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Absolute advantage. One nation's ability to produce a product more efficiently—with fewer resources—than another nation.

Activist economists. Economists who see an important role for government in guiding the economy's performance.

Aggregate demand. The total quantity of output demanded by all sectors in the economy together at various price levels in a given time period.

Aggregate supply. The total quantity of output supplied by all producers in the economy together at various price levels in a given time period.

Allocative efficiency. Using society's scarce resources to produce in the proper quantities the products that consumers value most.

Annual inflation rate. The percent change in a price index from one year to the next.

Antitrust laws. Laws that have as their objective the maintenance and promotion of competition.

Applied research. Research conducted with a commercial purpose in mind.

Appreciation of currency. An increase in the exchange value of a currency relative to other currencies.

Asset. Anything of value owned by an entity.

Automatic stabilizers. Changes in the level of government spending or taxation that occur automatically whenever the level of aggregate income (GDP) changes.

Average fixed cost (AFC). Total fixed cost divided by the number of units being produced.

Average total cost (ATC). Total cost divided by the number of units being produced.

Average variable cost (AVC). Total variable cost divided by the number of units being produced.

Balance of payments (BOP) statement. A record of all economic transactions between a particular country and the rest of the world during some specified period of time.

Balance of payments deficit. Total payments to other countries exceed total receipts from other countries for an unfavorable balance of payments.

Balance of payments surplus. Total receipts from other countries exceed total payments to other countries for a favorable balance of payments.

Balance sheet. A statement of a business's assets and liabilities.

Balanced budget. A situation in which government tax revenue is exactly equal to government expenditures.

Barriers to entry. Obstacles that discourage or prevent firms from entering an industry; examples include patent restrictions, large investment requirements, and restrictive licensing regulations.

Basic research. Research conducted to gain knowledge for its own sake.

Bretton Woods system. A fixed exchange rate system whereby nations agreed to fix a value on their currency in terms of the dollar, and the United States agreed to redeem dollars from other central banks for gold.

Budget deficit. The situation that exists when government expenditures exceed tax revenues.

Budget surplus. The situation that exists when government tax receipts exceed government expenditures.

Business cycle. The recurring ups and downs in the level of economic activity.

Capital. Physical aids to the production process; for example, factories, machinery, and tools.

Capital account. The portion of a nation's balance of payments statement that records the purchase and sale of capital assets.

Capitalism. An economic system in which the means of production are privately owned and fundamental economic choices are made by individual buyers and sellers interacting in markets.

Cartel. A group of producers acting together to control output and the price of their product.

Central bank. A government agency responsible for controlling a nation's money supply.

Ceteris paribus. "Other things being equal"; the assumption that other variables remain constant.

Change in demand. An increase or decrease in the quantity demanded at each possible price, caused by a change in the determinants of demand; represented graphically by a shift of the entire demand curve to a new position.

Change in quantity demanded. An increase or decrease in the amount of a product demanded as a result of a change in its price, with factors other than price held constant; represented graphically by movement along a stationary demand curve.

Change in quantity supplied. An increase or decrease in the amount of a product supplied as a result of a change in its price, with factors other than price held constant; represented graphically by movement along a stationary supply curve.

Change in supply. An increase or decrease in the amount of a product supplied at each and every price, caused by a change in the determinants of supply; represented graphically by a shift of the entire supply curve.

Checkable deposits. All types of deposits on which customers can write checks.

Civilian labor force. All persons over the age of sixteen who are not in the armed forces and who are either employed or actively seeking employment.

Civilian unemployment rate. The percentage of the civilian labor force that is unemployed.

Classical economists. A school of eighteenth- and nineteenth-century economists who believed that market economies automatically tend toward full employment.

Closed economy. An economy that does not exchange goods and services with other nations.

Coefficient of demand elasticity. A value that indicates the degree to which quantity demanded will change in response to a price change.

Coefficient of supply elasticity. A value that indicates the degree to which the quantity supplied will change in response to a price change.

Collusion. Agreement among sellers to fix prices or in some other way restrict competition.

Command socialism. An economic system in which the means of production are publicly owned and the fundamental economic choices are made by a central authority.

Common-property resources. Resources that belong to society as a whole rather than to particular individuals.

Comparative advantage. One nation's ability to produce a product at a lower opportunity cost than other nations.

Complement. A product that is normally purchased along with another good or in conjunction with another good.

Conscious parallelism. A situation in which firms adopt similar policies even though they have had no communication whatsoever.

Consumer sovereignty. An economic condition in which consumers dictate which goods and services will be produced by businesses.

Consumption tax. A tax assessed on the amount spent. Also called an expenditure tax.

Cost-benefit analysis. A systematic comparison of costs and benefits.

Cost-push inflation. Inflation caused by rising costs of production.

Crowding out. The phenomenon that occurs when increased government borrowing drives up interest rates and thereby reduces the level of investment spending.

Current account. The portion of a nation's balance of payments statement that records the exports and imports of goods and services.

Cyclical unemployment. Joblessness caused by a reduction in the economy's total demand for goods and services.

Deficiency payment. A payment made to farmers on a price-support program; equal to the difference between the market price and the support price times the number of bushels sold.

Demand. A schedule showing the quantities of a good or service that consumers are willing and able to purchase at various prices during a given time period, when all factors other than the product's price remain unchanged.

Demand curve. A graphical representation of demand, showing the quantities of a good or service that consumers are willing and able to purchase at various prices during a given time period, ceteris paribus.

Demand deposits. Non-interest-bearing checking accounts at commercial banks.

Demand-pull inflation. Inflation caused by increases in aggregate demand.

Deposit multiplier. The multiple by which checkable deposits (in the entire banking system) increase or decrease in response to an initial change in excess reserves.

Depreciation of currency. A decrease in the exchange value of a currency relative to other currencies.

Determinants of demand. The factors that underlie the demand schedule and determine the precise position of the demand curve: income, tastes and preferences, expectations regarding prices, the prices of related goods, and the number of consumers in the market.

Determinants of supply. The factors that underlie the supply schedule and determine the precise position of the supply curve: technology, resource prices, and number of producers in the market.

Discount rate. The rate of interest charged by the Federal Reserve on loans to depository institutions.

Discretionary fiscal policy. The deliberate changing of the level of government spending or taxation in order to guide the economy's performance.

Diseconomies of scale. Increases in the average cost of production caused by larger plant size and scale of output.

Dominant strategy. A strategy that should be pursued regardless of the strategy selected by a firm's rivals.

Dumping. The sale of a product to foreign consumers at a price that is less than the cost of producing that good or service.

Economic growth. An increase in an economy's production capacity or potential GDP.

Economic indicators. Signals or measures that tell us how well the economy is performing.

Economic loss. The amount by which total cost, including all opportunity costs, exceeds total revenue.

Economic profit. The amount by which total revenue exceeds total cost, including the opportunity cost of owner-supplied resources; also called an above-normal profit.

Economic resources. The scarce inputs used in the process of creating a good or providing a service; specifically, land, labor, capital, and entrepreneurship.

Economic system. The set of institutions and mechanisms by which a society provides answers to the three fundamental questions.

Economic theories. Generalizations about causal relationships between economic facts, or variables.

Economics. The study of how to use our limited resources to satisfy our unlimited wants as fully as possible.

Economies of scale. Reductions in the average cost of production caused by larger plant size and scale of output.

Entrepreneurship. The managerial function that combines land, labor, and capital in a cost-effective way and uncovers new opportunities to earn profit; includes willingness to take the risks associated with a business venture.

Equilibrium exchange rate. The exchange rate at which the quantity of a currency demanded is equal to the quantity supplied.

Equilibrium price. The price that brings about an equality between the quantity demanded and the quantity supplied.

Equilibrium quantity. The quantity demanded and supplied at the equilibrium price.

Excess reserves. Bank reserves in excess of the amount required by law.

Exchange rate. The price of one nation's currency stated in terms of another nation's currency.

Exchange rate risk. The risk of losing income or wealth when the exchange rate changes unexpectedly.

Expenditure tax. A tax assessed on the amount spent. Also called a consumption tax.

Exports. Goods and services produced domestically and sold to customers in other countries.

External benefits. Benefits paid for by one party or group that spill over to other parties or groups; also referred to as spillover benefits.

External costs. Costs created by one party or group and imposed on other (unconsenting) parties or groups; also referred to as spillover costs.

Externalities. Costs or benefits that are not borne by either buyers or sellers but that spill over onto third parties.

Federal budget. A statement of the federal government's planned expenditures and anticipated receipts for the upcoming year.

Federal funds market. A market that brings together banks in need of reserves and banks that temporarily have excess reserves.

Federal funds rate. The rate of interest charged by banks for lending reserves to other banks.

Firm. The basic producing unit in a market economy. Firms buy economic resources and combine them to produce goods and services.

Fixed costs. Costs that do not vary with the level of the activity in which the individual or business is engaged and that cannot be avoided; for businesses, costs that do not change with the level of output.

Fixed exchange rate. An exchange rate established by central governments rather than by market forces.

Flexible exchange rate. An exchange rate that is determined by market forces, by the supply and demand for the currency. Also described as a floating exchange rate.

Floating exchange rate. See flexible exchange rate.

Fractional reserve principle. The principle that a bank needs to maintain only a fraction of a dollar in reserve for each dollar of its demand deposits.

Free trade. Trade that is not hindered by artificial restrictions or trade barriers of any type.

Frictional unemployment. People who are out of work because they are in the process of changing jobs or are searching for their first job.

Full employment. When the actual rate of unemployment is equal to the natural rate of unemployment.

Game theory. The study of the strategies employed by interdependent firms.

Gold standard. A fixed exchange rate system whereby the value of each country's currency is directly tied to gold.

Government failure. The enactment of government policies that produce inefficient and/or inequitable results.

Government franchise. An exclusive license to provide some product or service.

Gross domestic product. The total monetary value of all final goods and services produced within a nation in one year.

Gross national product. The total monetary value of all final goods and services produced by domestically owned factors of production in one year.

Household. A living unit that also functions as an economic unit. Whether it consists of a single person or a large family, each household has a source of income and responsibility for spending that income.

Human capital. The knowledge and skills that are embodied in labor. Human capital is acquired through education and training.

Import quota. A law that specifies the maximum amount of a particular product that can be imported.

Imports. Goods and services that are purchased from foreign producers.

Income effect. Consumer ability to purchase greater quantities of a product that has declined in price.

Industry. A group of firms that produce identical or similar products.

Industry structure. The makeup of an industry: its number of sellers and their size distribution, the nature of the product, and the extent of barriers to entry.

Inferior good. A product for which demand decreases as income increases and increases as income decreases.

Inflation. A rise in the general level of prices.

Inflationary gap. The amount by which the equilibrium level of real GDP exceeds potential GDP.

Interest rate effect. The increase in the amount of aggregate output demanded that results from the lower interest rates that accompany a reduction in the overall price level.

Internal benefits. The benefits accruing to the person or persons purchasing a good or service; also referred to as private benefits.

Internal costs. The costs borne by the firm that produces the good or service; also referred to as private costs.

Internalize costs. Consider external costs as if they were private costs.

International economics. The study of international trade and finance: why nations trade and how their transactions are financed.

International trade effect. The increase in the amount of aggregate output demanded that results when a reduction in the price level makes domestic products less expensive in relation to foreign products.

Investment tax credit. A tax reduction available to firms that invest in eligible equipment.

Invisible hand. A doctrine introduced by Adam Smith in 1776 holding that individuals pursuing their self-interest will be guided (as if by an invisible hand) to achieve objectives that are also in the best interest of society as a whole.

Joint research venture. Research projects in which firms pool their resources and share the costs of research and development.

Labor. The mental and physical work of those employed in the production process.

Laissez-faire economy. An economy in which the degree of government intervention is minimal.

Land. All the natural resources or raw materials used in production; for example, acreage, timber, water, iron ore.

Law of demand. The quantity demanded of a product is negatively, or inversely, related to its price. Consumers will purchase more of a product at lower prices than at higher prices.

Law of increasing costs. As more of a particular product is produced, the opportunity cost per unit will increase.

Law of supply. The quantity supplied of a product is positively, or directly, related to its price. Producers will supply a larger quantity at higher prices than at lower prices.

Liabilities. The debts of an entity, or what it owes.

Lifetime Learning Tax Credit. A federal program that provides a tax deduction equal to 20 percent of the cost of qualified educational expenses.

Loanable funds market. The market in which businesses and households borrow funds to make investments.

Logrolling. The trading of votes to gain support for a proposal.

Long run. The period of time during which all a business's inputs, including plant and equipment, can be changed.

Long-run equilibrium. A situation in which the size of an industry is stable: There is no incentive for additional firms to enter the industry and no pressure for established firms to leave it.

Loss. The excess of total cost over total revenue.

M-1. Federal Reserve definition of the money supply that includes currency in the hands of the public plus all checkable deposits; the narrowest definition of the money supply.

M-2. Federal Reserve definition of the money supply that includes all of "M-1 plus money-market mutual fund balances, money-market deposits at savings institutions, and small savings deposits.

M-3. Federal Reserve definition of the money supply that includes all of M-2 plus large savings deposits.

Macroeconomics. The study of the economy as a whole and the factors that influence the economy's overall performance.

Managed exchange rates. Exchange rates that are determined by market forces with some intervention by central banks. Also described as a managed float.

Managed float. See managed exchange rates.

Marginal. Additional or extra.

Marginal cost (MC). The additional cost of producing one more unit of output.

Marginal revenue (MR). The additional revenue to be gained by selling one more unit of output.

Marginal social benefit. The benefit that the consumption of another unit of output conveys to society.

Marginal social cost. The cost that the production of another unit of output imposes on society.

Market. All actual or potential buyers and sellers of a particular item. Markets can be international, national, regional, or local.

Market failure. Situations in which a market economy produces too much or too little of certain products and thus does not make the most efficient use of society's limited resources.

Market power. Pricing discretion; the ability of a firm to influence the market price of its product.

Means of production. The raw materials, factories, farms, and other economic resources used to produce goods and services.

Medium of exchange. A generally accepted means of payment for goods and services; one of the three basic functions of money.

Merger. The union of two or more companies into a single firm.

Microeconomics. The study of the behavior of individual economic units.

Mixed economies. Economies that represent a blending of capitalism and socialism. All real-world economies are mixed economies.

Monetarism. The belief that changes in the money supply play the primary role in determining the level of aggregate output and prices in the economy.

Monetary policy. Any action intended to alter the supply of money in order to influence the level of total spending and thereby combat unemployment or inflation.

Monetary rule. A rule that would require the Federal Reserve to increase the money supply at a constant rate.

Monopolistic competition. An industry structure characterized by a large number of small sellers of slightly differentiated products and by modest barriers to entry.

Monopoly. An industry structure characterized by a single firm selling a product for which there are no close substitutes and by substantial barriers to entry.

Motivating. The function of providing incentives to supply the proper quantities of demanded products.

Nash equilibrium. A situation in which each firm's strategy is the best it can choose, given the strategies chosen by the other firms in the industry.

National saving. The sum of private saving and public saving; the total amount of saving taking place in an economy.

Natural monopoly. A situation in which a single firm can supply the entire market at a lower average cost than two or more firms could.

Natural rate of unemployment. The minimum level of unemployment that an economy can achieve in normal times. The rate of unemployment that would exist in the absence of cyclical unemployment.

Near money. Assets that are not money but that can be converted quickly to money.

Nonactivist economists. Economists who do not believe that government should play an active role in attempting to guide the economy's performance.

Normal good. A product for which demand increases as income increases and decreases as income decreases.

Normal profit. An amount equal to what the owners of a business could have earned if their resources had been employed elsewhere; the opportunity cost of owner-supplied resources.

Normative issue. A question that calls for a value judgment about how things ought to be.

NOW account. A savings account on which the depositor can write checks; NOW stands for negotiable order of withdrawal.

Official reserve transactions. The purchase and sale of reserve assets by central banks.

Oligopoly. An industry structure characterized by a few relatively large sellers and substantial barriers to entry.

Open economy. An economy that exchanges goods and services with other nations.

Open-market operations. The buying and selling of government securities by the Federal Reserve as a means of influencing the money supply.

Opportunity cost. The best, or most valued, alternative that is sacrificed when a particular action is taken.

Owners' equity. The owners' claims on the assets of the business; it is equal to assets minus liabilities.

Physical capital. Physical aids to production. Examples include machines, tools, and factories.

Policy ineffectiveness theorem. The theory that systematic monetary and fiscal policies cannot alter the level of output or employment in the economy; they can change only the price level.

Price ceiling. A legally established maximum price below the equilibrium price.

Price discrimination. The practice of charging different consumers different prices for the same product.

Price elasticity of demand. A measure of the responsiveness of the quantity demanded of a product to a change in its price.

Price elasticity of supply. A measure of the responsiveness of the quantity supplied of a product to a change in its price.

Price index. A measure of changes in the general level of prices. Three basic price indexes are used in the United States: the Consumer Price Index, the Producer Price Index, and the Implicit Price Deflator.

Price leadership. An informal arrangement whereby a single firm takes the lead in all price changes in the industry.

Price searcher. A firm that possesses pricing discretion.

Price support. A legally established minimum price above the equilibrium price.

Price taker. A firm that must accept price as a given that is beyond its control.

Private benefits. The benefits accruing to the person or persons purchasing a good or service; also referred to as internal benefits.

Private costs. The costs borne by the firm that produces the good or service; also referred to as internal costs.

Private goods that yield significant external benefits. Products that convey most of their benefits to the person making the purchase but also create substantial external benefits for other individuals or groups.

Private saving. The amount of income that households have left over after subtracting taxes and consumption spending.

Product differentiation. Distinguishing a product from similar products offered by other sellers in the industry through advertising, packaging, or physical product differences.

Production efficiency. Producing a product at the lowest possible average total cost. The essence of production efficiency is that each product is produced with the fewest possible scarce resources .

Production possibilities curve. A curve that shows the combinations of goods that an economy is capable of producing with its present stock of economic resources and existing techniques of production.

Productivity of labor. The amount of output the average worker is able to produce. A common measure of the productivity of labor is output per hour.

Profit. The excess of a business's total revenue over its total cost.

Profit maximizer. A business that attempts to earn as much profit as possible.

Property rights. The legal rights to use goods, services, or resources.

Public choice. The study of how government makes economic decisions.

Public debt. The accumulated borrowings of the federal government; also known as the national debt.

Public goods. Products that convey their benefits equally to paying and nonpaying members of society.

Public saving. The amount of tax revenue that is left over after the government pays for its spending.

Pure competition. A situation in which a large number of relatively small buyers and sellers interact.

Pure private goods. Products that convey their benefits only to the purchaser.

Rationing. The function of dividing up or allocating a society's scarce items among those who want them.

Real balance effect. The increase in the amount of aggregate output demanded that results from an increase in the real value of the public's financial assets.

Real gross domestic product. Gross domestic product that has been adjusted to eliminate the impact of changes in the price level.

Real income. The purchasing power of your income; the amount of goods and services it will buy.

Recessionary gap. The amount by which the equilibrium level of real GDP falls short of potential GDP.

Rent ceiling. A legally established maximum rent below the equilibrium rent.

Rent control. A legally established maximum rent below the equilibrium rent.

Required reserves. The amount of reserves a depository institution is required by law to maintain. These reserves must be in the form of vault cash or deposits with the Federal Reserve.

Research. The process of gaining new knowledge. Research is sometimes characterized as basic research or applied research.

Research and development. The term used to describe the three stages leading to technological advances: research, invention, and innovation.

Reserve requirement. The fraction of a bank's checkable deposits that must be held as required reserves.

Rule of seventy-two. The mathematical principle that a variable's doubling time roughly equals seventy-two divided by the growth rate.

Savings deposits. Interest-bearing deposits at commercial banks and savings institutions.

Secondary rationing device. A nonprice condition that supplements the primary rationing device, which is price.

Short run. The period of time during which at least one of a business's inputs (usually plant and equipment) is fixed—that is, incapable of being changed.

Shortage. An excess of quantity demanded over quantity supplied.

Social benefit. The full benefit received by all the members of society; the sum of private benefits and external benefits.

Social cost. The full cost to a society of the production and/or consumption of a product; the sum of private, or internal, costs and external costs.

Stagflation. High unemployment combined with high inflation.

Standard of value. A unit in which the prices of goods and services can be expressed; one of the three basic functions of money.

Statistical discrepancy. The entry in a nation's balance of payments statement that adjusts for missing or improperly recorded transactions.

Store of value. A vehicle for accumulating or storing wealth to be used at a future date; one of the three basic functions of money.

Structural unemployment. Unemployment caused by changes in the makeup, or structure, of the economy, whereby some skills become obsolete or in less demand.

Substitute. A product that can be used in place of some other product because, to a greater or lesser extent, it satisfies the same consumer wants.

Substitution effect. Consumers' willingness to substitute for other products the product that has declined in price.

Sunk cost. Costs that cannot be avoided. See Fixed costs.

Supply. A schedule showing the quantities of a good or service that producers are willing and able to offer for sale at various prices during a given time period, when all factors other than the product's price remain unchanged.

Supply curve. A graphical representation of supply.

Supply-side economics. The branch of economics that focuses on stimulating aggregate supply through policies that involve minimal government intervention.

Surplus. An excess of quantity supplied over quantity demanded.

Tariff. A tax on imported goods.

Technological advances. Discoveries that make it possible to produce more or better products from the same resources.

Technology. The state of knowledge about how to produce products.

Theories. Generalizations about causal relationships between facts, or variables.

Theory of rational expectations. The theory that people use all available information to develop realistic expectations about the future.

Total cost (TC). Total fixed cost plus total variable cost.

Total revenue (TR). The total receipts of a business from the sale of its product. Total revenue is calculated by multiplying the selling price of the product times the number of units sold.

Trade adjustment assistance. Aid to workers and firms that have been harmed by import competition.

Trade barriers. Legal restrictions on trade.

Trade deficit. Merchandise imports exceed merchandise exports for an unfavorable balance of trade.

Trade surplus. Merchandise exports exceed merchandise imports for a favorable balance of trade.

Transfer payments. Expenditures for which no goods and services are received in exchange.

Trusts. Combinations of firms organized for the purpose of restraining competition and thereby gaining economic profit.

Tying contract. An agreement specifying that the purchaser will, as a condition of sale for some product, also buy some other product offered by the seller.

Unemployment rate. See Civilian unemployment rate.

Utility. Personal satisfaction.

Variable costs. Costs that change with the level of output, tending to increase when output increases and to decrease when output declines.

Voluntary export restraint (VER). An agreement under which an exporting country voluntarily limits its exports to a particular country, often under threat of the imposition of a quota.