Economics terminology that differs from common usage
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In any technical subject, words commonly used in everyday life acquire very specific technical meanings, and confusion can arise when someone is uncertain of the intended meaning of a word. This article explains the differences in meaning between some technical terms used in economics and the corresponding terms in everyday usage.
Economists commonly use the term recession to mean either a period of two successive calendar quarters each having negative growth[clarification needed] of real gross domestic product[1][2][3]—that is, of the total amount of goods and services produced within a country—or that provided by the National Bureau of Economic Research (NBER): "...a significant decline in economic activity spread across the country, lasting more than a few months, normally visible in real GDP growth, real personal income, employment, industrial production, and wholesale-retail sales."[4] Almost all economists and policymakers refer to the NBER's determination for the precise dates of a U.S. recession's beginning and end.[5]
In contrast, in non-expert, everyday usage, recession may refer to a period in which the unemployment rate is substantially higher than normal.
"Unemployed"
Labor economists categorize people into three groups: employed—actually working at a job, even if part-time; unemployed—not working, but looking for work or awaiting a scheduled recall from a temporary layoff; and not in the labor force—neither working nor looking for work.[3][6] People not in the labor force, even if they have given up looking for a job despite wanting one, are not considered unemployed. For this reason it is often thought, especially when a recession has persisted for a sustained period, that the unemployment rate understates the true amount of unemployment because some unemployment is disguised by discouraged workers having left the labor force.
The everyday usage of the word unemployed is usually broad enough to include disguised unemployment, and may include people with no intention of finding a job. For example, a dictionary definition is: "not engaged in a gainful occupation",[7] which is broader than the economic definition.
"Money"
Economists use the word money to mean very liquid assets which are held at any moment in time.[3][6] The units of measurement are dollars or another currency, with no time dimension, so this is a stock variable. There are several technical definitions of what is included in "money", depending on how liquid a particular type of asset has to be in order to be included. Common measures include M1, M2, and M3.
In everyday usage, money can refer to the very liquid assets included in the technical definition, but it usually refers to something much broader. When someone says "She has a lot of money," the intended meaning is almost certainly that she has a lot of what economists would call financial wealth, which includes not only the most liquid assets (which tend to pay low or zero returns), but also stocks, bonds and other financial investments not included in the technical definition. Non-financial assets, such as land and buildings, may also be included. For example, dictionary definitions of money include "wealth reckoned in terms of money" and "persons or interests possessing or controlling great wealth",[8] neither of which correspond to the economic definition.
A related but different everyday usage occurs in the sentence "He makes a lot of money." This refers to a variable that economists call income. Unlike the usages mentioned above, this one has the units "dollars, or another currency, per unit of time", where the unit of time might be a week, month, or year, making it a flow variable.
"Investment" and "capital"
While financial economists use the word investment to refer to the acquisition and holding of potentially income-generating forms of wealth such as stocks and bonds,[9]macroeconomists usually use the word for the sum of fixed investment—the purchasing of a certain amount of newly produced productive equipment, buildings or other productive physical assets per unit of time—and inventory investment—the accumulation of inventories over time.[6] This is one of the major types of expenditure in an economy, the others being consumption expenditure, government expenditure, and expenditure on a country's export goods by people outside the country.
The everyday usage of investment coincides with the one used by financial economists—the acquisition and holding of potentially income-generating forms of wealth such as stocks and bonds.[10]
Similarly, while financial economists use the word capital to refer to funds used by entrepreneurs and businesses to buy what they need to make their products or to provide their services,[11] macroeconomists and microeconomists use the term capital to mean productive equipment, buildings or other productive physical assets.[12]
As with the term investment, the everyday usage of capital coincides with its use by financial economists.[10]
"Government spending"
Economists distinguish between government spending on newly produced goods and services, such as paying a company to build a new highway, and government spending on transfer payments, which are payments such as welfare payments intended to redistribute income. In economic models, transfer payments are normally treated as a negative component of "taxes net of transfers", leaving "government spending on (newly produced) goods and services" as a separate category, often referred to simply as "government spending".[3][6]
In everyday usage, "government spending" refers to the broader concept of government spending on goods and services plus transfer payments.
In general usage, including by economists outside the above context, welfare refers to a form of transfer payment.[14]
"Efficient"
Economists use the word efficient to mean any of several closely related things:[12]
No one can be made better off without making someone else worse off (Pareto efficiency).
No more output cannot be obtained without increasing the amount of inputs.
Production proceeds at the lowest possible per-unit cost.
All of these definitions involve the idea that nothing more can be achieved given the resources available.
In popular usage, efficient often has the similar but less precise meaning "functioning effectively".[10]
"Cost" and "profit"
The economics term cost, also known as economic cost or opportunity cost, refers to the potential gain that is lost by foregoing one opportunity in order to take advantage of another. The lost potential gain is the cost of the opportunity that is accepted. Sometimes this cost is explicit: for example, if a firm pays $100 for a machine, its cost is $100. Other times, however, the cost is implicit: for example, if a firm diverts resources from producing output worth $200 into producing a different kind of output, then regardless of how much or how little of the latter output is produced, the opportunity cost of doing so is $200.
In accounting, there is a different technical concept of cost, which excludes implicit opportunity costs.
In common usage, as in accounting usage, cost typically does not refer to implicit costs and instead only refers to direct monetary costs.
The economics term profit relies on the economic meaning of the term for cost. While in common usage, profit refers to earnings minus accounting cost, economists mean earnings minus economic cost or opportunity cost.
"Demand"
In economics, demand refers to the strength of one or many consumers' willingness to purchase a good or goods at a range of different prices. If, for example, a rise in income causes a consumer to be willing to purchase more of a good than before contingent on each possible price, economists say that the income rise has caused the consumer's demand for the good to rise. In contrast, if a change in market conditions leads to a decline in the price of a good resulting in a consumer's being willing to buy more of it, economists say that the consumer's quantity demanded of the good has risen. A change in quantity demanded is represented by a movement along the demand curve, while a change in demand is represented by a shift of the demand curve.[12]
In popular usage a change in "demand" can refer to either what economists call a change in demand or what economists call a change in quantity demanded.
"Supply"
In economics, supply refers to the strength of one or many producers' willingness to produce and sell a good or goods at any in a range of prices. If, for example, a reduction in production costs causes a producer to be willing to provide more of a good than before contingent on each possible price, economists say that the drop in production costs has caused supply to rise. In contrast, if a change in market conditions leads to a decline in the price of a good resulting in a producer willing to sell less of it, economists say that the consumer's quantity supplied of the good has fallen. A change in quantity supplied is represented by a movement along the supply curve, while a change in supply is represented by a shift of the supply curve.[12]
"Marginal"
While "marginal" in common usage tends to mean tangential, implying limited importance, in economics "marginal" means "incremental". For example, the marginal propensity to consume refers to the incremental tendency to spend income on consumer goods: the fraction of any additional income which is spent on additional consumption (or conversely, the fraction of any decrease in income which becomes a decrease in consumption). Likewise, the marginal product of capital refers to the additional production of output that results from using an additional unit of physical capital (machinery, etc.). If very small increments are being considered, so that calculus is used, then this ratio of incremental amounts is a derivative (for example, the marginal propensity to consume becomes the derivative of consumption with respect to income).
"Significant"
In common usage, "significant" usually means "noteworthy" or "of substantial importance". In econometrics—the use of statistical techniques in economics—"significant" means "unlikely to have occurred by chance". For example, suppose one wishes to find if the minimum wage rate affects firms' decisions on how much labor to hire. If the data show, on the basis of statistical techniques, an effect of a particular non-zero magnitude, one wants to know whether that non-zero magnitude could have arisen in the data by chance when in fact the true effect is zero. If a statistical test shows that there is less than, say, a 5% chance that one would have found this particular value if the true value were zero, then it is said that the estimate is "significant at the 5% level". If not, then it is said that the estimate is "insignificant at the 5% level".
Note, however, that the less precise phrase "economically significant" is sometimes used by economists to mean something very similar to the common usage of "significant". If the effect of the minimum wage on hiring decisions were found to be very small and yet the numerical result is very unlikely to have occurred only by chance, then the estimated effect is said to be statistically significant but not significant economically.
"Biased"
In common usage, "biased" generally means "prejudiced". In econometrics, the estimate of the effect of one thing on another (say, the estimate of the effect of the minimum wage upon employment decisions) is said to be "biased" if the technique that was used to obtain the estimate has the effect that, a priori, the expected value of the estimated effect differs from the true effect, whatever the latter may be. In this case the technique, as well as the estimate obtained with the technique, is called "biased". Researchers are likely to view a biased estimate with suspicion.
"Dummy"
In common usage, dummy can offensively refer to someone who is silent or unintelligent, as in a mannequin or puppet.[15] In econometrics, dummy generally refers to a binary variable that indicates whether a certain quality is present or absent. So, for example, a "male dummy" would refer to a variable indicating that someone is male, rather than referring to an unintelligent male or a male puppet.
"Elasticity"
In general usage, elasticity refers to flexibility. In economics, it refers to a quantitative measurement of the degree of flexibility of something in response to something else. For example, the "elasticity of demand with respect to income" or the "income elasticity of demand" for a product refers to the percentage change in the quantity of the product demanded in response to a 1% change in consumers' income, or more generally to the ratio of the percentage change in quantity demanded to the percentage change in income. The change in the denominator always causes the change in the numerator, so the elasticity can be said to be the ratio of a percentage change that is caused to the percentage change of something that is causative.
"Rational"
In general usage, one is said to be rational if one is sane or lucid.[15] In economics, rationality means that an economic agent specifies, or acts as if he implicitly specifies, a way to characterize his or someone's well-being, and then takes into account all relevant information in making choices so as to optimize that well-being. For example, an individual consumer is assumed to be rational in the sense that he maximizes a utility function, which expresses his subjective sense of well-being as a function of the amounts of various goods he consumes; firms are assumed to maximize profit or some related goal. Economists assume that in the presence of uncertainty, an agent is rational in the sense of specifying a way of evaluating sets of possible outcomes (and associated probabilities) with some function: A consumer is assumed to choose his consumption levels of various goods so as to pick the set of possible outcomes, and associated probabilities, that maximizes this function, which is often assumed to be the expected value of a von Neumann–Morgenstern utility function; a firm is often assumed to maximize the expected value of profit.
"Rent"
In general usage, rent refers to a payment made in exchange for temporary use of property, for example paying rent to stay in an apartment. In economics, rent is any payment to an owner or factor of production in excess of the costs needed to bring that factor into production. Effectively, it is payment made to a producer above and beyond what would have been necessary to incentivize them to produce. It can roughly be understood as unearned revenue.
In many cases,[which?][clarification needed] common-usage rent is an example of economic-usage rent, making the distinction between the two confusing.
Related Research Articles
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilized amounts of the various inputs determine the quantity of output according to the relationship called the production function. There are four basic resources or factors of production: land, labour, capital and entrepreneur. The factors are also frequently labeled "producer goods or services" to distinguish them from the goods or services purchased by consumers, which are frequently labeled "consumer goods".
In microeconomics, supply and demand is an economic model of price determination in a market. It postulates that, holding all else equal, in a competitive market, the unit price for a particular good or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded will equal the quantity supplied, resulting in an economic equilibrium for price and quantity transacted. The concept of supply and demand forms the theoretical basis of modern economics.
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer by a governmental organization in order to collectively fund government spending, public expenditures, or as a way to regulate and reduce negative externalities. Tax compliance refers to policy actions and individual behaviour aimed at ensuring that taxpayers are paying the right amount of tax at the right time and securing the correct tax allowances and tax relief. The first known taxation took place in Ancient Egypt around 3000–2800 BC. Taxes consist of direct or indirect taxes and may be paid in money or as its labor equivalent.
In economics, inflation is a general increase in the prices of goods and services in an economy. This is usually measured using the consumer price index (CPI). When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money. The opposite of CPI inflation is deflation, a decrease in the general price level of goods and services. The common measure of inflation is the inflation rate, the annualized percentage change in a general price index. As prices faced by households do not all increase at the same rate, the consumer price index (CPI) is often used for this purpose.
In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Inflation reduces the value of currency over time, but deflation increases it. This allows more goods and services to be bought than before with the same amount of currency. Deflation is distinct from disinflation, a slowdown in the inflation rate; i.e., when inflation declines to a lower rate but is still positive.
Saving is income not spent, or deferred consumption. In economics, a broader definition is any income not used for immediate consumption. Saving also involves reducing expenditures, such as recurring costs.
This aims to be a complete article list of economics topics:
In economics and political science, fiscal policy is the use of government revenue collection and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables developed in reaction to the Great Depression of the 1930s, when the previous laissez-faire approach to economic management became unworkable. Fiscal policy is based on the theories of the British economist John Maynard Keynes, whose Keynesian economics theorised that government changes in the levels of taxation and government spending influence aggregate demand and the level of economic activity. Fiscal and monetary policy are the key strategies used by a country's government and central bank to advance its economic objectives. The combination of these policies enables these authorities to target inflation and to increase employment. In modern economies, inflation is conventionally considered "healthy" in the range of 2%–3%. Additionally, it is designed to try to keep GDP growth at 2%–3% and the unemployment rate near the natural unemployment rate of 4%–5%. This implies that fiscal policy is used to stabilise the economy over the course of the business cycle.
In economics, an inferior good is a good whose demand decreases when consumer income rises, unlike normal goods, for which the opposite is observed. Inferiority, in this sense, is an observable fact relating to affordability rather than a statement about the quality of the good. There are many examples of inferior goods, including cheap cars, public transit options, payday lending, and inexpensive food. The shift in consumer demand for an inferior good can be explained by two natural economic phenomena: the substitution effect and the income effect.
Consumption is the act of using resources to satisfy current needs and wants. It is seen in contrast to investing, which is spending for acquisition of future income. Consumption is a major concept in economics and is also studied in many other social sciences.
In microeconomics, the law of demand is a fundamental principle which states that there is an inverse relationship between price and quantity demanded. In other words, "conditional on all else being equal, as the price of a good increases (↑), quantity demanded will decrease (↓); conversely, as the price of a good decreases (↓), quantity demanded will increase (↑)". Alfred Marshall worded this as: "When we say that a person's demand for anything increases, we mean that he will buy more of it than he would before at the same price, and that he will buy as much of it as before at a higher price". The law of demand, however, only makes a qualitative statement in the sense that it describes the direction of change in the amount of quantity demanded but not the magnitude of change.
Fixed investment in economics is the purchasing of newly produced fixed capital. It is measured as a flow variable – that is, as an amount per unit of time.
In economics, output is the quantity and quality of goods or services produced in a given time period, within a given economic network, whether consumed or used for further production. The economic network may be a firm, industry, or nation. The concept of national output is essential in the field of macroeconomics. It is national output that makes a country rich, not large amounts of money.
Household debt is the combined debt of all people in a household, including consumer debt and mortgage loans. A significant rise in the level of this debt coincides historically with many severe economic crises and was a cause of the U.S. and subsequent European economic crises of 2007–2012. Several economists have argued that lowering this debt is essential to economic recovery in the U.S. and selected Eurozone countries.
The wealth elasticity of demand, in microeconomics and macroeconomics, is the proportional change in the consumption of a good relative to a change in consumers' wealth. Measuring and accounting for the variability in this elasticity is a continuing problem in behavioral finance and consumer theory.
In economics, tax incidence or tax burden is the effect of a particular tax on the distribution of economic welfare. Economists distinguish between the entities who ultimately bear the tax burden and those on whom the tax is initially imposed. The tax burden measures the true economic effect of the tax, measured by the difference between real incomes or utilities before and after imposing the tax, and taking into account how the tax causes prices to change. For example, if a 10% tax is imposed on sellers of butter, but the market price rises 8% as a result, most of the tax burden is on buyers, not sellers. The concept of tax incidence was initially brought to economists' attention by the French Physiocrats, in particular François Quesnay, who argued that the incidence of all taxation falls ultimately on landowners and is at the expense of land rent. Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or ultimately suffers a loss from, the tax. The key concept of tax incidence is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply. As a general policy matter, the tax incidence should not violate the principles of a desirable tax system, especially fairness and transparency. The concept of tax incidence is used in political science and sociology to analyze the level of resources extracted from each income social stratum in order to describe how the tax burden is distributed among social classes. That allows one to derive some inferences about the progressive nature of the tax system, according to principles of vertical equity.
In accounting, finance and economics, an accounting identity is an equality that must be true regardless of the value of its variables, or a statement that by definition must be true. Where an accounting identity applies, any deviation from numerical equality signifies an error in formulation, calculation or measurement.
Economic theory evaluates how taxes are able to provide the government with required amount of the financial resources and what are the impacts of this tax system on overall economic efficiency. If tax efficiency needs to be assessed, tax cost must be taken into account, including administrative costs and excessive tax burden also known as the dead weight loss of taxation (DWL). Direct administrative costs include state administration costs for the organisation of the tax system, for the evidence of taxpayers, tax collection and control. Indirect administrative costs can include time spent filling out tax returns or money spent on paying tax advisors.
The sectoral balances are a sectoral analysis framework for macroeconomic analysis of national economies developed by British economist Wynne Godley.
This glossary of economics is a list of definitions of terms and concepts used in economics, its sub-disciplines, and related fields.
1 2 3 4 Baumol, William J., and Blinder, Alan S. Macroeconomics: Principles and Policy, Southwestern College Publ., eleventh ed., 2008; ISBN0-324-58621-3.
↑ "unemployed". Merriam-Webster. Retrieved 13 June 2010.
↑ "money". Merriam-Webster. Retrieved 13 June 2010.
↑ Bodie, Zvi; Kane, Alex; and Marcus, Alan J. Investments, eighth edition, McGraw-Hill/Irwin, 2008; ISBN0-07-338237-X
1 2 3 Webster's College Dictionary, Random House, 1995.
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