Glossary

absolute advantage: The superior production capabilities of an entity, while comparative advantage is based on the analysis of opportunity cost. ↩︎
annuity: A fixed amount of money paid to someone every year, usually until their death. ↩︎
balanced budget: The state of government finances when current government revenue from taxes, fees, and other sources is just equal to current government expenditures. ↩︎
bankruptcy: When a court judges that a debtor is unable to make the payments owed to a creditor. ↩︎
bond: A promise to repay the principal (amount borrowed) plus interest at a specified time in the future. Organizations such as corporations and governments issue bonds as a method of borrowing from bondholders. ↩︎
broken window hypothesis: Theory that suggests that visible signs of disorder and neglect in an environment can lead to an increase in both petty and serious crime. ↩︎
budget: Estimated income and itemized planned expenditures for a time period. ↩︎
budget deficit: The amount by which total government spending exceeds total government revenue during a specific time period, usually one year. ↩︎
budget surplus: The amount by which total government spending falls below total government revenue during a specific time period, usually one year. ↩︎
capital formation: The production of buildings, machinery, tools, and other equipment that will enhance future productivity. The term can also be applied to efforts to upgrade the knowledge and skill of workers (human capital) and thereby increase their ability to produce in the future. ↩︎
capital investment: Expenditures on the buildings, machinery, tools, and other equipment that will enhance future productivity. ↩︎
capital market: The broad term for the various marketplaces where investments such as stocks and bonds are bought and sold. ↩︎
capitalism: An economic, political, and social system in which property, business, and industry are privately owned, directed toward making the greatest possible profits for successful organizations and people. ↩︎
certificates of deposit (CD): A Savings certificate with a fixed maturity date and specified fixed interest rate, which can be issued in any denomination aside from minimum investment requirements. Such instruments restrict access to the funds until the maturity date of the investment. Certificates of Deposit is the term used in the United States. Similar instruments exist in most countries although the name may differ. In the EU these are known as “Fixed Rate” or “Fixed Deposit” accounts. ↩︎
certification: Confirms the education, training, and other qualifications of an individual. Unlike licensing, certification does not prohibit noncertified individuals from competing in the market. ↩︎
Coase theorem: A theory that bargaining between individuals or groups over property rights will lead to an optimal and efficient outcome. ↩︎
collateral: Something pledged as security for repayment of a loan, to be forfeited in the event of a default. ↩︎
collusion: A secret or illegal cooperation or conspiracy, especially in order to cheat or deceive others. A group of firms engaged in collusion is often called a cartel. ↩︎
competition: A dynamic process of rivalry among parties such as producers or input suppliers, each of whom seeks to deliver a better deal to buyers when quality, price, and product information are all considered. Competition implies open entry into the market. Potential suppliers do not have to obtain permission from the government in order to enter the market. ↩︎
compound interest: Interest that is earned not only on the principal but also on the interest previously earned. ↩︎
constitution: A body of fundamental principles or established precedents according to which a state or other organization is acknowledged to be governed. ↩︎
consumer price index: An index that tracks changes in the cost of a basket of goods and services over time, serving as a key indicator of inflation and cost of living. It compares the price of this basket in a specific period to a base year, helping to understand how prices are changing and affecting consumer purchasing power. ↩︎
creative destruction: The replacement of old products and production methods by innovative new ones that consumers judge to be more valuable. The process generates economic growth and higher living standards. ↩︎
crony capitalism: An economy in which success in business depends on close relationships between business people and government officials. It may be exhibited by favoritism in the distribution of legal permits, government grants, special tax breaks, or other forms of state interventionism. ↩︎
dead end job: A job where there is little or no chance of career development and advancement into a better position. ↩︎
decentralization (of government): The transfer of authority from central to local government. ↩︎
depreciation: Loss in value of an asset as it is used. ↩︎
dirigisme: State control of economic and social matters. ↩︎
discouraged worker: Someone who has given up looking for work and has left the labor market. ↩︎
diversification: The strategy of investing in a number of diverse firms, industries, and instruments such as stocks, bonds, and real estate in order to minimize the risk accompanying investments. ↩︎
dividend: (A part of) the profit of a company which is paid to the people who own shares in it. ↩︎
economic efficiency: A situation that occurs when (1) all activities generating more benefit than cost are undertaken; and (2) no activities are undertaken for which the cost exceeds the benefit. ↩︎
economic institutions: The legal, regulatory, and monetary rules, laws, and customs that affect the security of property rights, enforcement of contracts, and the volume of exchange. They exert a major impact on transaction costs between parties, particularly when the trading partners do not know each other. ↩︎
economic prosperity: Persistent increases in per capita income and improvements in the standard of living. ↩︎
economies of scale: Reductions in the firm’s per-unit costs that occur when large plants are used to produce large volumes of output. ↩︎
embargo: A government-imposed restriction on trade or other commercial activity with a particular country. ↩︎
entrepreneur: A profit-seeking decision-maker who assumes the risk of developing innovative approaches and products with the expectation of realizing profits. A successful entrepreneur’s actions will increase the value of resources. ↩︎
equilibrium: A state in which the conflicting forces of supply and demand are in balance. When a market is in equilibrium, the decisions of consumers and producers are brought into harmony and the quantity demanded will equal the quantity supplied at the market clearing price. ↩︎
equities: Refers to the ownership interests or shares of stock issued by companies. ↩︎
equity mutual fund: An entity that pools the funds of investors and uses them to purchase a bundle of stocks. Mutual funds make it possible for even small investors to hold a diverse bundle of stocks. ↩︎
exchange rate: The domestic price of one unit of a foreign currency. For example, if it takes $0.035 to purchase one Ukrainian hryvnia, the dollar-hryvnia exchange rate is 0.035. ↩︎
Exchange traded funds (ETFs): Investment funds that are traded on stock exchanges, much like individual stocks. They are designed to track the performance of a particular index, commodity, sector, or asset class. ETFs offer investors exposure to a diversified portfolio of assets, similar to mutual funds, but they trade throughout the day on stock exchanges at market-determined prices. ↩︎
Experian Credit Score: It is a numerical representation of an individual's creditworthiness based on their credit history and financial behavior, as assessed by Experian's proprietary credit scoring model. ↩︎
exports: Goods and services produced domestically but sold to foreign purchasers. ↩︎
externality: Spillover effect of an activity that influences the well-being of nonconsenting external parties. If the spillover effects are positive, they are also called external benefits. If the spillover effects adversely impact external parties, they are also called external costs. ↩︎
extreme poverty rate: The extreme poverty rate is a measure used to indicate the proportion of a population living below the international poverty line, which is defined by the World Bank as earning less than $2.15 per day at 2017 purchasing power adjusted prices. ↩︎
FICO score: This score is used by lenders to help make accurate, reliable, and fast credit risk decisions across the customer lifecycle. The credit score rank-orders consumers by how likely they are to pay their credit obligations as agreed. ↩︎
foreclosure rate: The percentage of home mortgages on which the lender has started the process of taking ownership of the property because the borrower has failed to make the monthly payments. ↩︎
foreign exchange: Often abbreviated as forex or FX, refers to the global marketplace where currencies are traded. For example, when a tourist from the United States visits France and needs to exchange their US dollars (USD) for euros (EUR) to pay for goods and services there. They participate in foreign exchange by selling USD and buying EUR. ↩︎
free rider: Someone who benefits from a collective resource, service, or good without contributing fairly to its provision or maintenance. ↩︎
game theory: Game theory is a branch of mathematics and economics that studies strategic interactions between rational decision-makers. It provides a framework for analyzing situations in which the outcome of an individual's decision depends not only on their own actions but also on the actions of others. ↩︎
government bond: A debt security issued by a government to support government spending. Federal government bonds in the United States include savings bonds, Treasury bonds, and Treasury inflation-protected securities (TIPS). ↩︎
government enterprise: A legal entity that is created by a government in order to partake in commercial activities on the government’s behalf. ↩︎
government failure: A situation in which the structure of incentives is such that the political process, including democratic political decision-making, will encourage individuals to undertake actions that conflict with economic efficiency. ↩︎
gross domestic product (GDP): The market value of all goods and services in their final (rather than intermediate) use which are produced within a country during a specific period. It is a measure of both income and output. ↩︎
human capital: The abilities, skills, and health of human beings that contribute to the production of both current and future output. Investment in training and education can increase the supply of human capital. ↩︎
hyperinflation: A condition where the price of everything in a national economy goes out of control and increases very quickly. People still debate when, precisely, very rapid inflation turns into hyper-inflation (an increase in prices of 50% or even 100% or more within a year). ↩︎
import quota: A specific limit or maximum quantity or value of a good that is permitted to be imported into a country during a given period. ↩︎
imports: Goods and services produced by foreigners but purchased by domestic buyers. ↩︎
incentives: The expected payoffs from actions. They may be either positive (the action is rewarded) or negative (the action results in penalty). ↩︎
income transfers: Payments made by the government to individuals and businesses that do not reflect services provided by the recipients. They are funds taxed away from some and transferred to others. ↩︎
indexed equity mutual fund: An equity mutual fund that holds a portfolio of stocks which matches their share (or weight) in a broad stock market index such as the S&P 500. The overhead of these funds is usually quite low because their expenses on stock trading and research are low. The value of the mutual fund shares will move up and down along with the index to which the fund is linked. ↩︎
inflation: A continuing rise in the general level of prices of goods and services. During inflation, the purchasing power of the monetary unit, such as the hryvnia, declines. ↩︎
international dollar: An artificial currency used to eliminate purchasing power differences when comparing national economies. ↩︎
investment: The purchase, construction, or development of capital resources, including both nonhuman and human capital. Investments increase the supply of capital. ↩︎
investment goods: Goods and/or facilities bought or constructed for the purpose of producing future economic benefits. Examples include rental houses, factories, ships, or roads. They are also often referred to as capital goods. ↩︎
invisible hand: The tendency of market prices to direct individuals pursuing their own self-interest into activities that promote the economic well-being of the society. ↩︎
“junk” bonds: High-risk bonds, usually issued by less-than-well-established firms, that pay high interest rates because of their risk. ↩︎
labor force: The labor force is the sum of persons in employment plus persons in unemployment. Together these two groups of the population represent the current supply of labor. ↩︎
law of comparative advantage: A principle that reveals how individuals, firms, regions, or nations can produce a larger output and achieve mutual gains from trade. Under this principle each specializes in the production of goods that it can produce cheaply (that is, at a low opportunity cost) and exchanges these goods for others that are produced at a high opportunity cost. ↩︎
law of demand: A principle that states there is an inverse relationship between the price of an item and the quantity of it which buyers are willing to purchase when other things are held constant. As the price of an item increases, consumers purchase less of it. As price decreases, they buy more. ↩︎
law of supply: A principle that states there is a positive relationship between the price of an item and the quantity of it which producers are willing to supply when other things are held constant. As the price of an item increases, producers will supply more. As price decreases, they will supply less. ↩︎
less-developed countries: Countries with low per capita incomes, low levels of education, widespread illiteracy, and widespread use of production methods that are largely obsolete in high-income countries. They are sometimes referred to as developing countries. ↩︎
logrolling: The exchange between politicians of political support on one issue for political support on another. ↩︎
loss: The amount by which sales revenue fails to cover the cost of supplying a good or service. Losses are a penalty imposed on those who use resources to produce less value than they could have otherwise produced. ↩︎
managed equity mutual fund: An equity mutual fund that has a portfolio manager who decides what stocks will be held in the fund and when they will be bought or sold. A research staff generally provides support for the fund manager. ↩︎
marginal: A term used to describe the effects of a change in the current situation. For example, the marginal cost is the cost of producing an additional unit of a product, given the producer’s current facility and production rate. ↩︎
marginal benefit: The change in total value or benefit derived from an action such as consumption of an additional unit of a good or service. It reflects the maximum amount that the individual considering the action would be willing to pay for it. ↩︎
marginal cost: The change in total cost resulting from an action such as the production of an additional unit of output. ↩︎
marginal tax rate: The percentage of an extra dollar of income that must be paid in taxes. It is the marginal tax rate that is relevant in personal decision-making. ↩︎
market: An abstract concept that encompasses the trading arrangements of buyers and sellers which underlie the forces of supply and demand. ↩︎
market failure: A situation in which the structure of incentives is such that markets will encourage individuals to undertake activities which are inconsistent with economic efficiency. ↩︎
market forces: The information and incentives communicated through market prices; profits and losses that motivate buyers and sellers to coordinate their decisions. ↩︎
middlemen: People who buy and sell goods or services or arrange trades. Middlemen reduce transaction costs. ↩︎
minimum wage: Legislation requiring that workers be paid at least the stated minimum hourly rate of pay. ↩︎
moderate poverty rate: The moderate poverty rate refers to the proportion of a population living below a poverty threshold $3.65 that is higher than the extreme poverty line but still indicates a low standard of living. The $3.65 poverty line is derived from typical national poverty lines in countries classified as Lower Middle Income. ↩︎
monetary policy: The deliberate control of the national money supply and, in some cases, credit conditions, by the government. This policy establishes the environment for market exchange. ↩︎
money: Anything that is generally accepted as final payment for goods and services by buyers and sellers; serves as a medium of exchange, a store of value, and a standard of value. Characteristics of money are portability, stability in value, uniformity, durability, and acceptance. ↩︎
money market certificate: A type of savings product in which a bank or lending institution invests your money in a variety of investments. ↩︎
money supply: The supply of highly liquid (easily available) assets used to make purchases. The money supply typically includes currency and balances in checking account funds. Other definitions expand to include assets that can be converted into payment mechanisms easily, such as savings account balances. Note that credit cards are not part of the money supply. If they are paid at the end of the month, to count them would mean double counting checking account balances. An interesting debate is if and when Central Banks will start to include Bitcoin (and other cyber currencies) as a part of the money supply. ↩︎
monopoly: A monopoly, in a broader economic sense, is a market structure characterized by a single seller or producer supplying a unique product or service with no close substitutes.The concept of monopoly covers a range of contexts, from economic markets to the specific case of governmental authority. ↩︎
moral hazard: A situation where providing protection against a risk increases the occurrence of the risky behavior because it reduces the potential adverse consequences of the action. ↩︎
mortgage: An instrument used to borrow funds against an asset such as a house. The asset is used as security. If the borrowed funds are not repaid as promised, the lender can foreclose against the asset and use the sale proceeds to recover the unpaid balance of the loan. ↩︎
mortgage default: Home mortgages on which the borrower is ninety days or more late with the payments on the loan or it is in the foreclosure process. ↩︎
mutual fund: An entity that pools the funds of investors and channels them into various categories of investments. There are a variety of mutual funds, including equity funds, bond funds, real estate funds, and money-market funds. ↩︎
national debt: The sum of the indebtedness of a government in the form of outstanding interest-earning bonds. It reflects the cumulative impact of budget deficits and surpluses. ↩︎
national income: The total income earned by the citizens of a country during a specific period. ↩︎
nominal GDP growth: It refers to percentage increase in the value of all goods and services produced by an economy over a specific period, measured in current market prices. ↩︎
nominal return: The return on an asset in monetary terms. Unlike the real return, it makes no allowance for changes in the general level of prices (inflation). ↩︎
normative question: A question that asks what SHOULD be (a subjective condition) — instead of asking an objective fact. ↩︎
occupational licensing: A requirement that a person obtain permission from the government in order to perform certain business activities or work in certain occupations. ↩︎
oligarch: A very rich business leader with a great deal of political influence (particularly with reference to individuals who benefited from the privatization of state-run industries after the collapse of the Soviet Union). ↩︎
oligopoly: Oligopoly is a market structure characterized by a small number of large firms that dominate the market for a particular product or service. ↩︎
open market operations: The purchase and sale of government securities (such as bonds) in the open market by a central bank. ↩︎
open markets: Markets that suppliers can enter without obtaining permission from governmental authorities. ↩︎
opportunity cost: The highest valued alternative good or activity that must be sacrificed as a result of choosing an option. ↩︎
patent: A right or title for a set period giving the holder the sole right to exclude others from making, using, or selling an invention. ↩︎
pay as you go: A system in which a person or organization pays for the costs of something when they occur rather than before or afterwards. ↩︎
personal income: The total income received by domestic households and non-corporate businesses. ↩︎
personal income tax: A tax levied on the income earned by individuals, including wages, salaries, dividends, interest, and other income a person earns throughout the year. ↩︎
physical capital: Human-made resources (such as tools, equipment, and structures) used to produce other goods and services. They enhance our ability to produce in the future. ↩︎
plunder: The act of acquiring things by taking them from others. ↩︎
pork-barrel legislation: Government spending projects that benefit local areas but which are paid for by taxpayers at large. The projects typically have costs that exceed benefits; the residents of the district getting the benefits want these projects because they do not have to pay much of the costs. ↩︎
portfolio: The holdings of savings, investments, and real assets such as real estate owned by an individual or financial institution. ↩︎
price controls: Prices that are imposed by the government. The prices may be set either above or below the level that would be established by markets. ↩︎
price floor: A government-established minimum price that buyers must pay for a good or resource. ↩︎
price gouging: When a seller spikes the prices of goods, services, or commodities to a level much higher than is considered reasonable or fair, and is considered exploitative, potentially to an unethical extent. ↩︎
principal: The amount of funds borrowed. The borrower will pay interest on this amount. ↩︎
private investment: The flow of private-sector expenditures on durable assets (fixed investment) plus the addition to inventories (inventory investment) during a period. These expenditures enhance our ability to provide consumer benefits in the future. ↩︎
private property rights: Property rights that are exclusively held by an owner, or group of owners, and which can be transferred to others at the owner’s discretion. ↩︎
productive function: Productive function of government refers to government provision of (1) a legal and monetary environment for the smooth operation of markets and (2) a few goods that are difficult to provide through markets. ↩︎
productive resources: The inputs used to make goods and services (i.e., natural resources, human resources and capital goods). ↩︎
productivity: The average output produced per worker during a specific time period, usually measured as output per hour worked. ↩︎
profit: Revenues that exceed the cost of production. The cost includes the opportunity cost of all resources involved in the production process, including those owned by the firm. Profit results only when the value of the good or service produced is greater than the cost of the resources required for its production. ↩︎
protective function: A system of rules and laws that protect individuals and their property from damages associated with the use of force, fraud, or theft. ↩︎
public choice: The study of decision-making as it affects the formation and operation of collective organizations such as governments. In general, the principles and methodology of economics are applied to political science topics. ↩︎
public good: Goods with the following two characteristics: (1) jointness in consumption—provision of the good to one party simultaneously makes it available to others; and (2) non-excludability—it is difficult or virtually impossible to exclude nonpaying customers. ↩︎
publicly provided good: Publicly provided good, also known as a public good, is a type of good or service that is non-excludable and non-rivalrous in consumption. ↩︎
purchasing power parity: A money conversion rate used to express the purchasing powers of different currencies in common units. ↩︎
quartiles: Quartiles are statistical measures that divide a set of data into four equal parts or groups, with each part representing a quarter of the dataset. The dataset is first sorted in ascending order, and then three points are identified that divide the data into four equal groups. ↩︎
random walk theory: The theory that current stock prices already reflect all known information about the future. Therefore the future movement of stock prices will be determined by surprise occurrences, which will cause prices to change in an unpredictable or random fashion. ↩︎
rational ignorance: Voter ignorance resulting from the fact that people perceive their individual votes as unlikely to be decisive. Therefore they are rational in having little incentive to seek the information needed to cast an informed vote. ↩︎
real GDP: It measures the total economic output of a country, adjusted for inflation or price changes, over a specific period. ↩︎
real value: The value adjusted for inflation. ↩︎
realtor commissions: A fee paid to a real estate agent or broker for their services—sometimes a percentage of the sale price, but also as a different fee model. ↩︎
recession: A downturn in economic activity characterized by declining real gross domestic product (GDP). As a rule of thumb, economists define a recession as two consecutive quarters in which there is a decline in real GDP. ↩︎
regulatory capture: A situation when a regulatory agency that is created to promote the public interests prioritizes the interests of the industries they regulate. ↩︎
rent-seeking: Actions by individuals and interest groups designed to restructure public policy in a manner that will either directly or indirectly redistribute more income to themselves. ↩︎
replacement rate fertility: The number of births per woman that keeps the population size stable over time. ↩︎
resource: An input used to produce economic goods and services. Natural resources, labor, skills, entrepreneurial talent, and capital are examples. Human history is a record of our struggle to transform available, but limited, resources into things that we would like to have (economic goods). ↩︎
rule of law: The effective understanding that everyone is subject to the same laws, preventing some from enacting laws that they will not have to abide by. ↩︎
saving: The portion of after-tax income that is not spent on consumption. ↩︎
scarcity: Condition in which people would like to have more of a good or resource than is freely available from nature. Almost everything we value is scarce. ↩︎
secondary effects: Consequences of an economic change that are not immediately identifiable but are felt only with the passage of time. ↩︎
shortsightedness effect: Misallocation of resources that results because public sector action is biased (1) in favor of proposals yielding clearly defined current benefits in exchange for difficult-to-identify future costs; and (2) against proposals with clearly identified current costs but yielding less concrete and less obvious future benefits. ↩︎
Smoot-Hawley trade bill: The Smoot-Hawley Tariff Act, a piece of legislation passed by the U.S. Congress in 1930, aimed to protect American farmers and other industries from foreign competition by raising U.S. tariffs to historically high levels on imported goods. ↩︎
socialism: The set of beliefs that states that all people are equal and should share equally in a country’s money, or the political systems based on these beliefs. ↩︎
special interest: Refers to groups or organizations that advocate for specific policies, regulations, or funding allocations that benefit their particular industries, causes, or constituencies. ↩︎
special-interest effect: The bias of the political process toward adoption of programs that provide substantial individual benefits to well-organized interest groups at the expense of small individual costs imposed on the bulk of voters. There is a tendency for such programs to be adopted even when they are inefficient. ↩︎
special-interest issue: An issue that generates substantial individual benefits to a small organized minority while imposing a small individual cost on many other voters. ↩︎
specialization: Specialization is a method of production whereby an entity focuses on the production of a limited scope of goods to gain a greater degree of efficiency. ↩︎
Standard & Poor’s (S&P) 500 Index: A basket of five hundred stocks that are selected because they are thought to be collectively representative of the stock market as a whole. Over 70 percent of all U.S. stock value is contained in the S&P 500. ↩︎
stock: Ownership shares of a corporation. Corporations raise funds by issuing stock ownership shares, which entitle the owners to a proportional share of the firm’s profits. The stock owners are not liable for the debts of the corporation beyond their initial investment. However, there is no assurance that the owners will receive either their initial investment or any return in the future. ↩︎
subsidy: A government payment or tax credit provided to either the producers or consumers of certain goods. The payments to producers of ethanol, which sum to about $1.50 per gallon, provide an example. ↩︎
substitutes: Products that serve similar purposes. An increase in the price of one will cause an increase in the demand for the other, and a decline in the price of one will cause a decline in the demand for the other (for example, hamburgers and tacos, butter and margarine, Chevrolets and Fords). ↩︎
tariff: A tax levied on goods imported into a country. ↩︎
tax shelter: A tax shelter is a legal method or financial arrangement that enables individuals or businesses to reduce their taxable income and therefore lower their tax liability. ↩︎
third sector: An umbrella term that covers a range of different organizations with different structures and purposes, belonging neither to the public sector (i.e., the state) nor to the private sector (profit-making private enterprise). ↩︎
transaction cost: The time, effort, and other resources needed to search out, negotiate, and consummate an exchange of goods or services. ↩︎
treasury bill: A form of short-term government debt on which interest is paid at the end of the borrowing period. They are used for managing fluctuations in the government’s short-run cash needs. ↩︎
Treasury Inflation Protected Securities (TIPS): Inflation-indexed bonds issued by the U.S. Department of Treasury. These securities adjust both their principal and coupon interest payments upward with the rate of inflation so that their real return is not affected by the change in rate. TIPS have been issued in the United States since January 1997. ↩︎
VAT: Value added tax, a type of tax that is paid by the person who buys goods and services. ↩︎
venture capitalist: A financial investor who specializes in making loans to entrepreneurs with promising business ideas. These ideas often have the potential for rapid growth but are usually also very risky and thus do not qualify for commercial bank loans. ↩︎
zero-sum game: The situation in game theory in which one person’s gain is equivalent to another’s loss, so the net change in wealth or benefit is zero. In the financial markets, options and futures are examples of zero-sum games, excluding transaction costs. ↩︎