absolute advantage

an advantage derived from one country having a lower absolute input cost of producing a particular good than another country (35)

accounting measure of costs

the direct costs that can be measured (23)

accounting profit

total revenue less total costs except for the opportunity cost if capital (23)

adaptive expectation

an expectation formed on the basis of information collected in the past (15)

adding value

creating output that is more valuable than the resources used to create the output (23)

adverse selection

the situation that occurs when higher-quality consumers or producers are driven out of the market because unobservable qualities are misvalued (26)

age-earnings profile

the relationship between a worker's earnings and age (29)

age-productivity profile

the relationship between a worker's productivity and age (29)

aggregate demand curve

a curve that shows the different equilibrium levels of expenditures at different price levels (9)

aggregate supply curve

a curve that shows the amount of production at different price levels (9)

annual return

the dividend plus the capital gain per year (31)

antitrust policy

government policies and programs designed to control the growth of monopoly and enhance competition (27)

antitrust policy

finding applications for basic research results (31)

appreciate

to increase the value of a currency under floating exchange rates--that is, exchange rates determined by supply and demand (37)

arbitrage

buying in a market where the price is low and selling in a market where the price is high to profit from the price differential (17)

arc elasticity

the price elasticity of demand measured over a price range using the midpoint, or average, as the base (20)

association as causation

the mistaken assumption that because two events seem to occur together, one causes the other (1)

assumptions

statements that are taken for granted without justification (1)

automatic stabilizer

an element of fiscal policy that changes automatically as income changes (12)

autonomous consumption

consumption that is independent of income (10)

average fixed cost (AFC)

total fixed costs divided by the quantity produced (22)

average physical product (APP)

output per unit of resource (22)

average propensity to consume (APC)

the proportion of disposable income spent for consumption (10)

average propensity to save (APS)

the proportion of disposable income saved (10)

average total cost (ATC)

total costs divided by the total output (22)

average variable cost (AVC)

total variable costs divided by the quantity produced (22)

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backward-bending labor supply curve

a labor supply curve indicating that a person is willing and able to work more hours as the wage rate increases until, at some sufficiently high wage rate, the person chooses to work fewer hours (29)

balance of payments

a record of a country's trade in goods, services, and financial assets with the rest of the world (7)

balance of trade

the balance on the merchandise account in the U.S. balance of payments (7)

balanced-budget multiplier

a measure of how much equilibrium income changes if government spending and taxes both increase or decrease by the same amount (12 App.)

barrier to entry

anything that impedes the ability of firms to begin a new business in an industry in which existing firms are earning positive economic profits (25)

barter

the direct exchange of goods and services without the use of money (3)

base year

the year against which other years are measured (6)

basic research

creation of new knowledge (31)

bilateral aid

foreign aid that flows from one country to another (19)

bilateral monopoly

a market in which a monopsonistic buyer of resources faces a monopoly seller of resources (30)

break-even analysis

determining the quantity of units that must be sold to just cover costs (27)

break-even price

the price that is equal to the minimum point of the average total-cost curve (24)

budget deficit

the shortage that results when government spending is greater than revenue (5)

budget line

a line showing all the combinations of goods that can be purchased with a given level of income (21 App.)

budget surplus

the excess that results when government spending is less than revenue (5)

business cycle

the recurrent pattern of rising real GDP followed by falling real GDP (5, 8)

business firm

a business organization controlled by a single management (4)

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Coase Theorem

when bargaining is costless and property rights can be assigned without difficulty, the amount of an externality-generating activity will not depend on who is assigned the property rights (32)

capital

products such as machinery and equipment that are used in production (1)

capital account

the record in the balance of payments of the flow of financial assets into and out of a country (7)

capital consumption allowance

the estimated value of depreciation plus the value of accidental damage to capital stock (6)

capital control

a government-imposed restriction on the free movement of financial assets between nations (17)

capital gain

an increase in the price of financial capital (31)

capitalism

an economic system characterized by private ownership of most resources and the use of markets to allocate goods and services (40)

capitalized value

the present value of an expected future income stream (32)

capture theory

government actions benefit some special-interest group that has captured control of regulations, legislation, or governing authority (27)

cartel

an organization of independent firms whose purpose is to control and limit production and maintain or increase prices and profits (26)

cash transfers

money allocated away from one group in society to another (34)

centrally planned economy

an economic system in which the government determines what goods and services are produced and the prices at which they are sold (5)

ceteris paribus

other things being equal, or everything else held constant (1)

chain-type real GDP growth

the geometric mean of the growth rates found using beginning and ending year prices (6)

circular flow diagram

a model showing the flow of output and income from one sector of the economy to another (4)

classical economics

a school of thought that assumes that real national income is determined by aggregate supply, while the equilibrium price level is determined by aggregate demand (16)

closed shop

a workplace in which union membership is a condition of employment (30)

coincident indicator

a variable that changes at the same time that real output changes (8)

collective bargaining

the process by which union and management negotiate labor contracts (30)

commercial bank loan

a bank loan at market rates of interest, often involving a bank syndicate (19)

commercial policy

government policy that influences international trade flows (36)

comparable worth

the idea that pay ought to be determined by job characteristics rather than by supply and demand and that jobs with comparable requirements should receive comparable wages (30)

comparative advantage

the ability to produce a good or service at a lower opportunity cost than someone else (2, 35)

compensating wage differentials

wage differences that make up for the higher risk or poorer working conditions of one job over another (29)

complementary goods

goods that are used together (as the price of one rises, the demand for the other falls) (3)

composite currency

an artificial unit of account that is an average of the values of several national currencies (13)

concentration

the degree to which a few firms control the output and pricing decisions in a market (27)

constant returns to scale

unit costs remain constant as the quantity of production is increased and all resources are variable (22)

constant-cost industry

an industry that can expand or contract without affecting the prices of the resources it purchases (24)

consumer equilibrium

the point at which the marginal utilities per dollar of expenditure on the last unit of each good purchased are equal (21)

consumer price index (CPI)

a measure of the average price of goods and services purchased by the typical household (6)

consumer sovereignty

the supreme authority of consumers to determine, by means of their purchases, what is produced (4)

consumer surplus

the difference between what the consumer is willing to pay for a unit of a good and the price that the consumer actually has to pay (21)

consumption

household spending (4)

consumption function

the relationship between disposable income and consumption (10)

contracting out

hiring a private firm to provide a product or service for a government entity (27)

core competency

the primary business a firm is involved in (27)

corporation

a legal entity owned by shareholders whose liability for the firm's losses is limited to the value of the stock they own (4)

cost of living adjustment (COLA)

an increase in wages that is designed to match increases in prices of items purchased by the typical household (6)

cost-plus pricing/markup pricing

a pricing policy whereby a firm computes its average cost of producing a product and then sets the price at some percentage above this cost (26)

cost-push inflation

inflation caused by rising costs of production (9)

coupon

fixed amount a borrower agrees to pay a bondholder each year (31)

credit

available savings that are lent to borrowers to spend (13)

cross-price elasticity of demand

the percentage change in the demand for one good divided by the percentage change in the price of a related good, ceteris paribus (20)

crowding

forcing a group into certain kinds of occupations (30)

crowding out

a drop in consumption or investment spending caused by government spending (12)

currency convertibility

the ease with which the domestic currency can be converted into foreign currency so foreign exchange rates can properly reflect the domestic currency value of foreign prices (40)

currency substitution

the use of foreign money as a substitute for domestic money when the domestic money has a high rate of inflation (13)

current account

the sum of the merchandise, services, investment income, and unilateral transfers accounts in the balance of payments (7)

customs union

an organization of nations whose members have no trade barriers among themselves but are free to fashion their own trade policies toward non-members (36)

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deadweight loss

the reduction of consumer surplus without a corresponding increase in monopoly profit when a perfectly competitive firm is monopolized (25)

debt

loans (23)

decreasing-cost industry

an industry in which the costs of producing a unit of output fall as more output is produced (24)

deficit

in a balance of payments account, the amount by which debits exceed credits (7)

demand

the quantities of a well-defined commodity that consumers are willing and able to buy at each possible price during a given period of time, ceteris paribus (3)

demand curve

a graph of a demand schedule that measures price on the vertical axis and quantity demanded on the horizontal axis (3)

demand schedule

a list or table of the prices and the corresponding quantities demanded of a particular good or service (3)

demand-pull inflation

inflation caused by increasing demand for output (9)

dependent variable

the variable whose value depends on the value of the independent variable (1 App.)

deposit expansion multiplier

the reciprocal of the reserve requirement (13)

depreciate (a currency)

a decrease in the value of a currency under floating exchange rates (39)

depreciation (of capital)

a reduction in the value of capital goods over time due to their use in production (6)

depression

a severe, prolonged economic contraction (8)

derived demand

demand stemming from what a good or service can produce, not demand for the good or service itself (28)

determinants of demand

factors other than the price of the good that influence demand--income, tastes, prices of related goods and services, expectations, and number of buyers (3)

determinants of supply

factors other than the price of the good that influence supply--prices of resources, technology and productivity, expectations of producers, number of producers, and the prices of related goods and services (3)

devaluation

a deliberate decrease in the official value of a currency (37)

development

turning research into viable products (31)

differentiated products

products that consumers perceive to be different from one another (23)

diminishing marginal utility

the principle that the more of a good that one obtains in a specific period of time, the less is the additional utility yielded by each additional unit of that good (21)

direct or positive relationship

the relationship that exists when the values of related variables move in the same direction (1 App.)

discount rate

the interest rate the Fed charges commercial banks (14)

discouraged workers

workers who have stopped looking for work because they believe no one will offer them a job (8)

discretionary fiscal policy

changes in government spending and taxation aimed at achieving a policy goal (12)

discrimination

prejudice that occurs when factors unrelated to marginal productivity affect the wages or jobs that are obtained (30)

diseconomies of scale

the increase of unit costs as the quantity of production increases and all resources are variable (22)

disequilibrium

a point at which quantity demanded and quantity supplied are not equal at a particular price (3)

disparate impact

an impact that differs according to race, sex, color, religion, or national origin, regardless of the motivation (30)

disparate treatment

treatment of individuals differently because of their race, sex, color, religion, or national origin (30)

disposable personal income (DPI)

personal income minus personal taxes (6)

dissaving

spending financed by borrowing or using savings (10)

disutility

dissatisfaction (21)

diversification

producing more than one product in order to enhance profits or reduce risk of loss (27)

dividend

the amount returned to shareholders on each share of stock as a percent of the value of the stock (31)

dominant strategy

a strategy that produces better results no matter what strategy the opposing firm follows (26)

double coincidence of wants

the situation that exists when A has what B wants and B has what A wants (3)

double-entry bookkeeping

a system of accounting in which every transaction is recorded in at least two accounts and in which the debit total must equal the credit total for the transaction as a whole (7)

dual economy

an economy in which two sectors (typically manufacturing and agriculture) show very different levels of development (19)

dumping

selling goods at a lower price in foreign markets than at home (25)

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Eurocurrency market

the market for deposits and loans generally denominated in a currency other than the currency of the country in which the transaction occurs; also called offshore banking (13)

European Currency Unit (ECU)

a unit of account used by western European nations as their official reserve asset (13)

European Monetary System (EMS)

an organization composed of Western European nations that maintain fixed exchange rates among themselves and floating exchange rates with the rest of the world (37)

economic bad

any item for which we would pay to have less (1)

economic costs

total costs including explicit costs and the full opportunity costs of the resources that the producer does not buy or hire but already owns (23)

economic efficiency

a situation where no one in society can be made better off without making someone else worse off (5, 24)

economic good

any good that is scarce (1)

economic growth

an increase in real national income, usually measured as the percentage change in gross national product or gross domestic product per year (18)

economic profit

total revenue less total costs including all opportunity costs (23)

economic regulation

the prescription of price and output for a specific industry (27)

economic rent

the portion of earnings above transfer earnings; the payment for use of a resource whose supply is fixed (28)

economies of scale

the decrease of unit costs as the quantity of production increases and all resources are variable (22)

economies of scope

a decline in the per unit cost of producing goods as the number of goods produced rises (27)

emission standard

a maximum allowable level of pollution from a specific source (32)

emissions offset policy

an environmental policy wherein pollution permits are issued and a market in the permits then develops; an increase in pollutants by one source is acceptable if met by a decrease by another source (32)

equation of exchange

an equation that relates the quantity of money to nominal GNP (14)

equilibrium

the point at which quantity demanded and quantity supplied are equal at a particular price (3)

equilibrium exchange rates

the exchange rates that are established in the absence of government foreign exchange market intervention (37)

equimarginal principle

to maximize utility, consumers must allocate their scarce incomes among goods so as to equate the marginal utilities per dollar of expenditure on the last unit of each good purchased (21)

equity

shares of stocks (23)

excess reserves

the cash reserves beyond those required, which can be loaned (13)

exchange rate

the price of one country's money in terms of another country's money (3, 7)

export substitution

the use of labor to produce manufactured products for export rather than agricultural products for the domestic market (19)

export supply curve

a curve showing the relationship between the world price of a good and the amount that a country will export (35)

exports

products that a country sells to other countries (4)

expropriation

the government seizure of assets, typically without adequate compensation to the owners (19)

externalities

costs or benefits of a transaction that are borne by someone not directly involved in the transaction (5, 32)

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Federal Deposit Insurance Corporation (FDIC)

a federal agency that insures deposits in commercial banks (13)

Federal Open Market Committee (FOMC)

the official policy-making body of the Federal Reserve System (14)

Federal Reserve

the central bank of the United States (5)

FOMC directive

instructions issued by the FOMC to the Federal Reserve Bank of New York to implement monetary policy (14)

face value

amount of principal that will be paid back when a bond matures (31)

facilitating practices

actions by oligopolistic firms that can contribute to cooperation and collusion even though the firms do not formally agree to cooperate (26)

factors of production

goods used to produce other goods (1)

fair rate of return

a price that allows a monopoly firm to earn a normal profit (25)

fallacy of composition

the mistaken assumption that what applies in the case of one applies to the case of many (1)

featherbedding

using an inefficient combination of resources in order to preserve union jobs (30)

federal funds rate

the interest rate a bank charges when it lends excess reserves to another bank (14)

financial capital

the money used to purchase capital; stocks and bonds (31)

financial intermediaries

institutions that accept deposits from savers and make loans to borrowers (4)

first mover strategy

being the first firm to carry out some activity (27)

fiscal policy

policy directed toward government spending and taxation (5)

focused management

a factory in which just one product or part of a product is produced (27)

foreign aid

gifts or low-cost loans made to developing countries from official sources (19)

foreign direct investment

the purchase of a physical operating unit in a foreign country or more than ten percent investment (19)

foreign exchange

foreign currency and bank deposits that are denominated in foreign money (7)

foreign exchange market

a global market in which people trade one currency for another (7)

foreign exchange market intervention

buying and selling of currencies by a government or central bank to achieve a specified exchange rate (14, 37)

foreign exchange risk

the threat that future foreign currency payments or receipts will have a different domestic currency value than expected

forward exchange rate

the price established today for delivery of a foreign currency at a future date

fractional reserve banking system

a system in which banks keep less than 100 percent of the deposits available for withdrawal (13)

free good

a good for which there is no scarcity (1)

free ride

the enjoyment of the benefits of a good by a producer or consumer without having to pay for it (5)

free rider

a consumer or producer who enjoys the benefits of a good without paying for it (32)

free trade area

an organization of nations whose members have no trade barriers among themselves but are free to fashion their own trade policies toward non-members (36)

full-line supply

the bundle of policies offered by a candidate (36)

fundamental disequilibrium

a permanent shift in the foreign-exchange-market supply and demand curves, such that the fixed exchange rate is no longer an equilibrium rate (37)

future value

the equivalent value in the future of some amount received today (31)

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GDP price index

a broad measure of the prices of goods and services included in the gross domestic product (6)

General Agreement on Tariffs and Trade (GATT)

a trade agreement among over 100 nations that specifies the level of tariffs among the signatories (27)

Gini ratio

a measure of the dispersion of income ranging between 0 and 1; 0 means all families have the same income; 1 means 1 family has all of the income (34)

game theory

a description of oligopolistic behavior as a series of strategic moves and countermoves (26)

gold exchange standard

an exchange-rate system in which each nation fixes the value of its currency in terms of gold, but buys and sells the U.S. dollar rather than gold to maintain fixed exchange rates (37)

gold standard

a system whereby national currencies are fixed in terms of their value in gold, thus creating fixed exchange rates between currencies (37)

gross domestic product (GDP)

the market value of all final goods and services produced in a year within a country (6)

gross investment

total investment, including investment expenditures required to replace capital goods consumed in current production (6)

gross national production (GNP)

gross domestic production plus receipts of factor income from the rest of the world minus payments of factor income to the rest of the world (6)

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Herfindahl index

a measure of concentration calculated as the sum of the squares of the market share of each firm in an industry (27)

health maintenance organization (HMO)

an organization that provides comprehensive medical care to a voluntarily enrolled consumer population in return for a fixed, prepaid amount of money (33)

household

one or more persons who occupy a unit of housing (4)

human capital

skills, training, and personal health acquired through education and on-the-job training (29)

hyperinflation

an extremely high rate of inflation (8)

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International Monetary Fund (IMF)

an international organization that supervises exchange-rate arrangements and lends money to member countries experiencing problems meeting their external financial obligations (37)

import demand curve

a curve showing the relationship between the world price of a good and the amount that a country will import (35)

import substitution

the substitution of domestically produced manufactured goods for imported manufactured goods (19)

imports

products that a country buys from other countries (4)

in-kind transfers

the allocation of goods and services from one group in society to another (34)

income effect

the change in quantity demanded that occurs when the purchasing power of income is altered as a result of a price change (21)

income elasticity of demand

the percentage change in the demand for a good divided by the percentage change in income, ceteris paribus (20)

increasing marginal opportunity cost

a rising amount of one good or service that must be given up to obtain one additional unit of any good or service, no matter how many units are being produced (2)

increasing-cost industry

an industry in which the costs of resources rise when the industry expands (24)

increasing-returns-to-scale industry

an industry in which the costs of producing a unit of output fall as more output is produced (36)

independent variable

the variable whose value does not depend on the value of other variables (1 App.)

indifference curve

a curve showing all combinations of two goods that the consumer is indifferent among (21 App.)

indifference map

a complete set of indifference curves (21 App.)

indifferent

lacking any preference (21 App.)

indirect business tax

a tax that is collected by businesses for a government agency (6)

industrial policy

government direction and involvement in defining an economy's industrial structure (27)

inferior goods

goods for which the income elasticity of demand is negative (20)

inflation

a sustained rise in the average level of prices (8)

inputs

goods used to produce other goods (1)

interest rate effect

a change in interest rates that causes investment and therefore aggregate expenditures to change as the level of prices changes (9)

interest rate parity (IRP)

the condition under which similar financial assets have the same interest rate when measured in the same currency (17)

intermediate good

a good that is used as an input in the production of final goods and services (6)

intermediate target

an objective used to achieve some ultimate policy goal (14)

international banking facility (IBF)

a division of a U.S. bank that is allowed to receive deposits from and make loans to nonresidents of the United States without the restrictions that apply to domestic U.S. banks (13)

international reserve asset

an asset used to settle debts between governments (13)

international reserve currency

a currency held by a government to settle international debts (13)

international trade effect

the change in aggregate expenditures resulting from a change in the domestic price level that changes the price of domestic goods in relation to foreign goods (9)

intraindustry trade

simultaneous import and export of goods in the same industry by a particular country (35)

inventory

the stock of unsold goods held by a firm (6)

inverse or negative relationship

the relationship that exists when the values of related variables move in opposite directions (1 App.)

investment

spending on capital goods to be used in producing goods and services (4)

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Keynesian economics

a school of thought that emphasizes the role government plays in stabilizing the economy by managing aggregate demand (16)

Keynesian region

the portion of the aggregate supply curve at which prices are fixed because of unemployment and excess capacity (16)

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Lorenz curve

a curve measuring the degree of inequality of income distribution within a society (34)

labor

the physical and intellectual services of people, including the training, education, and abilities of the individuals in a society (1)

labor force participation

entering the work force (29)

lagging indicator

a variable that changes after real output changes (8)

land

all natural resources, such as minerals, timber, and water, as well as the land itself (1)

law of demand

as the price of a good or service rises (falls), the quantity of that good or service that people are willing and able to purchase during a particular period of time falls (rises), ceteris paribus (3)

law of diminishing marginal returns

when successive equal amounts of a variable resource are combined with a fixed amount of another resource, marginal increases in output that can be attributed to each additional unit of the variable resource will eventually decline (22)

law of supply

as the price of a good or service that producers are willing and able to offer for sale during a particular period of time rises (falls), the quantity of that good or service supplied rises (falls), ceteris paribus (3)

leading indicator

a variable that changes before real output changes (8)

legal reserves

the cash a bank holds in its vault plus its deposit in the Fed (14)

liquid asset

an asset that can easily be exchanged for goods and services (13)

local monopoly

a monopoly that exists in a limited geographic area (25)

lock-in

see path dependence (31)

logrolling

trading votes or support on one issue in return for votes or support on another issue (36)

long run

a period of time just long enough that the quantities of all resources can be varied (20)

long-run aggregate supply curve (LRAS)

a vertical line at potential level of national income (9)

long-run average total cost (LRAC)

the lowest-cost combination of resources with which each level of output is produced when all resources are variable (22)

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M1 money supply

financial assets that are most liquid (13)

Medicaid

a joint federal-state program that pays for health care for poor families, the neediest elderly, and disabled persons (33)

Medicare

a federal health care program for poor elderly, and disabled persons (33)

macroeconomics

the study of the economy as a whole (1)

managed care

comprehensive medical care provided within one firm (33)

managed competition

government intervention in the health-care market to guide competition so that costs are reduced (33)

managed floating exchange rates

the system whereby central banks intervene in the floating foreign-exchange market to influence exchange rates. (37)

mandatory retirement

a policy that requires workers to retire at a certain age (29)

marginal benefit

additional benefit (2, 32)

marginal cost (MC)

the additional costs of producing one more unit of output (2, 22)

marginal factor cost (MFC)

the additional cost of an additional unit of a resource (28)

marginal opportunity cost

the amount of one good or service that must be given up to obtain one additional unit of another good or service (2)

marginal physical product (MPP)

the additional quantity that is produced when one additional unit of a resource is used in combination with the same quantities of all other resources (22)

marginal propensity to consume (MPC)

change in consumption as a proportion of change in disposable income (10)

marginal propensity to import (MPI)

change in imports as a proportion of change in income (10)

marginal propensity to save (MPS)

change in saving as a proportion of change in disposable income (10)

marginal revenue

the additional revenue obtained by selling an additional unit of output (23)

marginal revenue product (MRP)

the value of the additional output that an extra unit of a resource can produce, MPP 3 MR (28)

marginal social cost

the additional social cost that results from a 1-unit increase in production (32)

marginal utility

the extra utility derived from consuming one more unit of a good or service (21)

market

a place or service that enables buyers and sellers to exchange goods and services (3)

market failure

the failure of the market system to achieve economic and technical efficiency (32)

market imperfection

a lack of efficiency that results from imperfect information in the market place (5)

maturity date

the time when the coupon payments end and the principal is paid back (31)

median voter theorem

candidates or parties select positions on issues that reflect the median voter's positions on those issues (36)

microeconomics

the study of economics at the level of the individual (1)

minimum efficient scale (MES)

the minimum point of the long-run average cost curve; the output level at which the cost per unit of output is the lowest (22)

model

see theory (1)

monetarist economics

a school of thought that emphasizes the role changes in the money supply play in determining equilibrium national income and price level (16)

monetary overhang

money accumulated by households because there was nothing available that they wanted to buy (40)

monetary policy

policy directed toward control of the money supply (5)

monetary reform

a new monetary policy that includes the introduction of a new monetary unit (15)

money

anything that is generally acceptable to sellers in exchange for goods and services (13)

money supply

financial assets that are immediately available for spending (13)

monopoly

a market structure in which there is a single supplier of a product (5, 25)

monopoly firm (monopolist)

a single supplier of a product for which there are no close substitutes (25)

monopoly power

market power, the ability to set prices (25)

monopsonist

a firm that is the only buyer of a resource (28)

moral hazard

the chance that people will alter their behavior in unanticipated ways after an agreement or contract has been defined (26)

most-favored customer (MFC)

customer who receives a guarantee of the lowest price and all product features for a certain period of time (26)

multilateral aid

aid provided by international organizations supported by many nations (19)

multinational business

a firm that owns and operates producing units in foreign countries (4)

multiple exchange rates

a system whereby a government fixes different exchange rates for different types of transactions (37)

multiplier

a measure of the change in income produced by a change in autonomous expenditures (11, 12)

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national income (NI)

net national product minus indirect business taxes (6)

national income accounting

the process that summarizes the level of production in an economy over a specific period of time, typically a year (6)

natural monopoly

a monopoly that emerges because of economies of scale (23, 25)

natural rate of unemployment

the unemployment rate that would exist in the absence of cyclical unemployment (8)

negative economic profit

total revenue is less than total costs when total costs include all opportunity costs (23)

negative income tax (NIT)

a tax system that transfers increasing amounts of income to households earning incomes below some specified level as their income declines (34)

net exports

exports minus imports (4)

net investment

gross investment minus capital consumption allowance (6)

net national product (NNP)

gross national product minus capital consumption allowance (6)

new classical economics

a school of thought that holds that changes in real national income are a product of unexpected changes in the level of prices (16)

nominal GDP

a measure of national output based on the current prices of goods and services (6)

nominal interest rate

the observed interest rate in the market (8)

nonrenewable (exhaustible) natural resources

resources that can not be replaced or renewed (32)

normal goods

goods for which the income elasticity of demand is positive (20)

normative analysis

analysis of what ought to be (1)

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occupational segregation

the separation of jobs by sex (30)

open economy

an economy in which a relatively large fraction of the GDP is devoted to internationally tradable goods (17, 37)

open market operations

the buying and selling of government bonds by the Fed to control bank reserves and the money supply (14)

open position

the situation of a firm waiting to buy foreign currency at a future spot rate

opportunity costs

the highest-valued alternative that must be forgone when a choice is made (2)

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Phillips curve

a graph that illustrates the relationship between inflation and the unemployment rate (15)

partnership

a business with two or more owners who share the firm's profits and losses (4)

patent

a legal document that gives an inventor the legal rights to an invention (18)

path dependence

economics of scale suggest that when new technology is adopted, the first form of the technology adopted will become the standard (31)

per capita real GDP

real national income divided by the population (18)

per se rule

actions that could be anticompetitive are intrinsically illegal (27)

perfectly elastic demand curve

a horizontal demand curve indicating that consumers can and will purchase all they want at one price (20)

perfectly inelastic demand curve

a vertical demand curve indicating that there is no change in the quantity demanded as the price changes (20)

personal income (PI)

national income plus income currently received but not earned, minus income currently earned but not received (6)

personnel practices

a firm's policies toward its employees (29)

portfolio investment

the purchase of securities (19)

positive analysis

analysis of what is (1)

positive economic profit (above-normal profit)

total revenue is greater than total costs when total costs include all opportunity costs (23)

potential competition

entry or rivalry capable of forcing existing producers to behave as if the competition actually existed (25)

potential real GDP

the output produced at the natural rate of unemployment (8)

precautionary demand for money

the demand for money to cover unplanned transactions or emergencies (14)

predatory dumping

dumping to drive competitors out of business (25)

preferred provider organization (PPO)

group of physicians who contract to provide services at a price discount (33)

present value

the equivalent value today of some amount to be received in the future (31)

price ceiling

a situation where the price is not allowed to rise above a certain level (3)

price discrimination

charging different customers different prices for the same product (20)

price elasticity of demand

the percentage change in the quantity demanded of a product divided by the percentage change in the price of that product (20)

price elasticity of supply

the percentage change in quantity supplied divided by the percentage change in price, ceteris paribus (20)

price floor

a situation where the price is not allowed to decrease below a certain level (3)

price index

a measure of the average price level in an economy (6)

price maker

a firm that sets the price of the product it sells (23)

price taker

a firm that is unable to set a price that differs from the market price without losing profit (23)

primary product

a product in the first stage of production, which often serves as input in the production of another product (19)

principle of mutual exclusivity

the owner of private property is entitled to enjoy the consumption of the property privately (32)

private costs

costs borne by the individual in the transaction that created the costs (32)

private label

the practice of a firm purchasing a product from another firm and putting its own label on the product (27)

private property right

the limitation of ownership to an individual (5, 32)

private sector

households, businesses, and the international sector (4)

privatization

transferring a publicly owned enterprise to private ownership (27)

producer price index (PPI)

a measure of average prices received by producers (6)

producer surplus

the difference between the price firms would have been willing to accept for their products and the price they actually receive (24)

production possibilities curve (PPC)

a graphical representation showing the maximum quantity of goods and services that can be produced using limited resources to the fullest extent possible (2)

productivity

the quantity of output produced per unit of resource (3)

progressive tax (progressive income tax)

a tax whose rate rises as income rises (12, 34)

proportional tax

a tax whose rate does not change as the tax base changes (34)

prospective payment system (PPS)

the use of a preassigned reimbursement rate by Medicare to reimburse hospitals and physicians (33)

public choice

the use of economics to analyze the actions and inner workings of the public sector (5)

public goods

goods whose consumption cannot be limited only to the person who purchased the good (5, 32)

public interest theory

government intervenes in business actions to improve the well-being of the general public (27)

public sector

the government (4)

purchasing power

the quantity of goods and services that a given quantity of income can buy

purchasing power parity (PPP)

the condition under which monies have the same purchasing power in different markets (17)

put

the right to sell currency at a certain price

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quantity demanded

the amount of a product that people are willing and able to purchase at a specific price (3)

quantity quota

a limit on the amount of a good that may be imported (36)

quantity supplied

the amount sellers are willing and able to offer at a given price, during a given period of time, everything else held constant (3)

quantity theory of money

with constant velocity, changes in the quantity of money change nominal GDP (14)

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rate of return

profit as a percentage of the cost of an investment (10)

rate-of-return regulation

definition of a firm's price and profit rate by a regulatory commission

rational expectation

an expectation that is formed using all available relevant information (15)

rational self-interest

the term economists use to describe how people make choices (1)

rationally ignorant voters

voters who do not have perfect information because it is too costly to acquire (36)

real GDP

a measure of the quantity of goods and services produced, adjusted for price changes (6)

real interest rate

the nominal interest rate minus the rate of inflation (8)

recession

a period in which real GDP falls (8)

recessionary gap

the increase in expenditures required to reach potential GDP (11)

regressive tax

a tax whose rate decreases as the tax base changes (34)

regulated monopoly

a monopoly firm whose behavior is monitored and prescribed by a government entity (25)

relative price

the price of one good expressed in terms of another good (3)

renewable (nonexhaustible) natural resources

resources that can be replaced or renewed (32)

rent seeking

the use of resources simply to transfer wealth from one group to another without increasing production or total wealth (5, 27)

required reserves

the cash reserves (a percentage of deposits) a bank must keep on hand or on deposit with the Federal Reserve (13)

reservation wage

the minimum wage a worker is willing to accept (15)

reserve currency

a currency that is used to settle international debts and is held by governments to use in foreign exchange market interventions (37)

residual claimants

entrepreneurs who acquire profit or the revenue remaining after all other resources have been paid (28)

resources

goods used to produce other goods, i.e., land, labor, capital, entrepreneurial ability (1)

risk premium

the extra return required to offset the higher risk associated with investing in a foreign asset (17)

roundabout production

the process of saving and accumulating capital in order to increase production in the future (32)

rule of 72

the number of years required for an amount to double in value is 72 divided by the annual rate of growth (18)

rule of reason

to be illegal an action must be unreasonable in a competitive sense and the anticompetitive effects must be demonstrated (27)

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saving

not consuming all current production (31)

saving function

the relationship between disposable income and saving (10)

scale

size; all resources change when scale changes (22)

scarcity

the shortage that exists when less of something is available than is wanted at a zero price (1)

scientific method

a manner of analyzing issues that involves five steps: recognition of the problem, assumptions, model building, predictions, tests of model (1)

sequential game

a situation in which one firm moves first and then the other firm is able to choose a strategy based on the first firm's choices (26)

shock

an unexpected change in a variable (15)

short run

a period of time just short enough that the quantities of at least some of the resources cannot be varied (20)

short-run average total cost (SRATC)

the lowest-cost combination of resources with which each level of output is produced when the quantity of at least one resource is fixed (22)

shortage

a quantity supplied that is smaller than the quantity demanded at a given price (3)

shutdown price

the minimum point of the average-variable-cost curve (24)

slope

the steepness of a curve, measured as the ratio of the rise to the run (1 App.)

social costs

the private and external costs of a transaction (32)

social regulation

the prescribing of health, safety, performance, and environmental standards that apply across several industries (27)

socialism

an economic system characterized by government ownership of most resources and centralized decision-making (40)

sole proprietorship

a business owned by one person who receives all the profits and is responsible for all the debts incurred by the business (4)

special drawing right (SDR)

an artificial unit of account created by averaging the values of the U.S. dollar, German mark, Japanese yen, French franc, and British pound (13, 37)

speculative demand for money

the demand for money created by uncertainty about the value of other assets (14)

speculators

people who seek to profit from an expected shift in an exchange rate by selling the currency expected to depreciate and buying the currency expected to appreciate, then exchanging the appreciated currency for the depreciated currency after the rate adjustment (37)

spending multiplier

the reciprocal of the sum of the MPS and the MPI (11)

standardized or nondifferentiated products

products that consumers perceive to be identical (23)

statistical discrimination

discrimination that results when an indicator of group performance is incorrectly applied to an individual member of the group (30)

sterilization

the use of domestic open market operations to offset the effects of a foreign exchange market intervention on the domestic money supply (14)

strategic behavior

behavior that occurs when what is best for B depends on what A chooses and what A chooses depends on what B is most likely to do (26)

strategic deterrence

undertaking an action to prevent certain behavior by rivals (27)

strategic management

using economics to devise strategies for firms (27)

strategic trade policy

the use of trade restrictions or subsidies to allow domestic firms with decreasing costs to gain a greater share of the world market (36)

strategic variables

factors affecting a firm over which the manager has control (27)

subsidies

payments made by government to domestic firms to encourage exports (36)

substitute goods

goods that can be used in place of each other (as the price of one rises, the demand for the other rises) (3)

substitution effect

the tendency of people to purchase less expensive goods that serve the same purpose as a good whose price has risen (21)

superstar effect

the situation where people with small differences in abilities or productivity receive vastly different levels of compensation (29)

supply

the amount of a good or service that producers are willing and able to offer for sale at each possible price during a period of time, ceteris paribus (3)

supply curve

a graph of a supply schedule that measures price on the vertical axis and quantity supplied on the horizontal axis (3)

supply schedule

a list or table of prices and corresponding quantities supplied of a particular good or service (3)

surplus

a quantity supplied that is larger than the quantity demanded at a given price (3)

surplus (in a balance of payments account)

the amount by which credits exceed debits (7)

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tariffs

taxes on imports or exports (36)

tax incidence

a measure of who pays a tax (20)

tax multiplier

a measure of the effect of a change in taxes on the equilibrium level of income (11,12)

technical efficiency

producing at a point on the PPC (5)

technology

ways of combining resources to produce output (18)

terms of trade

the amount of exports that must be exchanged for some amount of imports (19, 35)

tests

trials or measurements used to determine whether a theory is consistent with the facts (1)

theory (or model)

a simplified, logical story based on positive analysis that is used to explain an event (1)

time inconsistent

a characteristic of a policy or plan that changes over time in response to changing conditions (15)

total costs (TC)

the sum of total variable and total fixed costs (22)

total factor productivity (TFP)

the ratio of the economy's output to its stock of labor and capital (18)

total fixed costs (TFC)

costs that must be paid whether a firm produces or not (22)

total physical product (TPP)

the maximum output that can be produced when successive units of a variable resource are added to fixed amounts of other resources (22)

total revenue (TR)

TR = P x Q (20)

total utility

a measure of the total satisfaction derived from consuming a quantity of some good or service (21)

total variable costs (TVC)

costs that rise or fall as production rises or falls (22)

trade creation

an effect of a preferential trade agreement, allowing a country to obtain goods at a lower cost than is available at home (36)

trade credit

the extension of a period of time before an importer must pay for goods or services purchased (19)

trade deficit

exists when imports exceed exports (4)

trade diversion

an effect of a preferential trade agreement, reducing economic efficiency by shifting production to a higher-cost producer (36)

trade off

to give up one good or activity in order to obtain some good or activity (2)

trade surplus

exists when imports are less than exports (4)

transaction costs

the costs involved in making an exchange (3)

transactions account

a checking account at a bank or other financial institution that can be drawn on to make payments (13)

transactions demand for money

the demand to hold money to buy goods and services (14)

transfer earnings

the portion of total earnings required to keep a resource in its current use (28)

transfer payment

income transferred from one citizen, who is earning income, to another citizen (5, 6, 12)

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underemployment

the employment of workers in jobs that do not utilize their productive potential (8)

underground market

unreported exchanges of goods and services (8)

unemployment rate

the percentage of the labor force that is not working (8)

union shop

a workplace in which all employees must join a union within a specific period of time after they are hired (30)

unlimited wants

boundless desires for goods and services (1)

utility

a measure of the satisfaction received from possessing or consuming goods and services (21)

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value added

the difference between the value of output and the value of the intermediate goods used in the production of that output (6)

value quota

a limit on the monetary value of a good that may be imported (36)

value-added tax (VAT)

a general sales tax collected at each stage of production (12)

velocity of money

the average number of times each dollar is spent on final goods and services in a year (14)

venture capital

funds provided by a firm or individual that specializes in lending to new, unproven firms (4)

voting cycle

the situation where a collective decision process does not reach a decision (36)

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World Bank

an international organization that makes loans and provides technical expertise to developing countries (37)

World Trade Organization (WTO)

see GATT (27)

wealth

the value of all assets owned by a household (10)

wealth effect

a change in the real value of wealth that causes spending to change when the price level changes (9)

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X-inefficiency

the tendency of a firm not faced with competition to become inefficient (25)

yield

annual rate of return on a bond if the bond is held to maturity (31)

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zero economic profit (normal profit)

total revenue equals total costs when total costs include all opportunity costs (23)