (firms and customers).

Law of One Price, 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 (Micro, Macro, TE1, TESA). Introduced in Micro 8.10 Supply, demand, and competitive equilibrium: Is this a good model?, TE1 8.8 The model of perfect competition, TE1 TE1, TE1 18.1 Globalization and deglobalization in the long run, TE1 Unit 21 Innovation, information, and the networked economy, TESA Unit 11 Rent-seeking, price-setting, and market dynamics. See also: arbitrage.

learning by doing

This occurs when the output per unit of inputs increases with greater experience in producing a good or service (TE1, TESA). Introduced in TE1 18.10 Trade and growth, TE1 20.7 Dynamic environmental policies: Future technologies and lifestyles.

legal tender

Coins or banknotes that, according to the law, must be accepted in payment for goods and services. Coins or banknotes that must be accepted in payment of a debt (Macro, TE1, TESA). Introduced in Macro 6.6 Introducing the central bank.

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. Also known as: market interest rate. 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 the markup or spread on commercial lending. Also known as: market interest rate (ESPP, TE1, TESA). Introduced in TE1 10.9 The central bank, the money market, and interest rates, TE1 15.8 Monetary policy, TESA 10.9 The central bank, the money market, and interest rates, TESA 15.8 Monetary policy, ESPP 10.4 Banks, profits, and the creation of money. See also: interest rate, policy 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 (TE1, TESA). Introduced in TE1 18.10 Trade and growth.

leverage

See: leverage ratio (TE1, TESA). See also: leverage ratio.

leverage, gearing, leverage ratio

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 (Macro). Introduced in Macro 6.10 Businesses: Capital and the magic (and risks) of leverage, Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption.

leverage ratio (for banks or households)

The value of assets divided by the equity stake in those assets. The value of assets divided by the equity stake (capital contributed by owners and shareholders) in those assets (ESPP, DE, TE1, TESA). Introduced in TE1 10.10 The business of banking and bank balance sheets, TE1 17.8 Before the financial crisis: Households, banks, and the credit boom, TESA 10.10 The business of banking and bank balance sheets, ESPP 10.6 The business of banking and bank balance sheets, DE 10. Characteristics of banking systems around the world Working in Excel, DE Part 10.1 Summarizing the data, DE Part 10.1 Summarizing the data, DE Part 10.1 Summarizing the data.

leverage ratio (for non-bank companies)

The value of total liabilities divided by total assets (DE, TE1, TESA).

liability

A debt; an amount that is owed, with a contractual obligation to repay it in future. Anything of value that is owed (Macro, ESPP, TE1, TESA). Introduced in Macro 6.2 Bilateral debt: Marco and Julia, Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 10.7 Assets, liabilities, and net worth, TESA 10.7 Assets, liabilities, and net worth, ESPP 9.8 Borrowing may allow investing: Julia’s best hope. See also: balance sheet, asset.

life cycle model of consumption

A model of consumption spending in which individuals’ current consumption depends not only on their current income, but also on their expected future income, and their assets, allowing for savings and debts (Macro). Introduced in Macro 3.9 Why is consumption relatively smooth?, Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption.

Likert scale

A numerical scale (usually ranging from 1–5 or 1–7) used to measure attitudes or opinions, with each number representing the individual’s level of agreement or disagreement with a particular statement (DE). Introduced in DE Part 11.1 Summarizing the data, DE Getting started in R, DE Learning objectives for this part, DE Getting started in Python.

limit order

An announced price and quantity combination for an asset, either to be sold or bought (TE1, TESA). Introduced in TE1 11.6 Changing supply and demand for financial assets, TESA 11.5 Changing supply and demand for financial assets.

linear regression line

The best-fitting line through a set of data (TE1, TESA). Introduced in TE1 Unit 13 Economic fluctuations and unemployment, TESA Unit 13 Economic fluctuations and unemployment.

liquid

See: liquidity (TE1, TESA). See also: liquidity.

liquidity

Ease of buying or selling a financial asset at a predictable price (ESPP, TE1, TESA). Introduced in TE1 10.10 The business of banking and bank balance sheets, TESA 10.10 The business of banking and bank balance sheets, ESPP 10.6 The business of banking and bank balance sheets.

liquidity, liquid, illiquid

An asset is described as liquid if it can easily be sold (exchanged for money). Savings at a commercial bank are highly liquid if you can instantly withdraw them in cash, but less so if you have to give notice to the bank several weeks or months before a withdrawal. Housing is a relatively illiquid asset (that is, not liquid): it can take months or even years to complete the sale of a house (Macro). Introduced in Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets, Macro 8.1 Collapse of Lehman Brothers (2007–2009), TE1 10.10 The business of banking and bank balance sheets, TESA 10.10 The business of banking and bank balance sheets, ESPP 10.6 The business of banking and bank balance sheets.

liquidity risk

The risk that an asset cannot be exchanged for cash rapidly enough to prevent a financial loss (ESPP, TE1, TESA). Introduced in TE1 10.8 Banks, money, and the central bank, TE1 17.11 The role of banks in the crisis, TESA 10.8 Banks, money, and the central bank, ESPP 10.4 Banks, profits, and the creation of money.

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 (TE1, TESA). Introduced in TE1 21.4 Economies of scale and winner-take-all competition.

log scale

(TE1). See also: ratio scale

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 (DE, TE1, TESA). Introduced in TE1 13.1 Growth and fluctuations, TESA Unit 13 Economic fluctuations and unemployment.

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 (Micro, Macro). Introduced in Micro 7.4 Production and costs: The cost function for Beautiful Cars, Micro 8.7 Short-run and long-run equilibria.

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 (TE1, TESA). Introduced in TE1 11.3 Short-run and long-run equilibria, TESA 11.3 Short-run and long-run equilibria.

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 (TE1, TESA). Introduced in TE1 14.10 Aggregate demand and unemployment, TE1 16.6 Technological change and income inequality, TESA 14.10 Aggregate demand and unemployment, Micro 7.4 Production and costs: The cost function for Beautiful Cars, Micro 8.7 Short-run and long-run equilibria. See also: technology, institution, short run (model), medium run (model).

Lorenz curve

A graphical representation of the inequality of some quantity such as income or wealth. Taking income as an example, individuals in the population are arranged in ascending order of income. First we calculate the total income of the population. Then for each level of income, we plot the percentage of total income held by people at this income level or lower, against the percentage of people at this income level or lower. The area between the Lorenz curve and the 45-degree line, expressed as a fraction of the total area below the 45-degree line, is a measure of inequality. Other than for small populations, it is a close approximation to the Gini coefficient. 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 (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Macro 2.2 Measuring the economy: Inequality, TE1 5.12 Measuring economic inequality, TESA 5.12 Measuring economic inequality, ESPP 5.9 Measuring economic inequality, ESPP 8.9 Declining competition and increasing inequality in the US, DE Introduction. See also: Gini coefficient.

low capacity utilization

When a firm or economy could increase output by increasing employment utilizing the existing capital goods (TE1, TESA).

macroeconomics

Macroeconomics is the study of the economy as a whole, and how the outcomes in one part of the economy affect, and are affected by, what happens in others. So that macroeconomic models are manageable, we typically simplify them by focusing on totals and averages—for example, total employment, or average prices—and ignoring some of the variability among people, firms, and goods (Macro). Introduced in Macro 1.9 Studying the economy as a whole: Macroeconomics.

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 (Micro, Macro). Introduced in Micro 3.3 Goods and preferences.

marginal cost

The increase in total cost when one additional unit of output is produced. It corresponds to the slope of the total cost function at each point. The addition to total costs associated with producing one additional unit of output. The effect on total cost of producing one additional unit of output. It corresponds to the slope of the total cost function at each point (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.4 Production and costs: The cost function for Beautiful Cars, Micro 8.2 Buying and selling: Demand, supply, and the market-clearing price, Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, TE1 7.3 Production: The cost function for Beautiful Cars, TE1 8.2 The market and the equilibrium price, TE1 Marginal revenue and marginal cost, TESA 7.3 Profits, costs, and the isoprofit curve, TESA 8.2 The market and the equilibrium price, TESA 7.6.1 Marginal revenue and marginal cost, ESPP 7.6 Gains from trade, ESPP 8.5 The product market and the price-setting curve (firms and customers).

marginal external benefit, MEB

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 (Micro, Macro).

marginal external cost, MEC, marginal external cost (MEC)

The marginal external cost (MEC) is the cost of an additional unit of output that is incurred by someone other than the producer (or the sum of these costs if several others are affected). The marginal social cost is the sum of the MEC and the marginal private cost to the producer: MSC = MEC + MPC. The cost of producing an additional unit of a good that is incurred by anyone other than the producer of the good (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 12.1 Market failure: External effects of pollution, TESA 12.1 Market failure: External effects of pollution, ESPP 11.7 Market failure: External effects of pollution. See also: marginal private cost, marginal social cost.

marginal private benefit, MPB, marginal private benefit (MPB)

The benefit for a producer or consumer of producing or consuming an additional unit of a good. It is called the marginal private benefit, or MPB, to emphasise that it doesn’t include any external benefits conferred on others. 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.  (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, Macro 10.4 Political preferences and electoral competition: The median voter model, TE1 12.2 External effects and bargaining, TESA 12.2 External effects and bargaining, ESPP 11.8 External effects and private bargaining. See also: marginal external benefit, marginal social benefit.

marginal private cost, MPC, marginal private cost (MPC)

The cost for the producer of producing an additional unit of output. It is called the marginal private cost, or MPC (rather than simply the marginal cost) when we want to emphasise that it doesn’t include any external costs that production imposes on others. The cost for the producer of producing an additional unit of a good, not taking into account any costs its production imposes on others (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 12.1 Market failure: External effects of pollution, TESA 12.1 Market failure: External effects of pollution, ESPP 11.7 Market failure: External effects of pollution. See also: marginal external cost, marginal social cost.

marginal product

The marginal product of an input to production (for example, the marginal product of labour) is the additional amount of output produced in response to a 1-unit increase in the input. The additional amount of output that is produced if a particular input was increased by one unit, while holding all other inputs constant (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 5 The rules of the game: Who gets what and why, TE1 3.1 Labour and production, TE1 Average and marginal productivity, TESA 3.2 Labour and production, TESA 3.1.1 Average and marginal productivity, ESPP 4.4 Making decisions when there are trade-offs.

marginal product of labour

The additional amount of output that is produced if if the amount of labour employed was increased by one unit, while holding all other inputs constant (TESA).

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 (TE1, TESA). Introduced in TE1 20.7 Dynamic environmental policies: Future technologies and lifestyles. See also: marginal rate of transformation, feasible frontier.

marginal propensity to consume (MPC)

The change in consumption when disposable income changes by one unit (Macro, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, Macro 8.1 Collapse of Lehman Brothers (2007–2009), TE1 14.2 The multiplier model, TESA 14.1 The transmission of shocks: The multiplier process.

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 (Macro, TE1, TESA). Introduced in Macro 3.8 The multiplier model: Including the government and net exports, TE1 14.5 The multiplier model: Including the government and net exports, TESA 14.5 The multiplier model: Including the government and net exports.

marginal rate of substitution (MRS)

The trade-off that a person is willing to make between two goods. At any point, the MRS is the absolute value of the slope of the indifference curve. The trade-off that a person is willing to make between two goods. At any point, this is the slope of the indifference curve (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.3 Goods and preferences, Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 7 The firm and its customers, Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 3.2 Preferences, TE1 5.4 A model of choice and conflict, TE1 7.1 Breakfast cereal: Choosing a price, TE1 The marginal rate of substitution, TESA 3.3 Preferences, TESA 5.4 A model of choice and conflict, TESA 7.3 Profits, costs, and the isoprofit curve, TESA 3.2.1 Indifference curves and the marginal rate of substitution, ESPP 4.4 Making decisions when there are trade-offs, ESPP 5.3 Production and distribution: Using a model, ESPP 6.9 The employer sets the wage to minimize the cost per unit of effort, ESPP 7.5 The isoprofit curves and the demand curve, ESPP 10.6 The business of banking and bank balance sheets. See also: marginal rate of transformation.

marginal rate of transformation (MRT)

The quantity of a good that must be sacrificed to acquire one additional unit of another good. At any point, it is the absolute value of the slope of the feasible frontier. 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. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.4 The feasible set, Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 7 The firm and its customers, Micro 9.3 Borrowing: Bringing consumption forward in time to the present, Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 3.4 The feasible set, TE1 5.4 A model of choice and conflict, TE1 7.1 Breakfast cereal: Choosing a price, TE1 Calculating the marginal rate of transformation, TESA 3.5 The feasible set, TESA 5.4 A model of choice and conflict, TESA 7.3 Profits, costs, and the isoprofit curve, TESA 3.4.1 Marginal rate of transformation, ESPP 4.6 The feasible set, ESPP 5.3 Production and distribution: Using a model, ESPP 6.9 The employer sets the wage to minimize the cost per unit of effort, ESPP 7.5 The isoprofit curves and the demand curve, ESPP 9.3 Borrowing: Bringing consumption forward in time, ESPP 10.6 The business of banking and bank balance sheets. See also: marginal rate of substitution.

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 (Micro, Macro, TE1, TESA). Introduced in Micro 7.5 Demand, elasticity, and revenue, TE1 7.5 Setting price and quantity to maximize profit, TE1 Marginal revenue and marginal cost, TESA 7.3 Profits, costs, and the isoprofit curve, TESA 7.6.1 Marginal revenue and marginal cost.

marginal social benefit, MSB, marginal social benefit (MSB)

The marginal social benefit (MSB) is the benefit of the production or consumption of an additional unit of a good, including both the benefit for the producer or consumer (marginal private benefit) and the benefits conferred on others. MSB = MPB + MEB. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, Micro Unit 10 Market successes and failures: The societal effects of private decisions, Macro 8.12 Prudential policies to address fundamental uncertainty about environmental tipping points, TE1 12.2 External effects and bargaining, TESA 12.2 External effects and bargaining, ESPP 11.8 External effects and private bargaining.

marginal social cost, MSC, marginal social cost (MSC)

The marginal social cost (MSC) is the cost of producing an additional unit of output, including both the cost for the producer (marginal private cost) and the costs imposed on others (the MEC). MSC = MPC + MEC. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, Macro 8.12 Prudential policies to address fundamental uncertainty about environmental tipping points, TE1 12.1 Market failure: External effects of pollution, TESA 12.1 Market failure: External effects of pollution, ESPP 11.7 Market failure: External effects of pollution.

marginal utility

The additional utility resulting from a one-unit increase in the amount of a good. The additional utility resulting from a one-unit increase of a given variable (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.3 Goods and preferences, Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 5 The rules of the game: Who gets what and why, Micro 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1 8.2 The market and the equilibrium price, TESA 8.2 The market and the equilibrium price, ESPP 7.9 Buying and selling: Demand and supply in a competitive market.

market

A market enables people to exchange goods and services by means of directly reciprocated transfers (unlike gifts), voluntarily entered into for mutual benefit (unlike theft, taxation), in a way that is often impersonal (unlike transfers among friends, family). 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). A market is a way of connecting people who may mutually benefit by exchanging goods or services through a process of buying and selling (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.8 Capitalist institutions, ESPP 1.4 Economic growth.

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 (TE1, TESA). Introduced in TE1 11.5 The value of an asset: Basics, TESA 11.4 The value of an asset: Basics.

market clearing

A market clears when the amount of the good supplied is equal to the amount demanded (Micro, Macro).

market-clearing price

The price at which the amount of the good demanded is equal to the amount supplied. At this price there is no excess supply or excess demand (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1 8.2 The market and the equilibrium price, TESA 8.2 The market and the equilibrium price, ESPP 7.9 Buying and selling: Demand and supply in a competitive market. See also: equilibrium.

market failure

If the allocation resulting from market interactions is not Pareto efficient, we describe the situation as a market failure. The term may be used loosely to refer to any interaction resulting in a Pareto-inefficient allocation, whether or not a specific market is concerned. When markets allocate resources in a Pareto-inefficient way (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 10.1 Bananas, fish, and cancer, Micro Unit 10 Market successes and failures: The societal effects of private decisions, Macro 10.2 Government as an economic actor, TE1 Unit 12 Markets, efficiency, and public policy, TE1 22.1 The government as an economic actor, TESA 7.9 Price-setting, market power, and public policy, TESA Unit 12 Markets, efficiency, and public policy, ESPP 7.6 Gains from trade, ESPP 10.13 The role of banks in the crisis, ESPP 11.1 Introduction, ESPP 12.3 The government as an economic actor.

market income

Market income is income before the payment of taxes or the receipt of transfers from the government; it includes earnings (wages and salaries from employment) as well as income from self-employment and from the ownership of assets (interest, rents, or dividends) (Macro). Introduced in Macro 2.2 Measuring the economy: Inequality. See also: disposable income.

market power

A firm has market power if it 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). 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) (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, Micro Unit 7 The firm and its customers, TE1 7.10 Price-setting, competition, and market power, TESA 7.9 Price-setting, market power, and public policy, ESPP 7.6 Gains from trade.

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 (Micro, Macro). Introduced in Micro 7.1 Winning brands, Micro Unit 7 The firm and its customers.

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 (Micro, Macro, TE1, TESA). Introduced in Micro 6.4 Finding jobs and filling vacancies, Macro 1.6 Wage setting and unemployment (WS curve), TE1 21.5 Matching (two-sided) markets.

maturity

The maturity of a debt—such as a bond, or mortgage—is the date at which the loan must be fully repaid (Macro). Introduced in Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets.

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). Also known as: liquidity 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). Also known as: liquidity transformation (ESPP, TE1, TESA). Introduced in TE1 10.8 Banks, money, and the central bank, TESA 10.8 Banks, money, and the central bank, ESPP 10.4 Banks, profits, and the creation of money.

mean

A summary statistic for a set of observations, calculated by adding all values in the set and dividing by the number of observations (ESPP, DE). Introduced in ESPP 1.3 How did we get here? The hockey stick in real incomes, DE Part 2.2 Describing the data, DE Part 2.1 Collecting data by playing a public goods game, DE 2. Collecting and analysing data from experiments Working in Google Sheets, DE Part 2.1 Collecting data by playing a public goods game.

means of exchange

One of the characteristics of money is that it serves as a means of exchange: something that buyers and sellers are willing to exchange for goods and services (Macro). Introduced in Macro 6.5 Introducing money.

median

When a set of observations is arranged in order, the median is in the middle: half of the observations are above it, and half below. (More precisely, if the number of observations is odd, the median is the value of middle observation; if the number of obeservations is even, the median is the value halfway between the two middle observations.) 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: 5th percentile (Macro, ESPP, DE). Introduced in Macro 1.4 Measuring the macroeconomy: Nominal wages, prices, and real wages, Macro 9.9 Growth transitions, Macro 10.4 Political preferences and electoral competition: The median voter model, ESPP 1.3 How did we get here? The hockey stick in real incomes.

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 (TE1, TESA). See also: median voter model.

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 (TE1, TESA). Introduced in TE1 22.5 Democracy as a political institution. See also: 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 (TE1, TESA). Introduced in TE1 14.10 Aggregate demand and unemployment, TE1 16.9 Technological change, labour markets, and trade unions, TESA 14.10 Aggregate demand and unemployment. See also: capital, technology, institution, short run (model), long run (model).

menu costs

The resources used in setting and changing prices (Macro, TE1, TESA). Introduced in Macro Unit 4 Inflation and unemployment, TE1 15.1 What’s wrong with inflation?, TESA 15.1 What’s wrong with inflation?.

merchandise trade

Trade in tangible products that are physically shipped across borders (TE1, TESA). Introduced in TE1 18.1 Globalization and deglobalization in the long run.

merit good

A good or service that should be available to everyone on moral grounds, irrespective of their ability to pay (Micro, Macro). Introduced in Micro 10.11 The limits of markets, Macro 10.2 Government as an economic actor.

merit goods

Goods and services that should be available to everyone, independently of their ability to pay (ESPP, TE1, TESA). Introduced in TE1 12.8 The limits of markets, TE1 20.6 The measurement challenges of environmental policy, TESA 12.8 The limits of markets, ESPP 12.2 The limits of markets: Repugnant markets and merit goods, Micro 10.11 The limits of markets, Macro 10.2 Government as an economic actor.

microeconomics

Microeconomics is the study of the economic interactions between individual decision makers—consumers, firm owners, employers, employees, borrowers, and lenders—and the particular markets within which they buy and sell goods and services. It is concerned with understanding and explaining what we observe in specific markets, rather than the links between different parts of the economy (Macro). Introduced in Macro 1.9 Studying the economy as a whole: Macroeconomics.

minimum acceptable offer

In the ultimatum game, the smallest offer by the Proposer that will not be rejected by the Responder. More generally in bargaining situations, it is the least favourable offer that would be accepted. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro 10.3 Solving the problem: Private bargaining and property rights, TE1 4.10 Dividing a pie (or leaving it on the table), TE1 12.2 External effects and bargaining, TESA 4.10 Dividing a pie (or leaving it on the table), TESA 12.2 External effects and bargaining, ESPP 11.8 External effects and private bargaining.

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 (Micro, Macro). Introduced in Micro Unit 6 The firm and its employees.

missing market

When there is no market within which a potentially beneficial exchange or trade could occur, because of asymmetric or non-verifiable information, we say that the market for the good is missing. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, Micro 10.10 Asymmetric information: Hidden attributes and adverse selection, TE1 12.4 Property rights, contracts, and market failures, TESA 12.4 Property rights, contracts, and market failures, ESPP 11.10 Property rights, contracts, and market failures.

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 (TE1, TESA). Introduced in TE1 11.7 Asset market bubbles, TESA 11.6 Asset market bubbles.

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 (Macro, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro 6.6 Introducing the central bank, Macro 7.1 Chainsaws, government spending, and inflation, TE1 9.7 How changes in demand for goods and services affect unemployment, TE1 14.4 Investment spending, TESA 9.7 How changes in demand for goods and services affect unemployment, TESA 14.3 Household target wealth, collateral, and consumption spending. See also: quantitative easing.

money

Money is something that acts as a store of value and is widely accepted as a means of exchange. Typically it is also used as the unit of account, for measuring the value of goods and services, and assets and liabilities. Some commodities can be used as money, but in a modern economy money in the hands of the public consists of commercial bank deposits and currency (notes and coins) issued by the central bank. 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 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. 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 accepted as payment because others can use it for the same purpose (Macro, ESPP, TE1, TESA). Introduced in Macro 6.5 Introducing money, TE1 10.1 Money and wealth, TESA 10.1 Money and wealth, ESPP 10.3 Money and banks. See also: means of exchange, store of value.

money wage

The amount of money an employer pays to a worker. Also known as: nominal wage (TE1, TESA).

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 (ESPP, TESA). Introduced in TESA 7.9 Price-setting, market power, and public policy, ESPP 7.6 Gains from trade.

monopolized market

Market in which a single firm produces all the goods that are sold (TE1, TESA).

monopoly

A firm that is the only seller of a product without close substitutes. Also refers to a market with only one seller (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, TE1 1.10 Varieties of capitalism: Institutions, government, and the economy, TE1 7.10 Price-setting, competition, and market power, TESA 7.9 Price-setting, market power, and public policy, ESPP 1.4 Economic growth, ESPP 7.6 Gains from trade. See also: monopoly power, natural monopoly.

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 (ESPP, TE1, TESA). See also: monopoly.

monopoly rents

A form of profits, which arise due to restricted competition in selling a firm’s product. A form of economic profits, which arise due to restricted competition in selling a firm’s product (ESPP, TE1, TESA). Introduced in TE1 7.10 Price-setting, competition, and market power, TESA 7.9 Price-setting, market power, and public policy, ESPP 7.6 Gains from trade. See also: economic profit.

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 (Micro, Macro). Introduced in Micro Unit 6 The firm and its employees.

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 (ESPP, TE1, TESA). Introduced in TE1 12.6 Missing markets: Insurance and lemons, TE1 14.5 The multiplier model: Including the government and net exports, TESA 12.5 Public goods, TESA 14.5 The multiplier model: Including the government and net exports, ESPP 11.11 Public goods, common pool resources, and market failure. See also: hidden actions (problem of), incomplete contract, too big to fail.

moral hazard, hidden actions

If there is a conflict of interest between a principal and an agent over the agent taking some action that cannot be observed or cannot be verified by a court, then the principal faces a problem of hidden actions; also known as moral hazard (Micro, Macro). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, Micro Unit 10 Market successes and failures: The societal effects of private decisions, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro 6.10 Businesses: Capital and the magic (and risks) of leverage, TE1 12.6 Missing markets: Insurance and lemons, TE1 14.5 The multiplier model: Including the government and net exports, TESA 12.5 Public goods, TESA 14.5 The multiplier model: Including the government and net exports, ESPP 11.11 Public goods, common pool resources, and market failure.

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 (TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom. See also: collateral.

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 (Macro, ESPP, TE1, TESA). Introduced in Macro 6.4 Introducing a bank, TE1 10.8 Banks, money, and the central bank, TE1 14.3 Household target wealth, collateral, and consumption spending, TESA 10.8 Banks, money, and the central bank, TESA 14.3 Household target wealth, collateral, and consumption spending, ESPP 10.4 Banks, profits, and the creation of money. See also: collateral.

multiplier

See: fiscal multiplier (TE1, TESA). See also: fiscal multiplier.

multiplier model

A model of aggregate demand that includes the multiplier process (Macro, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, Macro 3.7 The multiplier model: Aggregate demand shocks cause business cycle fluctuations, Macro 4.7 The business cycle model: Aggregate demand, the supply side, and inflation, TE1 14.2 The multiplier model, TESA 14.1 The transmission of shocks: The multiplier process. See also: fiscal multiplier, 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 (Macro, TE1, TESA). Introduced in Macro Unit 3 Aggregate demand and the multiplier model, Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 14.1 The transmission of shocks: The multiplier process, TESA 14.1 The transmission of shocks: The multiplier process. See also: fiscal multiplier, multiplier model.

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) (ESPP). Introduced in ESPP 9.8 Borrowing may allow investing: Julia’s best hope.

Nash equilibrium

A Nash equilibrium is an economic outcome where none of the individuals involved could bring about an outcome they prefer by unilaterally changing their own action. More formally, in game theory it is defined as 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. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 4.3 Best responses in the rice–cassava game: Nash equilibrium, Micro 6.9 Getting employees to work hard: The labour discipline model, Micro 7.10 Markets with few firms: Strategic price setting, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, Macro 2.4 Labour market policies to address structural unemployment and inequality, Macro 3.11 Why is investment volatile?, Macro 10.4 Political preferences and electoral competition: The median voter model, Macro 10.12 Economic infeasibility, TE1 4.13 Social interactions: Conflicts in the choice among Nash equilibria, TE1 6.6 Work and wages: The labour discipline model, TE1 8.2 The market and the equilibrium price, TE1 9.3 The wage-setting curve: Employment and real wages, TE1 13.7 Why is investment volatile?, TE1 22.5 Democracy as a political institution, TESA 4.13 Social interactions: Conflicts in the choice among Nash equilibria, TESA 6.6 Work and wages: The labour discipline model, TESA 8.2 The market and the equilibrium price, TESA 9.2 Measuring the economy: Employment and unemployment, TESA 13.7 Why is investment volatile?, ESPP 2.11 Predicting economic outcomes: A Nash equilibrium, ESPP 3.8 Implementing public policies, ESPP 6.8 Work effort and wages: The labour discipline model, ESPP 7.9 Buying and selling: Demand and supply in a competitive market, ESPP 8.6 Wages, profits, and unemployment in the aggregate economy. See also: game theory.

national accounts

The system used for measuring overall output and expenditure in a country (Macro, TE1, TESA). Introduced in Macro 3.2 Measuring the aggregate economy: Gross domestic product, TE1 13.3 Measuring the aggregate economy, TESA 13.3 Measuring the aggregate economy.

natural experiment

An empirical study that exploits a difference in the conditions affecting two populations (or two economies), that has occurred for external reasons: for example, differences in laws, policies, or weather. Comparing outcomes for the two populations gives us useful information about the effect of the conditions, provided that the difference in conditions was caused by a random event. But it would not help, for example, in the case of a difference in policy that occurred as a response to something else that might affect the outcome. 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 (Micro, Macro, ESPP, DE, TE1, TESA). Introduced in Micro 1.10 Capitalism, causation, and history’s hockey stick, Micro Unit 6 The firm and its employees, Macro 5.1 ‘It’s the economy, stupid’: Government popularity, inflation, and unemployment, Macro 5.7 The size of the multiplier and the impact of fiscal policy, Macro 10.1 Women’s right to vote and the reduction in child mortality in the United States, TE1 1.9 Capitalism, causation and history’s hockey stick, TE1 6.4 Employment rents, TE1 14.7 The multiplier and economic policymaking, TESA 1.8 Capitalism, causation and history’s hockey stick, TESA 6.4 Employment rents, TESA 14.7 The multiplier and economic policymaking, ESPP 1.8 Capitalism and growth: Cause and effect?, ESPP 3.1 Introduction, ESPP 6.7 Employment rents, ESPP 12.5 Competition can limit political rent-seeking, DE Part 1.3 Carbon emissions and the environment, DE Part 1.2 Variation in temperature over time, DE Part 1.3 Carbon emissions and the environment, DE Part 1.3 Carbon emissions and the environment, DE Introduction.

natural logarithm

See: logarithmic scale (DE, TE1, TESA). See also: logarithmic scale.

natural monopoly

A production process in which the average cost curve is sufficiently downward-sloping, even in the long run, that a single firm can supply the whole market at lower average cost than two firms, making it impossible to sustain competition. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.11 Firms and markets with decreasing long-run average costs, TE1 7.12 Prices, costs, and market failure, TE1 22.1 The government as an economic actor, TESA 7.11 Prices, costs, and market failure, ESPP 12.3 The government as an economic actor.

negative feedback

Feedback that counteracts (pushes back against) movement away from equilibrium (Macro). Introduced in Macro 8.2 Tipping points, instability, and lock-in.

negative feedback (process)

We say that negative feedback occurs if an initial change sets in motion a process of further changes that dampen the original change. A process whereby some initial change sets in motion a process that dampens the initial change (Macro, ESPP, TE1, TESA). Introduced in TE1 14.5 The multiplier model: Including the government and net exports, TE1 17.9 Modelling housing bubbles, TESA 14.5 The multiplier model: Including the government and net exports, Macro 8.2 Tipping points, instability, and lock-in. See also: positive feedback (process).

net capital flows

The borrowing and lending tracked by the current account (TE1, TESA). Introduced in TE1 18.2 Globalization and investment. See also: current account, current account deficit, current account surplus.

net income

Gross income minus depreciation (ESPP, TE1, TESA). Introduced in TE1 10.1 Money and wealth, TESA 10.1 Money and wealth. See also: income, gross income, depreciation.

net present value

The net present value of a project that will generate income at some time in the future is the present value of the stream of income, minus the present value of the associated costs (whether the costs are incurred in the present or the future). The present value of a stream of future income minus the associated costs (whether the costs are in the present or the future) (Macro, ESPP, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment. See also: present value.

net worth

The net worth (or equivalently, wealth) of an individual, household, or organization is the difference between the total value of its assets and the total value of its liabilities. Assets less liabilities (Micro, Macro, ESPP, TE1, TESA). Introduced in Macro 6.2 Bilateral debt: Marco and Julia, Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 10.7 Assets, liabilities, and net worth, TESA 10.7 Assets, liabilities, and net worth, ESPP 9.8 Borrowing may allow investing: Julia’s best hope. See also: balance sheet, equity.

network economies of scale

A firm experiences network economies of scale when an increase in the number of users of an output of the firm implies an increase in the value of the output to each of them, because they are connected to each other. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.3 Economies of scale and the cost advantages of large-scale production, TE1 7.1 Breakfast cereal: Choosing a price, TESA Unit 7 The firm and its customers, ESPP 7.1 Introduction.

network external effects

An external effect of one person’s action on another, occuring because the two are connected in a network (TE1, TESA). Introduced in TE1 21.4 Economies of scale and winner-take-all competition. See also: external effect.

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 (TE1, TESA). Introduced in TE1 17.3 Policymakers in the Great Depression.

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 (Micro, Macro). Introduced in Micro 6.9 Getting employees to work hard: The labour discipline model. See also: no-shirking wage

no-shirking wage

The wage that is just sufficient to motivate a worker to provide effort at the level specified by their employer (Micro, Macro). Introduced in Micro 6.9 Getting employees to work hard: The labour discipline model, Micro Unit 6 The firm and its employees, Macro 1.6 Wage setting and unemployment (WS curve). See also: no-shirking condition

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 (Macro). Introduced in Macro 5.14 Monetary policy and the exchange rate, Macro 7.2 Exchange rate regimes, monetary policy, and inflation. See also: real exchange rate.

nominal interest rate

An interest rate is nominal if it is not corrected for inflation. The rates quoted by high-street banks on loans and savings accounts are nominal interest rates. 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. The interest rate uncorrected for inflation. It is the interest rate quoted by high-street banks (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 9.3 Borrowing: Bringing consumption forward in time to the present, Macro Unit 4 Inflation and unemployment, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 15.1 What’s wrong with inflation?, TESA 15.1 What’s wrong with inflation?, ESPP 9.6 Storing or lending allows smoothing and moving consumption to the future, ESPP 10.2 Assets, money, banks, and the financial system. See also: real interest rate, interest rate.

nominal wage

The actual amount received in payment for work, per unit of time, expressed in a particular currency. Also known as: money wage. The actual amount received in payment for work, in a particular currency. Also known as: money wage. The actual amount received in payment for work, in a particular currency. Also known as: money wage (Macro, ESPP, DE, TE1, TESA). Introduced in Macro 1.4 Measuring the macroeconomy: Nominal wages, prices, and real wages, Macro Unit 4 Inflation and unemployment, TE1 Unit 9 The labour market: Wages, profits, and unemployment, TESA Unit 9 The labour market: Wages, profits, and unemployment, ESPP 8.5 The product market and the price-setting curve (firms and customers). See also: real wage.

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 (TE1, TESA). Introduced in TE1 19.8 Predistribution, TE1 21.2 Innovation systems.

non-excludable, non-excludability

A good is non-excludable if it is impossible to prevent anyone from having access to it (Micro, Macro).

non-excludable public good

A public good for which it is impossible to exclude anyone from having access (ESPP, TE1, TESA). Introduced in TE1 12.5 Public goods, TESA 12.5 Public goods. See also: artificially scarce good.

non-rival good

A good that, if available to anyone, is available to everyone at no additional cost (ESPP, TE1, TESA). Introduced in ESPP 11.11 Public goods, common pool resources, and market failure. See also: rival good, non-excludable public good.

non-rival, non-rivalry

A good is non-rival if, when it is made available to one person, it can be made available to everyone else at no additional cost. Non-rivalry is the primary characteristic of a public good (Micro, Macro). Introduced in Micro 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting.

non-verifiable information, unverifiable information

Information is verifiable if it can be verified by a court and hence used to enforce a contract (Micro, Macro). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions.

normal good

A good for which demand increases when a person’s income rises, holding prices unchanged (ESPP). Introduced in ESPP 4.9 Applying the model: Explaining changes in working hours.

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, Micro 8.7 Short-run and long-run equilibria, TE1 7.4 Demand and isoprofit curves: Beautiful Cars. See also: economic profit, opportunity cost of capital.

NSDP

Net State Domestic Product (NSDP) is a measure of all goods and services produced within the boundaries of the state during a given period of time after deducting the wear and tear or depreciation (TESA). Introduced in TESA 2.10 Escaping from Malthusian stagnation.

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 (TE1, TESA). Introduced in TE1 Unit 6 The firm: Owners, managers, and employees, TE1 Unit 18 The nation and the world economy.

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 (TE1, TESA). Introduced in TE1 13.2 Output growth and changes in unemployment, TESA Unit 13 Economic fluctuations and unemployment. See also: Okun’s law.

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 (TE1, TESA). Introduced in TE1 13.2 Output growth and changes in unemployment, TESA Unit 13 Economic fluctuations and unemployment. See also: Okun’s coefficient.

oligopoly

A market with a small number of sellers of the same good, giving each seller some market power. A market with a small number of sellers, giving each seller some market power (ESPP, TE1, TESA). Introduced in TE1 11.4 Prices, rent-seeking, and market dynamics at work: Oil prices, TESA 7.9 Price-setting, market power, and public policy, TESA 8.6 The world oil market, ESPP 7.6 Gains from trade.

one-shot game

A game that is played once and not repeated (ESPP). Introduced in ESPP 2.4 Social interactions as games.

open-access resource

A resource that is rival or partially rival (more people using it reduces the benefits to others) but non-excludable (it is impossible to exclude anyone from using it) (Micro, Macro). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions.

opportunity cost

What you lose when you choose one action rather than the next best alternative. Example: ‘I decided to go on vacation rather than take a summer job. The job was boring and badly paid, so the opportunity cost of going on vacation was low.’ 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. When taking an action implies forgoing the next best alternative action, this is the net benefit of the foregone alternative (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, Micro 3.4 The feasible set, Micro Unit 5 The rules of the game: Who gets what and why, Micro 7.4 Production and costs: The cost function for Beautiful Cars, Micro 9.3 Borrowing: Bringing consumption forward in time to the present, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 3.3 Opportunity costs, TE1 7.3 Production: The cost function for Beautiful Cars, TE1 10.2 Borrowing: Bringing consumption forward in time, TE1 Unit 15 Inflation, unemployment, and monetary policy, TESA Unit 3 Work, scarcity, and choice, TESA 10.2 Borrowing: Bringing consumption forward in time, TESA Unit 15 Inflation, unemployment, and monetary policy, ESPP 4.3 Decision making, trade-offs, and opportunity costs, ESPP 9.3 Borrowing: Bringing consumption forward in time.

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 (Micro, Macro, TE1, TESA). Introduced in Micro 7.4 Production and costs: The cost function for Beautiful Cars, Micro 8.7 Short-run and long-run equilibria, Macro 9.3 Capital goods and technology, TE1 7.3 Production: The cost function for Beautiful Cars.

order book

A record of limit orders placed by buyers and sellers, but not yet fulfilled (TE1, TESA). Introduced in TE1 11.6 Changing supply and demand for financial assets, TESA 11.5 Changing supply and demand for financial assets.

own account work

Work undertaken for oneself, rather than for an employer (TESA). Introduced in TESA 3.1 Work and its forms, TESA Unit 6 The firm: Owners, managers, and employees.

ownership

The right to use and exclude others from the use of something, and the right to sell the thing that is owned (TE1, TESA). Introduced in TE1 1.7 Capitalism as an economic system, TESA 1.7 Capitalism as an economic system.

p-value

The probability of observing data at least as extreme as the data collected if a particular hypothesis about the population is true. The p-value ranges from to 1: the lower the probability (the lower the p-value), the less likely it is to observe the given data, and therefore the less compatible the data are with the hypothesis (DE). Introduced in DE Part 2.3 How did changing the rules of the game affect behaviour?, DE Part 2.3 How did changing the rules of the game affect behaviour?, DE Part 2.3 How did changing the rules of the game affect behaviour?, DE Part 2.3 How did changing the rules of the game affect behaviour?.

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 (Macro, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 14.5 The multiplier model: Including the government and net exports, TE1 17.12 The economy as teacher, TESA 14.5 The multiplier model: Including the government and net exports.

Pareto criterion

The Pareto criterion is a way of comparing two allocations, A and B. It states that A is an improvement on B if at least one person would be strictly better off with A than B (in other words, would strictly prefer A to B) and nobody would be worse off. We say that A Pareto dominates B. According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto efficient. According to the Pareto criterion, a desirable attribute of an allocation is that it be Pareto-efficient (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro Unit 5 The rules of the game: Who gets what and why, TE1 5.2 Evaluating institutions and outcomes: The Pareto criterion, TESA 5.2 Evaluating institutions and outcomes: The Pareto criterion, ESPP 3.3 Fairness and efficiency in the ultimatum game, ESPP 5.2 Institutions: The rules of the game. See also: Pareto dominant.

Pareto dominant

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 (ESPP, TE1, TESA). Introduced in TE1 5.2 Evaluating institutions and outcomes: The Pareto criterion, TESA 5.2 Evaluating institutions and outcomes: The Pareto criterion, ESPP 3.3 Fairness and efficiency in the ultimatum game. See also: Pareto efficient.

Pareto dominate, Pareto dominant

Allocation A Pareto dominates allocation B if it is better according to the Pareto criterion. That is, at least one person would be strictly better off with A than B, and nobody would be worse off (Micro, Macro). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 5.2 Evaluating institutions and outcomes: The Pareto criterion, TESA 5.2 Evaluating institutions and outcomes: The Pareto criterion, ESPP 3.3 Fairness and efficiency in the ultimatum game. See also: Pareto criterion.

Pareto efficiency curve

The set of all allocations that are Pareto efficient. The Pareto efficiency curve is sometimes called the ‘contract curve’, even though it is not necessary for any contract to be involved. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 5.9 Case 3 continued: Negotiating to a Pareto-efficient sharing of the surplus, TE1 5.8 The Pareto efficiency curve and the distribution of the surplus, TESA 5.7 Economically feasible allocations and the surplus, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela. See also: Pareto efficient.

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 (ESPP, TE1, TESA). Introduced in TE1 5.2 Evaluating institutions and outcomes: The Pareto criterion, TE1 7.7 Gains from trade, TE1 8.4 Market supply and equilibrium, TE1 The Pareto efficiency curve, TE1 External effects of pollution, TESA 5.2 Evaluating institutions and outcomes: The Pareto criterion, TESA 7.6 Gains from trade, TESA 5.8.1 The Pareto efficiency curve, TESA 12.1.1 External effects of pollution, ESPP 3.3 Fairness and efficiency in the ultimatum game, ESPP 5.3 Production and distribution: Using a model, ESPP 7.6 Gains from trade, ESPP 8.15 Looking backward: Baristas and bread markets.

Pareto efficient, Pareto efficiency

An allocation is Pareto efficient if there is no feasible alternative allocation in which at least one person would be better off, and nobody worse off (Micro, Macro). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 5 The rules of the game: Who gets what and why, Micro 5.9 Case 3 continued: Negotiating to a Pareto-efficient sharing of the surplus, Micro Unit 7 The firm and its customers, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, Micro 10.1 Bananas, fish, and cancer, Macro 3.11 Why is investment volatile?, Macro 10.2 Government as an economic actor, TE1 5.2 Evaluating institutions and outcomes: The Pareto criterion, TE1 7.7 Gains from trade, TE1 8.4 Market supply and equilibrium, TE1 The Pareto efficiency curve, TE1 External effects of pollution, TESA 5.2 Evaluating institutions and outcomes: The Pareto criterion, TESA 7.6 Gains from trade, TESA 5.8.1 The Pareto efficiency curve, TESA 12.1.1 External effects of pollution, ESPP 3.3 Fairness and efficiency in the ultimatum game, ESPP 5.3 Production and distribution: Using a model, ESPP 7.6 Gains from trade, ESPP 8.15 Looking backward: Baristas and bread markets.

Pareto improvement

A change that benefits at least one person without making anyone else worse off (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro 5.9 Case 3 continued: Negotiating to a Pareto-efficient sharing of the surplus, Micro Unit 7 The firm and its customers, TE1 5.7 Economically feasible allocations and the surplus, TE1 7.7 Gains from trade, TE1 14.8 The government’s finances, TESA 5.7 Economically feasible allocations and the surplus, TESA 7.6 Gains from trade, TESA 14.8 The government’s finances, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela, ESPP 7.6 Gains from trade. See also: Pareto dominant.

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 (ESPP). Introduced in ESPP 7.14 Conclusion.

partial equilibrium

Partial equilibrium analysis is the study of what happens in a single market, or sometimes just a single economic interaction (Macro). Introduced in Macro 1.9 Studying the economy as a whole: Macroeconomics. See also: general equilibrium.

participation rate

The ratio of the number of people in the labour force to the population of working age (Macro, ESPP, TE1, TESA). Introduced in Macro 1.3 Measuring the macroeconomy: Output, employment, unemployment, and inactivity, TE1 9.2 Measuring the economy: Employment and unemployment, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 8.2 Measuring the economy: Employment and unemployment. See also: labour force, 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. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 12.5 Public goods, TE1 21.6 Intellectual property rights, TESA 12.5 Public goods, ESPP 3.9 Unintended consequences of a redistributive tax, ESPP 10.2 Assets, money, banks, and the financial system.

pay-off

The pay-off for an individual player in a game is the benefit that the player receives as a result of the joint actions of all the players (Micro, Macro). Introduced in Micro Unit 4 Strategic interactions and social dilemmas.

payment service

Any service provided by a financial institution to allow one person or organization to pay another for a product or service (ESPP). Introduced in ESPP 10.4 Banks, profits, and the creation of money.

payoff

The benefit to each player associated with the joint actions of all the players (ESPP, TE1, TESA). Introduced in TE1 4.1 Social interactions: Game theory, TESA 4.1 Social interactions: Game theory, ESPP 2.4 Social interactions as games.

payoff matrix

A table of the payoffs associated with every possible combination of strategies chosen by two or more players in a game (ESPP). Introduced in ESPP 2.4 Social interactions as games.

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. 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 percentile refers to the smallest 1% of values in a set of observations (ESPP, DE). See also: decile.

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 (Micro, Macro). Introduced in Micro 8.10 Supply, demand, and competitive equilibrium: Is this a good model?.

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 (Micro, Macro). Introduced in Micro 8.10 Supply, demand, and competitive equilibrium: Is this a good model?.

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 (TE1, TESA). Introduced in TE1 8.8 The model of perfect competition. See also: law of one price.

performance-related pay

A pay which varies, at least partially, with a worker’s performance (TE1, TESA). See also: piece-rate work.

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 (Macro, TE1, TESA). Introduced in Macro 4.4 Inflation, unemployment, and conflicting claims on output, Macro 6.7 Who really signs the banknotes? The central bank’s balance sheet and the government, TE1 15.1 What’s wrong with inflation?, TESA 15.1 What’s wrong with inflation?.

piece rate

Under a piece rate contract, a worker is paid a fixed amount for each unit (‘piece’) of the product made (Micro, Macro). Introduced in Micro 6.6 Getting the work done: Contracts, principals, and agents.

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. A type of employment in which the worker is paid a fixed amount for each unit of the product made (ESPP, TE1, TESA). Introduced in TE1 6.3 Other people’s labour, TESA 3.1 Work and its forms, TESA 6.3 Other people’s labour, ESPP 6.4 Other people’s money: The separation of ownership and control.

Pigouvian subsidy

A government subsidy on activities that generate positive external effects, so as to correct an inefficient outcome. A government subsidy to encourage an economic activity that has positive external effects. Example: subsidizing basic research. A government subsidy to encourage an economic activity that has positive external effects. (For example, subsidizing basic research.) A government subsidy to encourage an economic activity that has positive external effects. (For example, subsidizing basic research) (Micro, Macro, ESPP, TE1, TESA). See also: external effect, Pigouvian tax

Pigouvian tax

A tax levied on activities that generate negative external effects so as to correct an inefficient market outcome (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 10.4 Solving the problem: Regulation, taxation, and compensation, TE1 12.3 External effects: Policies and income distribution, TESA 12.3 External effects: Policies and income distribution, ESPP 11.9 External effects: Government policies and income distribution. See also: external effect, Pigouvian subsidy.

policy (interest) rate, policy rate

The nominal interest rate set by the central bank, which applies to banks that borrow base money from each other, and from the central bank. Also known as: base rate, official 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. Also known as: base rate, official rate (Macro, ESPP, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro 5.14 Monetary policy and the exchange rate, Macro 7.2 Exchange rate regimes, monetary policy, and inflation, TE1 10.9 The central bank, the money market, and interest rates, TE1 15.8 Monetary policy, TESA 10.9 The central bank, the money market, and interest rates, TESA 15.8 Monetary policy, ESPP 10.2 Assets, money, banks, and the financial system. See also: real interest rate, nominal interest rate.

political accountability

Accountability achieved by political processes such as elections, oversight by an elected government, or consultation with affected citizens (ESPP, TE1, TESA). Introduced in TE1 22.1 The government as an economic actor, ESPP 12.3 The government as an economic actor. See also: accountability, economic accountability.

political institution

The rules of the game that determine who has power and how it is exercised in a society (ESPP). Introduced in ESPP 12.6 Political monopoly and competition compared.

political institutions

An institution is a set of laws and informal rules that regulate social interactions, sometimes also termed ‘the rules of the game’. Political institutions are the institutions that determine who has power and how it is exercised in a society. The rules of the game that determine who has power and how it is exercised in a society (Macro, TE1, TESA). Introduced in Macro 10.3 Democracy as a political institution, TE1 22.5 Democracy as a political institution, ESPP 12.6 Political monopoly and competition compared.

political rent

Political rent is the difference between the net benefit (monetary or otherwise) that an individual receives as a result of their political position, and the net benefit from their next best alternative (what they would receive in the absence of a privileged political position). 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. 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 he or she to lack a privileged political position (Macro, ESPP, TE1, TESA). Introduced in Macro 10.7 Modelling a self-interested political elite: Rent-seeking, TE1 22.2 Government acting as a monopolist, ESPP 12.4 The government as a rent-seeking monopolist. See also: economic rent.

political system

A political system determines how governments will be selected, and how those governments will make and implement decisions that affect all or most members of a population. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.12 Varieties of capitalism: Institutions, government, and politics, TE1 1.10 Varieties of capitalism: Institutions, government, and the economy, TESA 1.9 Varieties of capitalism: Institutions, government, and the economy, ESPP 1.4 Economic growth.

politically feasible

Capable of being implemented given the existing political institutions (ESPP). Introduced in ESPP 12.7 Spending by democratic governments: Priorities of a nation.

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 (ESPP, TE1, TESA). Introduced in TE1 20.10 Policy choices matter, ESPP 11.8 External effects and private bargaining. See also: external cost.

population of working age

A statistical convention, which in many countries is all people aged between 15 and 64 years (Macro, ESPP, TE1, TESA). Introduced in Macro 1.3 Measuring the macroeconomy: Output, employment, unemployment, and inactivity, TE1 9.2 Measuring the economy: Employment and unemployment, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 8.2 Measuring the economy: Employment and unemployment.

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 (ESPP). Introduced in ESPP 4.10 Applying the model: Explaining differences between countries.

positive feedback

Feedback that amplifies (reinforces) a movement away from equilibrium (Macro). Introduced in Macro 8.2 Tipping points, instability, and lock-in.

positive feedback (process)

We say that positive feedback occurs if an initial change sets in motion a process of further changes that magnify the original change. A process whereby some initial change sets in motion a process that magnifies the initial change (Macro, ESPP, TE1, TESA). Introduced in TE1 11.8 Modelling bubbles and crashes, TE1 14.5 The multiplier model: Including the government and net exports, TE1 Unit 17 The Great Depression, golden age, and global financial crisis, TE1 Unit 20 Economics of the environment, TESA 11.7 Modelling bubbles and crashes, TESA 14.5 The multiplier model: Including the government and net exports, Macro 8.2 Tipping points, instability, and lock-in. See also: negative feedback (process).

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 (TE1, TESA). Introduced in TE1 17.5 Workers and employers in the golden age.

power

The ability to do (and get) the things one wants in opposition to the intentions of others. The ability to do (and get) the things one wants in opposition to the intentions of others, ordinarily by imposing or threatening sanctions (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 5.2 Institutions and power, TE1 5.6 Allocations imposed by force, TESA 5.6 Allocations imposed by force, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela.

pre-distribution

Pre-distribution refers to policies that result in a more equal distribution of assets, so that the resulting distribution of market income is also more equal. In contrast, redistribution refers to policies focused on the market distribution of income to implement a more equal distribution of disposable income (Macro). Introduced in Macro 10.4 Political preferences and electoral competition: The median voter model.

precautionary saving

An increase in saving to restore wealth to its target level (Macro, TE1, TESA). Introduced in Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 14.3 Household target wealth, collateral, and consumption spending, TESA 14.3 Household target wealth, collateral, and consumption spending. See also: target wealth.

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 (TE1, TESA). Introduced in TE1 19.8 Predistribution. See also: redistribution policy.

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 (ESPP). Introduced in ESPP 2.3 Resolving social dilemmas, ESPP 4.4 Making decisions when there are trade-offs, ESPP 9.3 Borrowing: Bringing consumption forward in time.

preferences

A description of the relative values a person places on each possible outcome of a choice or decision they have to make. A description of the benefit or cost we associate with each possible outcome (Micro, Macro, TE1, TESA). Introduced in Micro 3.3 Goods and preferences, Micro 4.7 Social preferences: Altruism, Micro Unit 5 The rules of the game: Who gets what and why, Micro 9.3 Borrowing: Bringing consumption forward in time to the present, Macro 3.10 Shocks to households and the limits to smoothing consumption, TE1 3.2 Preferences, TESA 3.3 Preferences, ESPP 9.13 Conclusion, ESPP 2.3 Resolving social dilemmas, ESPP 4.4 Making decisions when there are trade-offs, ESPP 9.3 Borrowing: Bringing consumption forward in time.

present bias

An individual or household with present bias puts more weight on present rather than future consumption. They may prefer to consume all of their current income now, even when they know that income will be lower in the future (Macro). Introduced in Macro 3.10 Shocks to households and the limits to smoothing consumption.

present value

The effective value today of a stream of income or other benefits that will be received in the future. The present value is less that the future value when future income is discounted using an interest rate or the person’s own discount rate. 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 (Macro, ESPP, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 10.9 The central bank, the money market, and interest rates, TESA 10.9 The central bank, the money market, and interest rates, ESPP 10.4 Banks, profits, and the creation of money. See also: net present value.

present value criterion

A criterion for deciding whether or not to undertake an investment, taking into account all the costs and benefits now and in future: specifically, invest if the net present value is positive (Macro). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment.

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 (TE1, TESA). Introduced in TE1 20.5 Cap and trade environmental policies.

price discrimination

A selling strategy in which different prices are set for different buyers or groups of buyers based on the buyers’ differing willingness to pay. 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. A selling strategy in which different prices are set for different buyers or groups of buyers, or prices vary depending on the number of units purchased (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, TE1 11.2 How market organization can influence prices, TESA 7.2 The demand curve and willingness to pay, TESA 11.2 How market organization can influence prices, ESPP 7.1 Introduction.

price dynamics curve

The price dynamics curve is a graph of the relationship between the price of a good in period \(t\) (on the horizontal axis) and the price in period \(t + 1\) (on the vertical axis). A point where the graph crosses the 45-degree line represents a market equilibrium: at this price demand = supply so the price stays constant from one period to the next. At other prices excess demand or excess supply leads to a change in price (Macro). Introduced in Macro 8.5 Modelling a house price bubble and collapse, Macro 9.8 How poor countries get stuck at low growth and how they can grow rapidly.

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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.5 Demand, elasticity, and revenue, Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, Macro 10.12 Economic infeasibility, TE1 7.8 The elasticity of demand, TESA 7.7 The elasticity of demand, ESPP 3.9 Unintended consequences of a redistributive tax, ESPP 7.6 Gains from trade, ESPP 8.5 The product market and the price-setting curve (firms and customers).

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 (ESPP, TESA). Introduced in TESA 8.5 Changes in supply and demand, ESPP 7.12 Changes in supply and demand.

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 (ESPP, TE1, TESA). Introduced in TE1 18.1 Globalization and deglobalization in the long run. See also: arbitrage.

price markup

The price minus the marginal cost divided by the price. In other words, the profit margin as a proportion of the price. If the firm sets the price to maximize its profits, the markup is inversely proportional to the elasticity of demand for the good at that price. The price minus the marginal cost, divided by the price. It is inversely proportional to the elasticity of demand for this good. The price minus the marginal cost divided by the price. It is inversely proportional to the elasticity of demand for this good (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, TE1 7.8 The elasticity of demand, TESA 7.7 The elasticity of demand, ESPP 7.6 Gains from trade, ESPP 8.5 The product market and the price-setting curve (firms and customers).

price-setting curve

The curve that gives the real wage paid when firms choose their profit-maximizing price (TE1, TESA). Introduced in TE1 Unit 9 The labour market: Wages, profits, and unemployment, TE1 16.4 Investment, firm entry, and the price-setting curve in the long run, TESA Unit 9 The labour market: Wages, profits, and unemployment.

price-setting curve, PS curve

A relationship showing, for each level of economy-wide employment, the real wage that results when firms maximize profits by setting prices as a constant markup on costs (Macro). Introduced in Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, TE1 Unit 9 The labour market: Wages, profits, and unemployment, TE1 16.4 Investment, firm entry, and the price-setting curve in the long run, TESA Unit 9 The labour market: Wages, profits, and unemployment.

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 (ESPP). Introduced in ESPP 8.5 The product market and the price-setting curve (firms and customers).

price-taker

A buyer or seller acts as a price-taker if they cannot benefit from attempting to trade at any other price than the prevailing market price. A price-taker has no power to influence the market price, but can buy or sell as many items as they wish at that price. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 8 Supply and demand: Markets with many buyers and sellers, TE1 8.2 The market and the equilibrium price, TESA 8.2 The market and the equilibrium price, ESPP 7.9 Buying and selling: Demand and supply in a competitive market.

primary deficit

The government deficit (its revenue minus its expenditure) excluding interest payments on its debt (TE1, TESA). Introduced in TE1 14.8 The government’s finances, TESA 14.8 The government’s finances. See also: government 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 (Macro, TE1, TESA). Introduced in Macro 2.6 Segmented labour markets, TE1 19.7 Putting the model to work: Explaining changes in inequality. See also: secondary labour market, segmented labour market.

primary markets

(ESPP, TE1). See also: secondary and 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. This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract. This relationship exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract. Also known as: principal–agent problem (ESPP, DE, TE1, TESA). Introduced in TE1 6.10 Principals and agents: Interactions under incomplete contracts, TE1 9.12 Looking backward: Baristas and bread markets, TE1 10.12 Credit market constraints: A principal–agent problem, TE1 12.6 Missing markets: Insurance and lemons, TE1 19.6 Inequality, endowments, and principal–agent relationships, TE1 22.14 Special interests, TESA 6.10 Principals and agents: Interactions under incomplete contracts, TESA 9.13 Conclusion, TESA 10.12 Credit market constraints: A principal–agent problem, TESA 12.5 Public goods, ESPP 6.15 Principals and agents: Interactions under incomplete contracts, ESPP 9.8 Borrowing may allow investing: Julia’s best hope, ESPP 10.13 The role of banks in the crisis, ESPP 11.11 Public goods, common pool resources, and market failure, ESPP 12.9 Administrative feasibility: Information and capacities, DE Introduction. See also: incomplete contract.

principal-agent relationship, principal-agent problem

A principal–agent relationship or problem exists when one party (the principal) would like another party (the agent) to act in some way, or have some attribute, that is in the interest of the principal, and that cannot be enforced or guaranteed in a binding contract (Micro, Macro). Introduced in Micro 6.6 Getting the work done: Contracts, principals, and agents, Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 10.13 Citizens and elected leaders as principals and agents, TE1 6.10 Principals and agents: Interactions under incomplete contracts, TE1 9.12 Looking backward: Baristas and bread markets, TE1 10.12 Credit market constraints: A principal–agent problem, TE1 12.6 Missing markets: Insurance and lemons, TE1 19.6 Inequality, endowments, and principal–agent relationships, TE1 22.14 Special interests, TESA 6.10 Principals and agents: Interactions under incomplete contracts, TESA 9.13 Conclusion, TESA 10.12 Credit market constraints: A principal–agent problem, TESA 12.5 Public goods, ESPP 6.15 Principals and agents: Interactions under incomplete contracts, ESPP 9.8 Borrowing may allow investing: Julia’s best hope, ESPP 10.13 The role of banks in the crisis, ESPP 11.11 Public goods, common pool resources, and market failure, ESPP 12.9 Administrative feasibility: Information and capacities, DE Introduction. See also: incomplete contract.

prisoners' dilemma

A prisoners’ dilemma is a game that has a dominant strategy equilibrium, but also has an alternative outcome that gives a higher pay-off to all players. So the Nash equilibrium is not Pareto efficient. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 4.3 The prisoners’ dilemma, TESA 4.3 The prisoners’ dilemma, ESPP 2.5 When self-interest works: The invisible hand, ESPP 4.10 Applying the model: Explaining differences between countries, ESPP 8.15 Looking backward: Baristas and bread markets.

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 12.5 Public goods, TESA 12.5 Public goods.

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. The right and expectation that one can enjoy one’s possessions in ways of one’s own choosing, exclude others from their use, and dispose of them by gift or sale to others who then become their owners (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.8 Capitalist institutions, Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 5.6 Allocations imposed by force, TE1 Unit 12 Markets, efficiency, and public policy, TESA 5.6 Allocations imposed by force, TESA Unit 12 Markets, efficiency, and public policy, ESPP 1.7 The capitalist revolution, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela.

procedural judgement 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) (Micro, Macro). Introduced in Micro Unit 5 The rules of the game: Who gets what and why. See also: substantive judgement of fairness.

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) (ESPP, TE1, TESA). Introduced in TE1 5.3 Evaluating institutions and outcomes: Fairness, TESA 5.3 Evaluating institutions and outcomes: Fairness, ESPP 3.3 Fairness and efficiency in the ultimatum game. See also: substantive judgements of fairness.

process innovation

An innovation that allows a good or service to be produced at lower cost than its competitors (TE1, TESA). Introduced in TE1 21.1 The innovation process: Invention and diffusion.

procyclical

Tending to move in the same direction as aggregate output and employment over the business cycle (TE1, TESA). Introduced in TE1 16.3 Job flows, worker flows, and the Beveridge curve. See also: countercyclical.

producer surplus

The producer of a good receives a surplus on each unit, equal to the price minus the marginal cost of producing it. The term ‘producer surplus’ normally refers to the sum of these surpluses across all units sold. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, TE1 7.7 Gains from trade, TESA 7.6 Gains from trade, ESPP 7.6 Gains from trade.

product innovation

An innovation that produces a new good or service at a cost that will attract buyers (TE1, TESA). Introduced in TE1 21.1 The innovation process: Invention and diffusion.

production function

A production function is a graphical or mathematical description of the relationship between the quantities of the inputs to a production process and the amount of output produced. When used to represent output in the whole economy, it is described as an aggregate 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 1 Prosperity, inequality, and planetary limits, Micro Unit 2 Technology and incentives, Micro Unit 5 The rules of the game: Who gets what and why, Macro 4.4 Inflation, unemployment, and conflicting claims on output, Macro 9.3 Capital goods and technology, TE1 3.1 Labour and production, TE1 14.10 Aggregate demand and unemployment, TESA 2.3 Basic concepts: Prices, costs, and innovation rents, TESA 3.2 Labour and production, TESA 14.10 Aggregate demand and unemployment, ESPP 4.4 Making decisions when there are trade-offs.

profit, economic profit

A firm’s profit is its revenue minus its total costs. We often refer to profit as ‘economic profit’ to emphasise that costs include the opportunity cost of capital (which is not included in ‘accounting profit’) (Micro, Macro). Introduced in Micro 7.1 Winning brands, Micro Unit 7 The firm and its customers, Micro 8.7 Short-run and long-run equilibria, Macro Unit 2 Unemployment, wages, and inequality: Supply-side policies and institutions, TE1 7.4 Demand and isoprofit curves: Beautiful Cars, ESPP 8.9 Declining competition and increasing inequality in the US.

profit margin

The difference between the price of a product and its marginal production cost. The difference between the price and the marginal cost (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.1 Winning brands, Micro Unit 7 The firm and its customers, Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, TE1 7.4 Demand and isoprofit curves: Beautiful Cars, TESA 7.7 The elasticity of demand, ESPP 7.6 Gains from trade, ESPP 8.5 The product market and the price-setting curve (firms and customers).

profit rate, rate of profit

The rate of profit on an investment is the net profit that it will generate in future (per period) as a percentatge of the initial investment cost (Macro). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment.

progressive (policy)

An expenditure or transfer that increases the incomes of poorer households by more than richer households, in percentage terms (TE1, TESA). Introduced in TE1 19.10 Redistribution: Taxes and transfers. See also: regressive (policy).

property rights

Legal protection of ownership, including the right to exclude others and to benefit from or sell the thing owned. Property rights may cover broadly-defined goods such as clean water, safety, or education, if these are protected by the legal system (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 5.5 Institutions, and the case of the independent farmer, Micro 10.3 Solving the problem: Private bargaining and property rights, TE1 Unit 12 Markets, efficiency, and public policy, TESA Unit 12 Markets, efficiency, and public policy, ESPP 11.7 Market failure: External effects of pollution.

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 (Macro, TE1, TESA). Introduced in Macro 4.8 The business cycle model: Demand and supply shocks, and inflation expectations, TE1 15.1 What’s wrong with inflation?, TE1 18.1 Globalization and deglobalization in the long run, TESA 15.1 What’s wrong with inflation?.

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 (Macro, TE1, TESA). Introduced in Macro 8.12 Prudential policies to address fundamental uncertainty about environmental tipping points, TE1 20.8 Environmental dynamics.

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 (ESPP, TE1, TESA). Introduced in TE1 12.5 Public goods, TESA 12.5 Public goods, ESPP 11.11 Public goods, common pool resources, and market failure.

public good

A good that, if available to anyone, can be made available to everyone at no additional cost. This characteristic is called non-rivalry. Some economists define public goods more strictly as goods that are both non-rival and non-excludable (non-excludable means that it is impossible to prevent anyone from consuming them). A good for which use by one person does not reduce its availability to others. Also known as: non-rival good (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 10.6 Public goods, non-rivalry, and excludability: A model of radio broadcasting, Macro 10.2 Government as an economic actor, TE1 4.6 Public goods, free riding, and repeated interaction, TE1 8.10 Price-setting and price-taking firms, TE1 12.5 Public goods, TE1 21.2 Innovation systems, TESA 4.6 Public goods, free riding, and repeated interaction, TESA 8.8 Price-setting and price-taking firms, TESA 12.5 Public goods, ESPP 2.7 Free riding and the provision of public goods. See also: non-excludable public good, artificially scarce good.

public good game

A public good game is a game in which individual players can take an action that would be costly to themselves, but would produce benefits for all players (including themselves) (Micro, Macro). Introduced in Micro 4.6 Public good games and cooperation.

public goods game

Similar to a prisoners’ dilemma game with more than two people; the dominant strategy is not to contribute to the public good (ESPP). Introduced in ESPP 8.15 Looking backward: Baristas and bread markets.

public policy

A policy decided by the government. Also known as: government policy (ESPP). Introduced in ESPP 3.2 Goals of public policy, ESPP 5.9 Measuring economic inequality.

purchasing power parity (PPP)

PPPs are price indices that measure how much it costs to purchase a basket of goods and services compared to how much it costs to purchase the same basket in a reference country in a particular year, such as the United States in 211. A statistical correction allowing comparisons of the amount of goods people can buy in different countries that have different currencies (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.4 Inequality in global income, Macro Unit 3 Aggregate demand and the multiplier model, TE1 1.2 Measuring income and living standards, TESA 1.2 Measuring income and living standards, ESPP 1.3 How did we get here? The hockey stick in real incomes. See also: constant prices.

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. This is a characteristic of a person who values an additional unit of consumption now over an additional unit later, when the amount of consumption is the same now and 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 (ESPP, TE1, TESA). Introduced in TE1 10.3 Impatience and the diminishing marginal returns to consumption, TE1 20.9 Why is addressing climate change so difficult?, TESA 10.2 Borrowing: Bringing consumption forward in time, ESPP 9.4 Reasons to borrow: Smoothing and impatience. See also: weakness of will.

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 (Macro, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 15.8 Monetary policy, TESA 15.8 Monetary policy. See also: zero lower bound.

quantity-based environmental policy

Policies that implement environmental objectives by using bans, caps, and regulations (TE1, TESA). Introduced in TE1 20.5 Cap and trade environmental policies.

quartiles, quartile groups

Quartiles split a set of observations into four equally-sized groups. The full set of observations is ordered according to a particular variable (e.g. wealth). The first quartile group is the observations in the bottom 25% (e.g. the 25% with the lowest wealth), the second is the next lowest 25%, and the fourth or top quartile group is the highest 25%. The quartiles are the cutoff values that separate the groups; the first quartile is the cutoff between the first and second quartile groups, and so on (Macro). Introduced in Macro 6.11 Household investments: Housing and financial assets.

quasi-linear, quasi-linear function

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 (Micro, Macro). Introduced in Micro Unit 5 The rules of the game: Who gets what and why.

quota

A limit imposed by the government on the volume of imports allowed to enter the economy during a specific period of time (TE1, TESA). Introduced in TE1 18.1 Globalization and deglobalization in the long run.

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 (TE1, TESA). Introduced in TE1 18.9 Globalization and anti-globalization.

radical innovation

Innovations based on a broad range of knowledge from different sectors, recombining this to create new and very different products (TE1, TESA).

range

The interval formed by the smallest (minimum) and the largest (maximum) value of a particular variable. The range shows the two most extreme values in the distribution, and can be used to check whether there are any outliers in the data. (Outliers are a few observations in the data that are very different from the rest of the observations.) (DE). Introduced in DE Part 2.2 Describing the data, DE Part 2.1 Collecting data by playing a public goods game, DE 2. Collecting and analysing data from experiments Working in Google Sheets, DE Part 2.1 Collecting data by playing a public goods game.

rate of return

The rate of return on a loan, or any investment, is the net amount the lender or investor gets back (that is, the total amount minus what they lent or put in) as a proportion of what they put in (Macro). Introduced in Macro 6.4 Introducing a bank.

ratio scale

Graphs are usually plotted using linear scales: the points marked on the axis are a fixed distance apart, and as we move along the axis from one point to the next, the corresponding variable increases by a constant amount. If instead we use a ratio scale, moving from one point to the next represents a constant proportional increase. For example, if a ratio scale with a factor of 2 starts with a value of 5 at the origin, the next points shown along the axis would be at values 1, 2, 4, 8… Ratio scales are useful for variables like aggregate output that tend to change in a proportional way. If output grows at a constant rate (e.g. 3% per annum) and is plotted against time using a ratio scale on the vertical axis, the graph will be a straight line. 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). Also known as a log scale (in for example, Microsoft Excel). 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). Also known as a log scale (in for example, Microsoft Excel) (Macro, ESPP, TE1). Introduced in Macro 9.2 Measuring economic growth: Ratio scales and growth rates, ESPP 1.4 Economic growth.

rationed goods

Goods that are allocated to buyers by a process other than price (such as queueing, or a lottery) (TE1, TESA). Introduced in TE1 11.9 Non-clearing markets: Rationing, queuing, and secondary markets, TESA 11.8 Non-clearing markets: Rationing, queuing, and secondary markets.

real depreciation, real appreciation

Real depreciation (depreciation of the real exchange rate) occurs if the price of foreign goods and services, converted into domestic currency at the market (nominal) exchange rate, increases relative to the price of domestic goods and services: that is, foreign goods and services become relatively more expensive. A real depreciation is referred to as an improvement in a home’s price competitiveness. Likewise, a real appreciation is referred to as a fall in competitiveness (Macro). Introduced in Macro 5.14 Monetary policy and the exchange rate, Macro 7.2 Exchange rate regimes, monetary policy, and inflation. See also: real exchange rate.

real estate

A general term that covers three types of property: land, housing, and other buildings (Macro). Introduced in Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets.

real exchange rate, competitiveness

The relative price of foreign and domestic goods and services; specifically, it is the price of foreign goods and services, converted into domestic currency at the market (nominal) exchange rate, divided by the price of domestic goods and services. The real exchange rate is a measure of competitiveness (Macro). Introduced in Macro 5.14 Monetary policy and the exchange rate, Macro 7.2 Exchange rate regimes, monetary policy, and inflation.

real GDP

An inflation-adjusted measure of the market value of the output of the economy in a given period. (GDP) (ESPP). Introduced in ESPP 1.3 How did we get here? The hockey stick in real incomes. See also: inflation, constant prices, gross domestic product.

real interest rate

An interest rate corrected for expected inflation (that is, the nominal interest rate minus the expected rate of inflation). It represents how many goods in the future one gets for the goods not consumed now. The price of bringing some real spending power forward in time. The interest rate corrected for inflation (that is, the nominal interest rate minus the rate of inflation). It represents how many goods in the future one gets for the goods not consumed now (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 9.3 Borrowing: Bringing consumption forward in time to the present, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro 6.9 Introducing financial markets, TE1 15.1 What’s wrong with inflation?, TESA 15.1 What’s wrong with inflation?, ESPP 9.6 Storing or lending allows smoothing and moving consumption to the future. See also: nominal interest rate, interest rate.

real wage

The wage expressed in terms of the amount of goods and services the worker can buy with it. It is calculated by dividing the nominal wage by the current price level in the same currency. 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 (Macro, ESPP, DE, TE1, TESA). Introduced in Macro 1.4 Measuring the macroeconomy: Nominal wages, prices, and real wages, Macro Unit 4 Inflation and unemployment, TE1 Unit 9 The labour market: Wages, profits, and unemployment, TE1 15.3 Inflation, the business cycle, and the Phillips curve, TESA Unit 9 The labour market: Wages, profits, and unemployment, TESA 15.3 Inflation, the business cycle, and the Phillips curve, ESPP 8.2 Measuring the economy: Employment and unemployment. See also: nominal wage.

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 (Macro, TE1, TESA). Introduced in Macro 3.5 Growth and fluctuations, TE1 13.1 Growth and fluctuations, TESA Unit 13 Economic fluctuations and unemployment.

reciprocity

A preference to be kind to or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind. 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. A preference to be kind or to help others who are kind and helpful, and to withhold help and kindness from people who are not helpful or kind (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 4.2 Equilibrium in the invisible hand game, TESA 4.2 Equilibrium in the invisible hand game, ESPP 2.8 Social preferences and the public good. See also: social preferences.

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 (TE1, TESA). Introduced in TE1 19.8 Predistribution. See also: predistribution policy.

regressive (policy)

An expenditure or transfer that increases the incomes of richer households by more than poorer households, in percentage terms (TE1, TESA). Introduced in TE1 19.10 Redistribution: Taxes and transfers. See also: progressive (policy).

regular wage

A fixed and regular compensation for services provided, independent of time taken to provide those services (TESA). Introduced in TESA 3.1 Work and its forms, TESA Unit 6 The firm: Owners, managers, and employees.

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 (Micro, Macro). Introduced in Micro 6.4 Finding jobs and filling vacancies. See also: firm-specific asset.

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) (Micro, Macro, TE1, TESA). Introduced in Micro 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, TE1 2.3 Basic concepts: Prices, costs, and innovation rents, TE1 15.1 What’s wrong with inflation?, TESA 2.3 Basic concepts: Prices, costs, and innovation rents, TESA 15.1 What’s wrong with inflation?.

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 (TE1, TESA). Introduced in TE1 18.2 Globalization and investment.

rent ceiling

The maximum legal price a landlord can charge for a rent (Micro, Macro, TE1, TESA). Introduced in Micro 8.13 Price controls, TE1 11.10 Markets with controlled prices, TESA 11.9 Markets with controlled prices.

repeated game

A game in which the same interaction (same payoffs, players, feasible actions) may occur more than once. A game in which the same interaction (same payoffs, players, feasible actions) may be occur more than once (ESPP, TE1, TESA). Introduced in ESPP 2.6 When self-interest doesn’t work: The prisoners’ dilemma.

repugnant market

Buying or selling something that people believe ought not to be exchanged on a market (ESPP). Introduced in ESPP 12.2 The limits of markets: Repugnant markets and merit goods.

research and development

Expenditures by a private or public entity to create new methods of production, products, or other economically relevant new knowledge (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.3 Economies of scale and the cost advantages of large-scale production, TE1 7.1 Breakfast cereal: Choosing a price, TESA Unit 7 The firm and its customers, ESPP 7.1 Introduction.

reservation indifference curve

A curve that indicates combinations of goods that are as highly valued as one’s reservation option. A curve that indicates allocations (combinations) that are as highly valued as one’s reservation option (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 5 The rules of the game: Who gets what and why, Micro Unit 9 Lenders and borrowers and differences in wealth, TE1 5.7 Economically feasible allocations and the surplus, TE1 10.3 Impatience and the diminishing marginal returns to consumption, TESA 5.7 Economically feasible allocations and the surplus, TESA 10.2 Borrowing: Bringing consumption forward in time, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela, ESPP 9.4 Reasons to borrow: Smoothing and impatience. See also: reservation option.

reservation option

When someone makes a choice amongst the available options in a particular transaction, the reservation option is their next best alternative option. Also known as: fallback option. A person’s next best alternative among all options in a particular transaction. Also known as: fallback option (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 2.2 Economic decisions: Opportunity costs, economic rents, and incentives, Micro Unit 5 The rules of the game: Who gets what and why, Micro 6.5 Managing hiring and quitting: The reservation wage curve, Micro 10.3 Solving the problem: Private bargaining and property rights, TE1 2.3 Basic concepts: Prices, costs, and innovation rents, TE1 5.7 Economically feasible allocations and the surplus, TE1 12.2 External effects and bargaining, TESA 2.3 Basic concepts: Prices, costs, and innovation rents, TESA 5.7 Economically feasible allocations and the surplus, TESA 12.2 External effects and bargaining, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela, ESPP 11.8 External effects and private bargaining. See also: reservation price.

reservation price

The lowest price at which someone is willing to sell a good. The lowest price at which someone is willing to sell a good (keeping the good is the potential seller’s reservation option) (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1 8.1 Buying and selling: Demand and supply, TESA 8.1 Buying and selling: Demand and supply in a competitive market, ESPP 7.9 Buying and selling: Demand and supply in a competitive market. See also: reservation option.

reservation wage

The reservation wage is the lowest wage a worker is willing to accept to take up a new job. It is the wage available in the worker’s next best job option (the reservation option). For workers whose next best option is unemployment, the reservation wage takes into account the wages they expect to receive when they find a new job as well as any income received while unemployed. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 6.5 Managing hiring and quitting: The reservation wage curve, Micro Unit 6 The firm and its employees, Micro Unit 6 The firm and its employees, Macro 1.6 Wage setting and unemployment (WS curve), Macro 2.4 Labour market policies to address structural unemployment and inequality, TE1 6.5 Determinants of the employment rent, TE1 9.3 The wage-setting curve: Employment and real wages, TESA 6.5 Determinants of the employment rent, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 6.7 Employment rents.

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 (Macro).

reserves (natural resource)

The amount of a natural resource that is economically feasible to extract given existing technologies (TE1, TESA). Introduced in TE1 20.2 Climate change. See also: resources (natural).

residual claimant

The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example, the cost of hiring workers and paying taxes). 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). The person who receives the income left over from a firm or other project after the payment of all contractual costs (for example the cost of hiring workers and paying taxes) (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 6.3 Other people’s money: The separation of ownership and control, TE1 6.2 Other people’s money: The separation of ownership and control, TESA 6.2 Other people’s money: The separation of ownership and control, ESPP 6.4 Other people’s money: The separation of ownership and control.

resolution

The process of closing or restructuring a bank without interrupting its critical economic functions. Bank shareholders and some or all of the bank’s creditors bear the losses, instead of taxpayers. One approach to resolution is bail-in (Macro). Introduced in Macro 8.10 Addressing instability of the financial system. See also: bail-in.

resources (natural)

The estimated total amount of a substance in the earth’s crust (TE1, TESA). Introduced in TE1 Unit 20 Economics of the environment. See also: reserves (natural resource).

revealed preference

A way of studying preferences by reverse engineering the motives of an individual (her preferences) from observations about her or his actions (TE1, TESA). Introduced in TE1 4.8 Behavioural experiments in the lab and in the field, TESA 4.8 Behavioural experiments in the lab and in the field.

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 (Macro, TE1, TESA). Introduced in Macro 5.1 ‘It’s the economy, stupid’: Government popularity, inflation, and unemployment, Macro 5.7 The size of the multiplier and the impact of fiscal policy, TE1 Unit 13 Economic fluctuations and unemployment, TE1 14.7 The multiplier and economic policymaking, TESA Unit 13 Economic fluctuations and unemployment, TESA 14.7 The multiplier and economic policymaking. See also: correlation.

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 (Macro).

risk aversion

A preference for certain over uncertain outcomes (ESPP). Introduced in ESPP 10.6 The business of banking and bank balance sheets.

risk aversion, risk-averse

A risk-averse person has a preference for certainty (for example, getting $1 for sure) over a risky outcome of the same average value (such as a 5-5 chance of getting $2 or nothing) (Micro, Macro). Introduced in Micro 9.11 How good is the model?, Macro 8.2 Tipping points, instability, and lock-in, ESPP 10.6 The business of banking and bank balance sheets.

risk premium

Risky assets have to offer a higher rate of return than risk-free assets to compensate the buyer for risk. The risk premium is the difference between the return on the risky asset, and the risk-free rate (Macro). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, Macro 6.9 Introducing financial markets.

rival good

A good which, if consumed by one person, is not available to another (ESPP, TE1, TESA). See also: non-rival good.

rival, partially rival

A good is rival if, when one person consumes a unit of the good, no-one else can consume that unit. It is partially rival if more people using the good reduces the benefits available to other users (Micro, Macro). See also: non-rival.

rule of law

The principle that all members of a society are bound by the same laws, and nobody—however powerful—is ‘above the law’ (Macro). Introduced in Macro 10.3 Democracy as a political institution.

saving

When consumption expenditure is less than net income, saving takes place and wealth rises (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, TE1 10.1 Money and wealth, TESA 10.1 Money and wealth, ESPP 9.2 Income, consumption, and wealth. See also: wealth.

scarcity

A good is scarce if it is valued, and there is an opportunity cost of acquiring more of it. A good that is valued, and for which there is an opportunity cost of acquiring more (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.2 A problem of choice and scarcity, TESA Unit 3 Work, scarcity, and choice, TESA 8.6 The world oil market, ESPP 7.13 The world oil market.

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 (TE1, TESA).

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 (Micro, Macro). Introduced in Micro 6.11 Putting the wage-setting model to work: Wages, employment, and the rate of 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 (ESPP, TE1, TESA). Introduced in TE1 11.6 Changing supply and demand for financial assets, TESA 11.5 Changing supply and demand for financial assets, ESPP 10.9 Changing supply and demand for a financial asset.

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 (Macro, TE1, TESA). Introduced in Macro 2.6 Segmented labour markets, TE1 19.7 Putting the model to work: Explaining changes in inequality. See also: primary labour market, segmented labour market.

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) (Macro, TE1, TESA). Introduced in Macro 2.6 Segmented labour markets, TE1 19.7 Putting the model to work: Explaining changes in inequality. See also: primary labour market, secondary labour market.

selection bias

An issue that occurs when the sample or data observed is not representative of the population of interest. For example, individuals with certain characteristics may be more likely to be part of the sample observed (such as students being more likely than CEOs to participate in computer lab experiments) (DE). Introduced in DE Part 9.1 Households that did not get a loan, DE Part 9.1 Households that did not get a loan, DE Part 9.1 Households that did not get a loan, DE Part 9.1 Households that did not get a loan.

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 (Macro, TE1, TESA). Introduced in Macro 3.10 Shocks to households and the limits to smoothing consumption, TE1 13.5 How households cope with fluctuations, TESA 13.5 How households cope with fluctuations.

separation of ownership and control

The attribute of some firms by which managers are a separate group from the owners (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 6.3 Other people’s money: The separation of ownership and control, TE1 6.2 Other people’s money: The separation of ownership and control, TESA 6.2 Other people’s money: The separation of ownership and control, ESPP 6.4 Other people’s money: The separation of ownership and control.

sequential game

A game in which players do not all choose their strategies at the same time, and players who choose later can see the strategies already chosen by the other players. An example is the ultimatum 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 4.10 Dividing a pie (or leaving it on the table), TESA 4.10 Dividing a pie (or leaving it on the table), ESPP 3.3 Fairness and efficiency in the ultimatum game. See also: simultaneous 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. Also known as: common stock (ESPP, TE1, TESA). Introduced in TE1 6.2 Other people’s money: The separation of ownership and control, TE1 11.5 The value of an asset: Basics, TESA 6.2 Other people’s money: The separation of ownership and control, TESA 11.4 The value of an asset: Basics, ESPP 1.7 The capitalist revolution, ESPP 6.4 Other people’s money: The separation of ownership and control.

share of employment in industry

Percentage of the workforce employed in non-agricultural i.e. industrial sector (TESA).

shares, stocks

Shares (also known as stocks) are financial assets that can be bought and sold, giving their owners (the shareholders) shared ownership of the assets of a firm, and therefore a right to receive a corresponding share of the firm’s profit (Micro, Macro). Introduced in Micro 6.3 Other people’s money: The separation of ownership and control, Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets, TE1 6.2 Other people’s money: The separation of ownership and control, TE1 11.5 The value of an asset: Basics, TESA 6.2 Other people’s money: The separation of ownership and control, TESA 11.4 The value of an asset: Basics, ESPP 1.7 The capitalist revolution, ESPP 6.4 Other people’s money: The separation of ownership and control, Micro Unit 2 Technology and incentives, TE1 10.1 Money and wealth, TE1 16.2 The job creation and destruction process, TESA 10.1 Money and wealth.

shock

An exogenous change in some of the fundamental data or variables used in a model. An exogenous change in some of the fundamental data used in a model (ESPP, TE1, TESA). Introduced in TE1 8.6 Changes in supply and demand, TE1 13.5 How households cope with fluctuations, TESA 8.5 Changes in supply and demand, TESA 13.5 How households cope with fluctuations, ESPP 7.12 Changes in supply and demand.

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) (Micro, Macro). Introduced in Micro 7.4 Production and costs: The cost function for Beautiful Cars, Micro 8.7 Short-run and long-run equilibria.

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 (TE1, TESA). Introduced in TE1 11.3 Short-run and long-run equilibria, TESA 11.3 Short-run and long-run equilibria.

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 (TE1, TESA). Introduced in TE1 14.10 Aggregate demand and unemployment, TE1 16.6 Technological change and income inequality, TESA 14.10 Aggregate demand and unemployment, Micro 7.4 Production and costs: The cost function for Beautiful Cars, Micro 8.7 Short-run and long-run equilibria. See also: wages, capital, technology, institutions, medium run (model), long run (model).

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 (TE1, TESA). Introduced in TE1 11.8 Modelling bubbles and crashes, TESA 11.7 Modelling bubbles and crashes.

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 (TE1, TESA). Introduced in TE1 11.10 Markets with controlled prices, TESA 11.9 Markets with controlled prices. See also: supply side, demand 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 (TE1, TESA). Introduced in TE1 22.14 Special interests.

significance level

A cut-off probability that determines whether a p-value is considered statistically significant. If a p-value is smaller than the significance level, it is considered unlikely that the differences observed are due to chance, given the assumptions made about the variables (for example, having the same mean). Common significance levels are 1% (p-value of 0.01), 5% (p-value of 0.05), and 10% (p-value of 0.1) (DE). See also: statistically significant, p-value.

simultaneity

When the right-hand and left-hand variables in a model equation affect each other at the same time, so that the direction of causality runs both ways. For example, in supply and demand models, the market price affects the quantity supplied and demanded, but quantity supplied and demanded can in turn affect the market price (DE). Introduced in DE Part 7.1 Drawing supply and demand diagrams, DE Part 7.2 Interpreting supply and demand curves, DE Part 7.1 Drawing supply and demand diagrams, DE Part 7.1 Drawing supply and demand diagrams.

simultaneous game

A game in which the players choose their strategies simultaneously, for example, the prisoners’ dilemma. A game in which players choose strategies simultaneously, for example the prisoners’ dilemma (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro Unit 4 Strategic interactions and social dilemmas, TE1 4.10 Dividing a pie (or leaving it on the table), TESA 4.10 Dividing a pie (or leaving it on the table), ESPP 2.4 Social interactions as games. See also: sequential game.

social dilemma

A situation in which actions taken independently by individuals in pursuit of their own private objectives 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. 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. A situation in which actions taken independently by individuals in pursuit of their own private objectives result in an outcome which is inferior to some other feasible outcome that could have occurred if people had acted together, rather than as individuals (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 4.1 Climate negotiations: Conflicts and common interests, TE1 Unit 4 Social interactions, TE1 Unit 12 Markets, efficiency, and public policy, TESA Unit 4 Social interactions, TESA Unit 12 Markets, efficiency, and public policy, ESPP 2.1 Introduction, ESPP 11.1 Introduction.

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 (ESPP, TE1, TESA). Introduced in TE1 19.10 Redistribution: Taxes and transfers, TE1 22.8 The advance of democracy, ESPP 12.7 Spending by democratic governments: Priorities of a nation. See also: co-insurance.

social interaction

A situation in which the actions taken by each person affect other people’s outcomes as well as their own (ESPP). Introduced in ESPP 2.2 Two types of social interaction.

social interactions

Situations in which the actions taken by each person affect other people’s outcomes as well as their own (Micro, Macro, TE1, TESA). Introduced in Micro 4.1 Climate negotiations: Conflicts and common interests, Micro Unit 4 Strategic interactions and social dilemmas, TE1 Unit 4 Social interactions, TESA Unit 4 Social interactions, ESPP 2.2 Two types of social interaction.

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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 4.6 Public good games and cooperation, TE1 4.6 Public goods, free riding, and repeated interaction, TE1 Unit 12 Markets, efficiency, and public policy, TESA 4.6 Public goods, free riding, and repeated interaction, TESA Unit 12 Markets, efficiency, and public policy, ESPP 2.10 How three kinds of social preferences address social dilemmas.

social preferences

An individual is said to have social preferences if their individual utility depends on what happens to other people, as well as on their own pay-offs. A person with social preferences cares not only about how her action affects her personally, but also about how it affects other people. Also known as: other-regarding preferences. Preferences that place a value on what happens to other people, even if it results in lower payoffs for the individual. Preferences that place a value on what happens to other people, and on acting morally, even if it results in lower payoffs for the individual (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 4.7 Social preferences: Altruism, TE1 4.4 Social preferences: Altruism, TE1 20.7 Dynamic environmental policies: Future technologies and lifestyles, TESA 4.4 Social preferences: Altruism, ESPP 2.3 Resolving social dilemmas.

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). A firm or individual for which net worth is positive or zero. For example, a bank for this assets are more than its liabilities (what it owes) (ESPP, TE1, TESA). See also: insolvent.

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 (Macro, TE1, TESA). Introduced in Macro 7.10 Why do some countries still end up with high and volatile inflation?, TE1 14.8 The government’s finances, TESA 14.8 The government’s finances.

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. This takes place when a country or some other entity produces a more narrow range of goods and services than it consumes, acquiring the goods and services that it does not produce by trade (ESPP, TE1, TESA). Introduced in TE1 18.4 Specialization and the gains from trade among nations, ESPP 1.4 Economic growth.

speculation

Buying and selling assets in order to profit from an anticipated change in their price (TE1, TESA). Introduced in TE1 11.5 The value of an asset: Basics, TESA 11.4 The value of an asset: Basics.

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 (ESPP, TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom. See also: hedge finance.

spurious correlation

A strong linear association between two variables that does not result from any direct relationship, but instead may be due to coincidence or to another unseen factor (DE). Introduced in DE Part 1.3 Carbon emissions and the environment, DE Part 1.2 Variation in temperature over time, DE Part 1.3 Carbon emissions and the environment, DE Part 1.3 Carbon emissions and the environment, DE Part 2.3 How did changing the rules of the game affect behaviour?, DE Part 2.3 How did changing the rules of the game affect behaviour?, DE Part 2.3 How did changing the rules of the game affect behaviour?, DE Part 2.3 How did changing the rules of the game affect behaviour?.

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 (Macro, TE1, TESA). Introduced in Macro 8.2 Tipping points, instability, and lock-in, TE1 11.8 Modelling bubbles and crashes, TESA 11.7 Modelling bubbles and crashes. See also: equilibrium.

stagflation

Persistent high inflation combined with high unemployment in a country’s economy (TE1, TESA). Introduced in TE1 17.6 The end of the golden age.

standard deviation

A measure of dispersion in a frequency distribution, equal to the square root of the variance. The standard deviation has a similar interpretation to the variance. A larger standard deviation means that the data is more spread out. Example: The set of numbers 1, 1, 1 has a standard deviation of zero (no variation or spread), while the set of numbers 1, 1, 999 has a standard deviation of 46.7 (large spread) (DE). Introduced in DE Part 2.2 Describing the data, DE Part 2.1 Collecting data by playing a public goods game, DE 2. Collecting and analysing data from experiments Working in Google Sheets, DE Part 2.1 Collecting data by playing a public goods game.

standard error

A measure of the degree to which the sample mean deviates from the population mean. It is calculated by dividing the standard deviation of the sample by the square root of the number of observations (DE). Introduced in DE Getting started in R, DE Part 6.2 Do management practices differ between countries?.

stationary state

In the absence of technological progress, the marginal contribution of additional capital goods to increased production would eventually become so small that the process of growth could cease. John Stuart Mill welcomed this prospect as ‘a very considerable improvement on our present condition’ (TE1, TESA).

statistically significant

When a relationship between two or more variables is unlikely to be due to chance, given the assumptions made about the variables (for example, having the same mean). Statistical significance does not tell us whether there is a causal link between the variables (DE). Introduced in DE Part 3.1 Before-and-after comparisons of retail prices, DE Getting started in R, DE Part 3.1 Before-and-after comparisons of retail prices, DE Getting started in Python.

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 (TE1, TESA). Introduced in TE1 19.8 Predistribution.

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 2 Technology and incentives, Micro Unit 9 Lenders and borrowers and differences in wealth, TE1 10.1 Money and wealth, TE1 16.2 The job creation and destruction process, TESA 10.1 Money and wealth. See also: flow.

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. A financial marketplace where shares (or stocks) and other financial assets are traded. It has a list of companies whose shares are traded there (ESPP, TE1, TESA). Introduced in TE1 11.6 Changing supply and demand for financial assets, TESA 11.5 Changing supply and demand for financial assets, ESPP 10.9 Changing supply and demand for a financial asset. See also: share.

stock market

A financial market in which people buy and sell shares (stocks) in companies (Macro). Introduced in Macro 6.3 Debt and the financial sector: Financial intermediaries and financial markets. See also: shares, stocks.

stock variable

A quantity measured at a point in time. Its units do not depend on time (ESPP). Introduced in ESPP 9.2 Income, consumption, and wealth. See also: flow variable.

store of value

One of the characteristics of money is that it can be used as a store of value: people can store their wealth in this form until they want to use it to buy goods and services (Macro). Introduced in Macro 6.5 Introducing money.

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 (TE1, TESA). Introduced in TE1 21.5 Matching (two-sided) markets.

strategic interaction

A social interaction in which the participants are aware of the ways in which their actions affect others (and the ways in which the actions of others affect them). 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) (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 4.1 Social interactions: Game theory, TESA 4.1 Social interactions: Game theory, ESPP 2.4 Social interactions as games.

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 (TE1, TESA).

strategy

An action (or action plan) that a person may choose, while being aware that the outcomes for themselves and others depend on their own strategy and the strategies chosen by others. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, TE1 4.1 Social interactions: Game theory, TESA 4.1 Social interactions: Game theory, ESPP 2.4 Social interactions as games.

structural unemployment

The level of unemployment where the supply side of the economy is in equilibrium. In the WS–PS model, it is the unemployment level at which the price-setting real wage equals the wage-setting real wage. The level of unemployment at the Nash equilibrium of the labour and product market model (Macro, ESPP). Introduced in Macro 1.8 Equilibrium and disequilibrium in the WS–PS model, Macro 2.4 Labour market policies to address structural unemployment and inequality, Macro 4.4 Inflation, unemployment, and conflicting claims on output, Macro 10.13 Citizens and elected leaders as principals and agents, ESPP 8.5 The product market and the price-setting curve (firms and customers). See also: WS–PS model, Nash equilibrium, supply side.

subprime borrower

An individual with a low credit rating and a high risk of default (ESPP, TE1, TESA). Introduced in TE1 Unit 17 The Great Depression, golden age, and global financial crisis, ESPP 10.12 Banks, housing, and the global financial crisis. See also: subprime mortgage.

subprime mortgage

A residential mortgage issued to a high-risk borrower, for example, a borrower with a history of bankruptcy and delayed repayments (ESPP, TE1, TESA). Introduced in TE1 17.8 Before the financial crisis: Households, banks, and the credit boom, ESPP 10.12 Banks, housing, and the global financial crisis. See also: subprime borrower.

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 (Micro, Macro, TE1, TESA). Introduced in Micro Unit 1 Prosperity, inequality, and planetary limits, TE1 2.2 Economic models: How to see more by looking at less, TESA 2.2 Economic models: How to see more by looking at less.

substantive judgement of fairness

An evaluation of an outcome based on the characteristics of the allocation itself, not how it was determined (Micro, Macro). Introduced in Micro Unit 5 The rules of the game: Who gets what and why. See also: procedural judgement of fairness.

substantive judgements of fairness

Judgements based on the characteristics of the allocation itself, not how it was determined (ESPP, TE1, TESA). Introduced in TE1 5.3 Evaluating institutions and outcomes: Fairness, TESA 5.3 Evaluating institutions and outcomes: Fairness, ESPP 3.3 Fairness and efficiency in the ultimatum game. See also: procedural judgements of fairness.

substitutes

Two goods (or services) are described as substitutes when consumers would readily replace one with the other if the prices were similar. If the price of one of the goods increased, consumers would be more likely to choose the other (so demand for it would increase). Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 7 The firm and its customers, TE1 7.10 Price-setting, competition, and market power, TE1 21.3 External effects: Complements, substitutes, and coordination, TESA 7.9 Price-setting, market power, and public policy, ESPP 7.6 Gains from trade. See also: complements.

substitution effect

When the price of a good changes, the substitution effect is the change in the consumption of the good that occurs because of the change in the good’s relative price. The price change also has an income effect, because it expands or shrinks the feasible set. 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. The effect that is only due to changes in the price or opportunity cost, given the new level of utility (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.6 Hours of work and technological progress, Micro 3.7 Income and substitution effects on hours of work and free time, Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 10.8 Scope for political rent-seeking under different political systems, TE1 3.7 Income and substitution effects on hours of work and free time, TE1 20.7 Dynamic environmental policies: Future technologies and lifestyles, TE1 22.3 Political competition affects how the government will act, TESA 3.8 Income and substitution effects on hours of work and free time, ESPP 4.9 Applying the model: Explaining changes in working hours, ESPP 8.6 Wages, profits, and unemployment in the aggregate economy. See also: income effect.

supply curve

A supply curve shows the number of units of output that would be supplied to the market at any given price. The firm’s supply curve shows the units supplied by an individual firm, and the market (or industry) supply curve shows the total number of units supplied by all sellers in the market (or firms in the industry). Also known as: supply function. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 8.2 Buying and selling: Demand, supply, and the market-clearing price, Micro Unit 8 Supply and demand: Markets with many buyers and sellers, TE1 8.1 Buying and selling: Demand and supply, TESA 8.1 Buying and selling: Demand and supply in a competitive market, ESPP 7.9 Buying and selling: Demand and supply in a competitive market.

supply shock

An unexpected change on the supply side of the economy, such as a rise or fall in oil prices or an improvement in technology (TE1, TESA). Introduced in TE1 15.7 Supply shocks and inflation, TESA 15.7 Supply shocks and inflation. See also: wage-setting curve, price-setting curve, Phillips curve.

supply shock, supply-side 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 (Macro). Introduced in Macro 4.8 The business cycle model: Demand and supply shocks, and inflation expectations, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 15.7 Supply shocks and inflation, TESA 15.7 Supply shocks and inflation. See also: demand shock, exogenous shock.

supply side

The side of a market on which those participating are offering something in return for money (for example, those selling bread) (TE1, TESA). Introduced in TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms. See also: demand side.

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) (TE1, TESA). Introduced in TE1 14.10 Aggregate demand and unemployment, TE1 17.1 Three economic epochs, TESA 14.10 Aggregate demand and unemployment, TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms. See also: demand side (aggregate economy).

supply-side equilibrium

The economy is in supply-side equilibrium when the markets involved in the production of output are in equilibrium. In the WS–PS model it is the labour market equilibrium; that is, where the price-setting real wage equals the wage-setting real wage (Macro). Introduced in Macro 4.4 Inflation, unemployment, and conflicting claims on output, Macro Unit 5 Macroeconomic policy: Inflation and unemployment.

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 (Macro, TE1, TESA). Introduced in Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 17.7 After stagflation: The fruits of a new policy regime.

supply-side problem

See: supply side (TE1, TESA). See also: supply side.

supply side, 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 (Macro). Introduced in Macro 1.2 The economy as a whole, Macro Unit 3 Aggregate demand and the multiplier model, TE1 1.6 Capitalism defined: Private property, markets, and firms, TESA 1.6 Capitalism defined: Private property, markets, and firms. See also: demand side.

surplus, joint

See: joint surplus. The sum of the economic rents of all involved in an interaction. Also known as: total gains from exchange or trade (TE1, TESA). Introduced in TESA 5.6 Allocations imposed by force.

surplus labour

Labour that does not add to output (TESA). Introduced in TESA 2.7 Malthusian Economics: Modelling output growth.

sustainable economic growth, sustainable growth

Growth in aggregate income (GDP) is sustainable if it occurs without reducing the capital stock or environmental resources that are needed to produce future income (Macro). Introduced in Macro 9.12 Planetary limits and sustainable growth.

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 (TE1, TESA). Introduced in TE1 11.5 The value of an asset: Basics, TESA 11.4 The value of an asset: Basics.

systemic risk

A risk that threatens the financial system itself (TE1, TESA). Introduced in TE1 11.5 The value of an asset: Basics, TESA 11.4 The value of an asset: Basics.

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 (TE1, TESA). Introduced in TE1 21.2 Innovation systems. See also: codified knowledge.

tangency

When a line touches a curve, but does not cross it. When two curves share one point in common but do not cross. The tangent to a curve at a given point is a straight line that touches the curve at that point but does not cross it (ESPP, TE1, TESA). Introduced in TE1 3.1 Labour and production, TESA 3.2 Labour and production, ESPP 4.8 Hours of work and economic growth, ESPP 6.9 The employer sets the wage to minimize the cost per unit of effort.

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 (Macro, TE1, TESA). Introduced in Macro 8.7 Housing booms and busts: Household borrowing, bank lending, and aggregate consumption, TE1 14.3 Household target wealth, collateral, and consumption spending, TESA 14.3 Household target wealth, collateral, and consumption spending.

tariff

A tax on a good imported into a country (TE1, TESA). Introduced in TE1 Unit 18 The nation and the world economy.

tax

A tax is a compulsory payment to the government levied, for example, on workers’ incomes (income taxes) or firms’ profits (profit taxes) or included in the price paid for goods and services (value added or sales taxes). 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) (Macro, ESPP). Introduced in Macro 2.7 Taxes and the WS–PS model, Macro 10.2 Government as an economic actor, ESPP 3.3 Fairness and efficiency in the ultimatum game.

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 (Micro, Macro, TE1, TESA). Introduced in Micro 8.12 The effect of a tax, TE1 8.7 The effects of taxes, TESA 8.7 The effects of taxes.

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 (TE1, TESA). Introduced in TE1 16.1 Technological progress and living standards.

technically feasible

An allocation within the limits set by technology and biology (ESPP, TE1, TESA). Introduced in TE1 5.5 Technically feasible allocations, TESA 5.5 Technically feasible allocations, ESPP 5.4 The rule of force: Bruno appears and has unlimited power over Angela.

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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.5 The continuous technological revolution, TE1 1.4 The permanent technological revolution, TESA 1.4 The permanent technological revolution, ESPP 1.4 Economic growth, ESPP 4.8 Hours of work and economic growth.

technology

The description of a process that uses a set of materials and other inputs, including the work of people and machines, to produce an output. 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. The description of a process using a set of materials and other inputs, including the work of people and machines, to produce an output. A process taking a set of materials and other inputs, including the work of people and machines, to produce an output (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 1.5 The continuous technological revolution, Micro Unit 2 Technology and incentives, Micro Unit 5 The rules of the game: Who gets what and why, TE1 1.4 The permanent technological revolution, TESA 1.4 The permanent technological revolution, ESPP 1.4 Economic growth.

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 (Macro). Introduced in Macro Unit 4 Inflation and unemployment.

time series data

A time series is a set of time-ordered observations of a variable taken at successive, in most cases regular, periods or points of time. Example: The population of a particular country in the years 199, 1991, 1992, … , 215 is time series data (DE). Introduced in DE Part 4.1 GDP and its components as a measure of material wellbeing, DE Part 4.1 GDP and its components as a measure of material wellbeing, DE Part 4.1 GDP and its components as a measure of material wellbeing, DE Part 4.1 GDP and its components as a measure of material wellbeing.

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 (Macro, TE1, TESA). Introduced in Macro 8.2 Tipping points, instability, and lock-in, TE1 20.8 Environmental dynamics, TE1 21.5 Matching (two-sided) markets. See also: asset price bubble.

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 (TE1, TESA). Introduced in Macro 8.2 Tipping points, instability, and lock-in, TE1 20.8 Environmental dynamics, TE1 21.5 Matching (two-sided) markets. See also: positive feedback (process).

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 (ESPP, TE1, TESA). Introduced in TE1 1.10 Varieties of capitalism: Institutions, government, and the economy, TE1 12.7 Incomplete contracts and external effects in credit markets, TESA 12.7 Incomplete contracts and external effects in credit markets, ESPP 1.10 Varieties of capitalism: Growth and stagnation. See also: moral hazard.

total costs

The sum of all the costs a firm incurs to produce its total output (Micro, Macro). Introduced in Micro Unit 7 The firm and its customers.

total factor productivity, TFP

In a production process, if the amount of output that can be produced increases, without any changes in the factors of production (inputs) we say that total factor productivity (TFP) has increased. For example, if the inputs are capital (\(K\)) and labour (\(N\)), we can write the production function as \(Y = zF(K,N)\), where \(z\) represents TFP (Macro). Introduced in Macro 9.3 Capital goods and technology.

total revenue, revenue

A firm’s total revenue is the number of units sold times the price per unit (Micro, Macro). Introduced in Micro Unit 7 The firm and its customers, Micro 7.5 Demand, elasticity, and revenue.

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. See: joint surplus (ESPP, TE1, TESA). Introduced in TE1 7.7 Gains from trade, TESA 7.6 Gains from trade, ESPP 7.6 Gains from trade.

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 (Macro, TE1, TESA). Introduced in Macro 3.3 GDP as expenditure: The components of GDP, TE1 13.4 Measuring the aggregate economy: The components of GDP, TESA 13.4 Measuring the aggregate economy: The components of GDP. See also: trade deficit, trade surplus.

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 (TE1, TESA). See also: law of one price.

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) (Macro, TE1, TESA). Introduced in Macro 3.3 GDP as expenditure: The components of GDP, TE1 13.4 Measuring the aggregate economy: The components of GDP, TESA 13.4 Measuring the aggregate economy: The components of GDP. See also: trade surplus, trade balance.

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) (Macro, TE1, TESA). Introduced in Macro 3.3 GDP as expenditure: The components of GDP, TE1 13.4 Measuring the aggregate economy: The components of GDP, TESA 13.4 Measuring the aggregate economy: The components of GDP. See also: trade deficit, trade balance.

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 (ESPP, TE1, TESA). Introduced in TE1 9.10 Labour unions: Bargained wages and the union voice effect, TESA 9.10 Labour unions: Bargained wages and the union voice effect, ESPP 8.11 Labour unions: Bargained wages and the union voice effect.

trade union, labour union

A trade union, or labour union, is a membership organization of workers. Its principal activities are the negotiation with employers of rates of pay and conditions of employment for its members (Macro). Introduced in Macro 2.5 Labour unions, TE1 9.10 Labour unions: Bargained wages and the union voice effect, TESA 9.10 Labour unions: Bargained wages and the union voice effect, ESPP 8.11 Labour unions: Bargained wages and the union voice effect.

trademark

A logo, a name, or a registered design typically associated with the right to exclude others from using it to identify their products (ESPP, TE1, TESA). Introduced in TE1 21.6 Intellectual property rights, ESPP 10.2 Assets, money, banks, and the financial system.

tragedy of the commons

A social dilemma in which self-interested individuals acting independently deplete a common resource, lowering the payoffs of all (ESPP, TE1, TESA). Introduced in TE1 20.9 Why is addressing climate change so difficult?, ESPP 2.2 Two types of social interaction. See also: social dilemma.

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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 10.3 Solving the problem: Private bargaining and property rights, TE1 12.2 External effects and bargaining, TESA 12.2 External effects and bargaining, ESPP 11.8 External effects and private bargaining.

trend component

The long-run growth component of a macroeconomic time series. Commonly obtained using the Hodrick–Prescott (HP) filter (DE). Introduced in DE Part 1: Collecting and preparing the data, DE Part 2: Links between female labour supply and the macroeconomy, DE Part 1: Collecting and preparing the data.

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 (TE1, TESA). Introduced in TE1 18.9 Globalization and anti-globalization.

ultimatum game

A game 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. 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 (Micro, Macro, ESPP). Introduced in Micro Unit 4 Strategic interactions and social dilemmas, Micro 5.2 Institutions and power, ESPP 3.3 Fairness and efficiency in the ultimatum game.

uncertainty

The term ‘uncertainty’ (sometimes called fundamental uncertainty) describes cases in which we do not know which of two or more situations will occur in the future, and the probabilities of each occurring are not known or cannot be reliably estimated (Macro).

uncovered interest parity, UIP

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 (Macro). Introduced in Macro 7.8 Global financial markets and policy interest rates.

unemployed, unemployment

An unemployed person is someone who is able and willing to work, but is not currently employed (Macro). Introduced in Macro 1.3 Measuring the macroeconomy: Output, employment, unemployment, and inactivity, TE1 9.2 Measuring the economy: Employment and unemployment, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 8.2 Measuring the economy: Employment and unemployment.

unemployment

A situation in which a person who is able and willing to work is not employed (ESPP, TE1, TESA). Introduced in TE1 9.2 Measuring the economy: Employment and unemployment, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 8.2 Measuring the economy: Employment and unemployment.

unemployment benefit

A government transfer that is paid to an unemployed person while they are unemployed (or for part of the unemployment period). Also known as unemployment insurance. A government transfer that is paid to an unemployed person while they are unemployed (or for part of the unemployment period). Also known as: unemployment insurance. A government transfer received by an unemployed person. Also known as: unemployment insurance (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 6 The firm and its employees, Macro 1.6 Wage setting and unemployment (WS curve), Macro 2.4 Labour market policies to address structural unemployment and inequality, TE1 6.5 Determinants of the employment rent, TESA 6.5 Determinants of the employment rent, ESPP 6.4 Other people’s money: The separation of ownership and control.

unemployment, involuntary

The state of being out of work, but pre­ferring to have a job at the wages and working conditions that other­wise identical employed workers have (TE1, TESA). Introduced in TE1 6.7 Wages, effort, and profits in the labour discipline model, TE1 Unit 9 The labour market: Wages, profits, and unemployment, TESA 6.7 Wages, effort, and profits in the labour discipline model, TESA Unit 9 The labour market: Wages, profits, and unemployment, TE1 9.2 Measuring the economy: Employment and unemployment, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 8.2 Measuring the economy: Employment and unemployment. See also: unemployment.

unemployment rate

The unemployment rate is the fraction of the total labour force that is seeking work, but is not currently employed. 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.) 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) (Macro, ESPP, TE1, TESA). Introduced in Macro 1.3 Measuring the macroeconomy: Output, employment, unemployment, and inactivity, TE1 9.2 Measuring the economy: Employment and unemployment, TESA 9.2 Measuring the economy: Employment and unemployment, ESPP 8.2 Measuring the economy: Employment and unemployment. See also: labour force, employment rate.

union voice effect

The union voice effect refers to the beneficial effect that a trade union, by providing a ‘voice’ to otherwise unheard workers, can have on their treatment by employers and their job satisfaction. 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 (Macro, ESPP). Introduced in Macro 2.5 Labour unions, ESPP 8.11 Labour unions: Bargained wages and the union voice effect.

unit cost

Total cost divided by number of units produced. Total cost divided by the number of units produced (ESPP, TESA). Introduced in TESA 7.3 Profits, costs, and the isoprofit curve, ESPP 7.1 Introduction.

unit of account

A standard unit that is used to measure and compare the market value of different goods and services. One of the functions of money in the economy is to act as a unit of account (Macro). Introduced in Macro 6.2 Bilateral debt: Marco and Julia, Macro 7.4 The ultimate Fix economy: A country within a common currency area.

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 (Macro, TE1, TESA). Introduced in Macro 8.2 Tipping points, instability, and lock-in, TE1 11.8 Modelling bubbles and crashes, TE1 21.5 Matching (two-sided) markets, TESA 11.7 Modelling bubbles and crashes. See also: equilibrium.

utility

A numerical indicator of the value that one places on an outcome. Outcomes with higher utility will be chosen in preference to lower valued ones when both are feasible. 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. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 3.3 Goods and preferences, Micro 4.7 Social preferences: Altruism, Micro 6.5 Managing hiring and quitting: The reservation wage curve, Micro Unit 6 The firm and its employees, Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 1.6 Wage setting and unemployment (WS curve), TE1 3.2 Preferences, TE1 6.5 Determinants of the employment rent, TE1 Indifference curves and the marginal rate of substitution, TESA 3.3 Preferences, TESA 6.5 Determinants of the employment rent, TESA 3.2.1 Indifference curves and the marginal rate of substitution, ESPP 4.4 Making decisions when there are trade-offs, ESPP 6.4 Other people’s money: The separation of ownership and control, ESPP 9.4 Reasons to borrow: Smoothing and impatience.

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 (Micro, Macro). Introduced in Micro 3.3 Goods and preferences.

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 (Macro, TE1, TESA). Introduced in Macro 3.2 Measuring the aggregate economy: Gross domestic product, TE1 13.3 Measuring the aggregate economy, TESA 13.3 Measuring the aggregate economy.

variable costs

Costs of production that vary with the number of units produced (Micro, Macro). Introduced in Micro 7.4 Production and costs: The cost function for Beautiful Cars.

variance

A measure of dispersion in a frequency distribution, equal to the mean of the squares of the deviations from the arithmetic mean of the distribution. The variance is used to indicate how ‘spread out’ the data is. A higher variance means that the data is more spread out. Example: The set of numbers 1, 1, 1 has zero variance (no variation), while the set of numbers 1, 1, 999 has a high variance of 221,334 (large spread) (DE). Introduced in DE Part 1.2 Variation in temperature over time, DE Part 1.2 Variation in temperature over time, DE Part 1.2 Variation in temperature over time, DE Part 1.2 Variation in temperature over time, DE Part 2.2 Describing the data, DE Part 2.1 Collecting data by playing a public goods game, DE 2. Collecting and analysing data from experiments Working in Google Sheets, DE Part 2.1 Collecting data by playing a public goods game.

Veblen effect

A negative effect on others that arises from a person’s consumption of goods such as luxury housing, clothing, or vehicles, that display or signal social status. 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 (Micro, Macro, ESPP). Introduced in Micro 3.10 Application: Work hours, free time, and inequality, ESPP 4.10 Applying the model: Explaining differences between countries. See also: conspicuous consumption.

verifiable information

Information is verifiable if it can be verified by a court and hence used to enforce a contract. Information that can be used to enforce a contract (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 10 Market successes and failures: The societal effects of private decisions, TE1 12.4 Property rights, contracts, and market failures, TESA 12.4 Property rights, contracts, and market failures, ESPP 11.10 Property rights, contracts, and market failures.

voluntary unemployment

A person may be said to be voluntarily unemployed if they are seeking work, but not willing to accept a job at the going wage for people of their level of skill and experience (Macro). Introduced in Macro 1.8 Equilibrium and disequilibrium in the WS–PS model. See also: involuntary unemployment.

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 (Macro, TE1, TESA). Introduced in Macro 4.4 Inflation, unemployment, and conflicting claims on output, TE1 15.1 What’s wrong with inflation?, TESA 15.1 What’s wrong with inflation?. See also: nominal wage.

wage labour

A system in which producers are paid for the time they work for their employers (ESPP, TE1, TESA). Introduced in TE1 Unit 6 The firm: Owners, managers, and employees, TESA 6.1 Firms, markets, and the division of labour, ESPP 6.2 Firms, markets, and the division of labour.

wage labour contract

See: wage labour, contract (TE1, TESA). See also: wage labour, contract.

wage markdown

When employers have labour market power they ‘mark down’ the wage. In our model with constant output per worker, the markdown is equal to the difference between the marginal cost of output and the average wage cost of a unit of output, as a proportion of the average wage cost of a unit of output (Macro). Introduced in Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages.

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 (Macro, TE1, TESA). Introduced in TE1 15.3 Inflation, the business cycle, and the Phillips curve, TESA 15.3 Inflation, the business cycle, and the Phillips curve, Macro Unit 4 Inflation and unemployment.

wage-setting curve

The curve that gives the real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well (TE1, TESA). Introduced in TE1 Unit 9 The labour market: Wages, profits, and unemployment, TE1 16.4 Investment, firm entry, and the price-setting curve in the long run, TESA Unit 9 The labour market: Wages, profits, and unemployment.

wage-setting curve, WS curve

A relationship showing, for each level of economy-wide employment, the wage that employers need to set to recruit and motivate workers (Macro). Introduced in Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, TE1 Unit 9 The labour market: Wages, profits, and unemployment, TE1 16.4 Investment, firm entry, and the price-setting curve in the long run, TESA Unit 9 The labour market: Wages, profits, and unemployment.

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 (ESPP). Introduced in ESPP 8.2 Measuring the economy: Employment and unemployment.

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 (Macro, ESPP). Introduced in Macro 2.4 Labour market policies to address structural unemployment and inequality, ESPP 8.13 Labour market policies to address unemployment and inequality.

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 (ESPP, TE1, TESA). Introduced in TE1 13.6 Why is consumption smooth?, TESA 13.6 Why is consumption smooth?.

wealth

The stock of things owned, or value of that stock. Wealth may generate income, or contribute to the owner’s wellbeing in some other way. 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 shares or bonds. To calculate wealth, debts are subtracted—for example, the mortgage owed to the bank. Debts owed to the person are added. 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. 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 shares or bonds. Debts are subtracted—for example, the mortgage owed to the bank. Debts owed to the person are added (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro Unit 9 Lenders and borrowers and differences in wealth, Macro 6.2 Bilateral debt: Marco and Julia, Macro 8.1 Collapse of Lehman Brothers (2007–2009), TE1 10.1 Money and wealth, TESA 10.1 Money and wealth, ESPP 9.2 Income, consumption, and wealth.

weighted average

A type of average that assigns greater importance (weight) to some components than to others, in contrast with a simple average, which weights each component equally. Components with a larger weight can have a larger influence on the average (DE). Introduced in DE 10. Characteristics of banking systems around the world Working in Excel, DE Part 10.1 Summarizing the data, DE Part 10.1 Summarizing the data, DE Part 10.1 Summarizing the data.

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) (TE1, TESA). Introduced in TE1 18.7 Winners and losers in the very long run and along the way, TE1 19.10 Redistribution: Taxes and transfers.

willingness to accept (WTA)

An indicator of how much a person values a good, measured by the minimum amount of money they would accept in exchange for a unit of the good (that is, their reservation price). The reservation price of a potential seller, who will be willing to sell a unit only for a price at least this high (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1 8.1 Buying and selling: Demand and supply, TESA 8.1 Buying and selling: Demand and supply in a competitive market, ESPP 7.9 Buying and selling: Demand and supply in a competitive market. See also: willingness to pay.

willingness to pay (WTP)

An indicator of how much a person values a good, measured by the maximum amount they would pay to acquire a unit of the good. 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 (Micro, Macro, ESPP, TE1, TESA). Introduced in Micro 7.5 Demand, elasticity, and revenue, Micro 8.2 Buying and selling: Demand, supply, and the market-clearing price, TE1 7.4 Demand and isoprofit curves: Beautiful Cars, TE1 8.1 Buying and selling: Demand and supply, TESA 7.2 The demand curve and willingness to pay, TESA 8.1 Buying and selling: Demand and supply in a competitive market, ESPP 7.1 Introduction. See also: willingness to accept.

winner-take-all competition

Firms entering a market first can often dominate the entire market, at least temporarily (TE1, TESA). Introduced in TE1 21.4 Economies of scale and winner-take-all competition.

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 (ESPP). Introduced in ESPP 6.13 Another kind of business organization: Cooperative firms.

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. Also known as: best response curve. The optimal amount of work that a worker chooses to perform for each wage that the employer may offer (ESPP, TE1, TESA). Introduced in TE1 6.6 Work and wages: The labour discipline model, TESA 6.6 Work and wages: The labour discipline model, ESPP 6.8 Work effort and wages: The labour discipline model, ESPP 8.2 Measuring the economy: Employment and unemployment.

WS-PS model, 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 (Macro, ESPP). Introduced in Macro Unit 1 The supply side of the macroeconomy: Unemployment and real wages, Macro Unit 2 Unemployment, wages, and inequality: Supply-side policies and institutions, Macro 4.7 The business cycle model: Aggregate demand, the supply side, and inflation, ESPP 8.2 Measuring the economy: Employment and unemployment. See also, wage-setting curve, price-setting curve, structural unemployment.

yield

The implied rate of return that the buyer gets on their money when they buy a bond at its market price (ESPP, TE1, TESA). Introduced in TE1 10.9 The central bank, the money market, and interest rates, TESA 10.9 The central bank, the money market, and interest rates, ESPP 10.4 Banks, profits, and the creation of money.

zero economic profit

A rate of profit equal to the opportunity cost of capital (TE1, TESA). See also: normal profits, 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 (Macro, TE1, TESA). Introduced in Macro Unit 4 Inflation and unemployment, Macro Unit 5 Macroeconomic policy: Inflation and unemployment, TE1 15.8 Monetary policy, TE1 17.3 Policymakers in the Great Depression, TESA 15.8 Monetary policy. See also: quantitative easing.

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 (TE1, TESA). Introduced in TE1 4.4 Social preferences: Altruism, TESA 4.4 Social preferences: Altruism.