A tax-deferred retirement savings plan defined by subsection 401(a) of the Internal Revenue Code.[1] The 401(a) plan is established by an employer, and allows for contributions by the employer or both employer and employee.[2] These plans are available to some employees of the government, educational institutions, and non-profits, and their funds can be rolled over to a different qualified retirement plan, such as a 401(k) or IRA,[3] when changing jobs.
A type of retirement plan which is sponsored by an employer and in which the employer may match a portion of the employee's contributions. Most contributions are tax-deferred until retirement withdraws occur.
A type of nonqualified,[6][7]tax advantaged deferred-compensation retirement plan that is available for governmental and certain nongovernmental employers in the United States. Unlike with a 401(k) plan, it has no 10% penalty for withdrawal before the age of 55 (59 years, 6 months for IRA accounts) (although the withdrawal is subject to ordinary income taxation). 457 plans can also allow independent contractors to participate in the plan, where 401(k) and 403(b) plans cannot.[8]
The ability of a party (whether an individual, firm, or country) to produce a greater quantity of a good, product, or service than competitors using the same amount of resources.
A positive effect on private fixed investment because of the growth of the market economy. Rising GDP usually implies that profit expectations and business confidence rise, encouraging businesses to build more factories and other buildings and to install more machinery.
A macroeconomic model that explains price level and output through the relationship of downward-sloping aggregate demand (AD) and upward-sloping aggregate supply (AS).
A macroeconomic model that explains inflation and output through the relationship of downward-sloping aggregate demand (AD) and horizontal inflation adjustment (IA). The monetary policy rule (MPR) is assumed, which is that the central bank increases interest rates in response to increase in inflation and vice versa.
A market situation where buyers and sellers have different information, and participants with key information participate selectively in trades at the expense of other parties.
Also called domestic final demand (DFD) or effective demand.
The total demand for goods and services in an economy.[10] It specifies the amounts of goods and services that will be purchased at all possible price levels.[11] Aggregate demand can also be interpreted as the demand for the gross domestic product of a country. It is often called effective demand, though this term also has a distinct meaning.
The difficult problem of finding a valid way to treat an empirical or theoretical aggregate as if it reacted like a less-aggregated measure, say, about behavior of an individual agent as described in general microeconomic theory.[12]
A macroeconomic model that explains output through the relationship of total factor productivity and capital. It assumes that there is no diminishing return of capital.
Also called the shipping the good apples out theorem, or the third law of demand.
When the prices of two substitute goods, such as high and low grades of the same product, are both increased by a fixed per-unit amount, consumption will shift toward the higher-grade product. This is because the added per-unit amount decreases the relative price of the higher-grade product.
A state of the economy in which production represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the marginal cost of producing. In the single-price model, at the point of allocative efficiency, price is equal to marginal cost.[13][14]
A tax imposed by the U.S. federal government in addition to the regular income tax for certain individuals, estates, and trusts. High-income taxpayers must calculate and pay the greater of the AMT or regular tax.[15]
A school of thought based around low levels of regulation and taxation, minimal public services, strong private property rights, contract enforcement, overall ease of doing business, and low barriers to free trade.
The application of economic theory and econometrics in specific settings. As one of the two sets of fields of economics (the other being the core),[19] it is typically characterized by the application of the core, i.e. economic theory and econometrics, to address practical issues in a range of fields.
The practice of taking advantage of a price difference between two or more markets by striking a combination of matching deals that capitalize upon the imbalance, with the profit being the difference between the market prices.
Also called the Arrow–Debreu–McKenzie model or ADM model.
A model that suggests there must be a set of prices such that aggregate supplies will equal aggregate demands for every commodity in the economy, given certain assumptions. It can be used to prove the existence of general equilibrium (or Walrasian equilibrium) of an economy.[21]
Also called a state-price security, pure security, or primitive security.
A contract that agrees to pay one unit of a numeraire (a currency or a commodity) if a particular state occurs at a particular time in the future and pays zero numeraire in all the other states.
A problem faced by companies when considering the transfer of intellectual property. A company may wish to sell some information, but it cannot fully describe the capabilities of the information without effectively transferring the information for free.
If the probabilistic beliefs of agents who share a common prior and update their probabilistic beliefs by Bayes' rule, regarding a fixed event, are common knowledge then these probabilities must coincide. Thus, agents cannot have common knowledge of a disagreement over the posterior probability of a given event.
The characteristic of being self-sufficient; the term is usually applied to political states or their economic systems. Autarky is possible when an entity can survive or continue its activities without external assistance or international trade. If a self-sufficient economy also deliberately refuses all trade with the outside world, then it is called a closed economy.[31]
The consumption expenditure that occurs when income levels are zero. Such consumption is considered autonomous of income only when expenditure on these consumables does not vary with changes in income; generally, it may be required to fund necessities and debt obligations. If income levels are actually zero, this consumption counts as dissaving, because it is financed by borrowing or using up savings.
A quantity equal to the total cost divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q).
The fixed costs (FC) of production divided by the quantity (Q) of output produced. Fixed costs are those costs that must be incurred in fixed quantity regardless of the level of output produced.
A firm's variable costs (labour, electricity, etc.) divided by the quantity of output produced. Variable costs are those costs which vary with the output.
Also called the Backus–Kehoe–Kydland consumption correlation puzzle or BKK puzzle.
The observation that consumption is much less correlated across countries than output. According to theory we should observe that consumption is much more correlated across countries than output in an Arrow–Debreu economy.
Also called the Backus-Smith consumption-real exchange rate puzzle or consumption – real-exchange-rate anomaly.
The observation that the correlations between consumption and real exchange rates are zero or negative. This is contrary to economic theory which predicts that with full risk sharing, relative consumption should be perfectly correlated with the real exchange rate.
Also called the advantage of backwardness or the latecomer's advantage.
The advantage that a still-developing country has because it can take advantage of the technology/industry gap with a developed country by implementing a new technology or venturing into an industry that is new to its economy but mature in the developed country.
The fact that it is easier for late-development countries to imitate technologies, but more difficult to imitate the system, because the reform will offend vested interests.[34]
The process of reasoning backwards in time, from the end of a problem or situation, to determine a sequence of optimal actions. It proceeds by first considering the last time a decision might be made and choosing what to do in any situation at that time. Using this information, one can then determine what to do at the second-to-last time of decision. This process continues backwards until one has determined the best action for every possible situation (i.e. for every possible information set) at every point in time.
Also called balance of international payments and abbreviated B.O.P. or BoP.
A record or summary of all economic transactions between the residents of a country and the rest of the world in a particular period of time (e.g. over a quarter of a year or, more commonly, over a year). These transactions are made by individuals, firms and government bodies. Thus the balance of payments includes all external visible and non-visible transactions of a country.
Also called commercial balance or net exports (NX).
The difference between the monetary value of a nation's exports and imports over a certain period.[35] Sometimes a distinction is made between a balance of trade for goods versus one for services. "Balance of trade" can be a misleading term because trade measures a flow of exports and imports over a given period of time, rather than a balance of exports and imports at a given point in time. Also, balance of trade does not necessarily imply that exports and imports are "in balance" with each other or anything else.
A budget, particularly that of a government, in which revenues are equal to expenditures. Thus, neither a budget deficit nor a budget surplus exists (the accounts "balance"). The term may also refer more generally to a budget that has no budget deficit but could possibly have a budget surplus.[36] A cyclically balanced budget is a budget that is not necessarily balanced year-to-year, but is balanced over the economic cycle, running a surplus in boom years and running a deficit in lean years, with these offsetting over time.
A financial institution that accepts deposits from the public and creates credit.[37] Lending activities can be performed either directly or indirectly through capital markets. Due to their importance in the financial stability of a country, banks are highly regulated in most countries. Most nations have institutionalized a system known as fractional reserve banking, under which banks hold liquid assets equal to only a portion of their current liabilities. In addition to other regulations intended to ensure liquidity, banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords.
In theories of competition in economics, a cost that must be incurred by a new entrant into a market that incumbents do not have or have not had to incur.[39][40] Because barriers to entry protect incumbent firms and restrict competition in a market, they can contribute to distortionary prices and are therefore most important when discussing antitrust policy. Barriers to entry often cause or aid the existence of monopolies or give companies market power.
Corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations.
Baxter-Stockman neutrality of exchange rate regime puzzle
Also called the exchange rate disconnect puzzle.
The unexpectedly weak relationship between the exchange rate and any other macroeconomic variable.[42]
The branch of economics that studies the effects of psychological, cognitive, emotional, cultural and social factors on the economic decisions of individuals and institutions and how those decisions vary from those implied by classical theory.[43]
The dynamic programming equation associated with discrete-time optimization problems.[44] It writes the "value" of a decision problem at a certain point in time in terms of the payoff from some initial choices and the "value" of the remaining decision problem that results from those initial choices.
Seeks to provide an economic justification for the phenomenon of intergenerational transfers of wealth; in other words, to explain why people leave money behind when they die.
A microeconomic model of price-setting oligopoly which studies what happens when there is a homogeneous product (i.e. consumers want to buy from the cheapest seller) where there is a limit to the output of firms which they are willing and able to sell at a particular price. This differs from the Bertrand competition model where it is assumed that firms are willing and able to meet all demand. The limit to output can be considered a physical capacity constraint which is the same at all prices (as in Edgeworth’s work) or to vary with price under other assumptions.
A concept in development economics or welfare economics that emphasizes that a firm's decision whether to industrialize or not depends on its expectation of what other firms will do. It assumes economies of scale and oligopolistic market structure and explains when industrialization would happen.
A mathematical model for the dynamics of a financial market containing derivative investment instruments. From the partial differential equation in the model, known as the Black–Scholes equation, one can deduce the Black–Scholes formula, which gives a theoretical estimate of the price of European-styleoptions and shows that the option has a unique price regardless of the risk of the security and its expected return (instead replacing the security's expected return with the risk-neutral rate). The formula led to a boom in options trading and provided mathematical legitimacy to the activities of the Chicago Board Options Exchange and other options markets around the world.[48] It is widely used, although often with adjustments and corrections, by options market participants.[49]:751
The main governing body that directs the operations of the United States Federal Reserve System. Its seven members supervise the 12 Federal Reserve Districts.
In finance, an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds. The bond is a debtsecurity, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date.[50] Interest is usually payable at fixed intervals (semiannual, annual, or sometimes monthly). Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the secondary market.[51]
Also called the Sam Vimes theory of socioeconomic unfairness.
Purchasing cheap, low-quality goods may become more expensive in the long run because they must be replaced more frequently. For example, purchasing expensive, high-quality boots may be cheaper over a long time because cheaper boots would quickly wear out and require replacement.
The idea that rationality is limited when individuals make decisions, and under these limitations, rational individuals will select a decision that is satisfactory rather than optimal.[52]
An economic model in international trade that illustrates a situation where a government can subsidize domestic firms to help them in their competition against foreign producers and in doing so enhances national welfare.
The point at which total cost and total revenue are equal, i.e. "even". There is no net loss or gain, and one has "broken even", though opportunity costs have been paid and capital has received the risk-adjusted, expected return. In short, all costs that must be paid are paid, and there is neither profit nor loss.[53][54]
A monetary system which established the rules for commercial and financial relations among the United States, Canada, Western Europe, Australia, and Japan after the 1944 Bretton Woods Agreement. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. The chief features were an obligation for each country to adopt a monetary policy that maintained its external exchange rates within 1 percent by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments; there was also a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies.
The amount by which spending exceeds revenue over a particular period of time; it is the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual.
The set of all possible consumption bundles that an individual can afford, given the prices of goods and the individual's income level. The budget set is bounded above by the budget line. Graphically speaking, all the consumption bundles that lie inside and on the budget constraint form the budget set. By most definitions, budget sets must be compact and convex.
Also called intervention storage or the ever-normal granary.
An attempt to use commodity storage for the purposes of stabilising prices in an entire economy or an individual (commodity) market. Specifically, commodities are bought when a surplus exists in the economy, stored, and are then sold from these stores when economic shortages in the economy occur.[55]
The downward and upward movement of gross domestic product (GDP) around its long-term growth trend.[57] The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts over time between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions).
A branch of applied economics which uses economic theory and quantitative methods to analyze business enterprises and the factors contributing to the diversity of organizational structures and the relationships of firms with labour, capital and product markets.[58]
Also called the corporate sector or sometimes simply business.
The part of the economy made up by companies.[59] It is generally considered a subset of the domestic economy,[60] excluding the economic activities of general government, of private households, and of non-profit organizations serving individuals.[61]
Also called the capital controversy or the two Cambridges debate
A dispute between proponents of two differing theoretical and mathematical positions in economics concerning the nature and role of capital goods and a critique of the neoclassical vision of aggregate production and distribution.[62]
A German science of public administration in the 18th and early 19th centuries that aimed at strong management of a centralized economy for the benefit mainly of the state.[63]
A market-based approach to limiting negative externalities (for example, pollution) by providing economicincentives for reducing the production of said negative externalities.[64]A central authority or governmental body allocates or sells a limited number (a "cap") of permits that allow the creation of a specific negative externality over a set time period. Permit owners are then allowed to sell these permits to others.
The extent to which an enterprise or a nation uses its installed productive capacity. It is the relationship between output that is produced with the installed equipment and the potential output which could be produced with it if capacity was fully used.
Any asset that can enhance one's power to perform economically useful work. Capital goods, real capital, or capital assets are already-produced, durable goods or any non-financial asset that is used in production of goods or services.[65] Capital is distinct from land (or non-renewable resources) in that capital can be increased by human labor. At any given moment in time, total physical capital may be referred to as the capital stock (which is not to be confused with the capital stock of a business entity).
A fixed, one-time expense incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. In other words, it is the total cost needed to bring a project to a commercially operable status. Whether a particular cost is capital or not depends on many factors, such as accounting, tax laws, and materiality.
Occurs when money or assets rapidly flow out of a country due to an event of economic consequence. Such events may include an increase in taxes on capital or capital holders or the government of the country defaulting on its debt that disturbs investors and causes them to lower their valuation of the assets in that country or otherwise to lose confidence in its economic strength.
A durable good that is used in the production of goods or services. Capital goods are one of the three types of producer goods, the other two being land and labour, which are also known collectively as primary factors of production. This classification originated with classical economics and has remained the dominant method for classification.
An institution that manages the currency, money supply, and interest rates of an entire state or nation. Central banks also usually oversee the commercial banking system of their respective countries. In contrast to a commercial bank, a central bank possesses a monopoly on increasing the monetary base in the state, and usually also prints the national currency,[66] which usually serves as the state's legal tender. Central banks also act as a "lender of last resort" to the banking sector during times of financial crisis. Most central banks usually also have supervisory and regulatory powers to ensure the solvency of member institutions, prevent bank runs, and prevent reckless or fraudulent behavior by member banks.
A model of the economy in which the major exchanges are represented as flows of money, goods and services, etc. between economic agents. The flows of money and goods exchanged in a closed circuit correspond in value, but run in the opposite direction. The circular flow analysis is the basis of national accounts and hence of macroeconomics.
Relates to "the exchange of goods and services, especially on a large scale".[67] It includes legal, economic, political, social, cultural and technological systems that operate in a country or in international trade.
An economic good or service that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them.[68]
The presence in a market of independent buyers and sellers competing with one another and the freedom of buyers and sellers to enter and leave the market.
A market in which many sellers compete against each other to attract customers. Each seller has an incentive to sell at the lowest price possible to attract customers, so prices tend to be driven so low that the sellers can just barely make a profit.
The addition of interest to the principal sum of a loan or deposit; it is often interpreted as "interest on interest". Compound interest is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus any previously accumulated interest. Contrast simple interest.
A class of economic models that use actual economic data to estimate how an economy might react to changes in policy, technology, or other external factors.
A theory of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their preferences subject to limitations on their expenditures, by maximizing utility subject to a consumer budget constraint.[75]
Measures changes in the price level of market basket of consumer goods and services purchased by households. The CPI is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically. Sub-indices and sub-sub-indices are computed for different categories and sub-categories of goods and services, being combined to produce the overall index with weights reflecting their shares in the total of the consumer expenditures covered by the index. It is one of several price indices calculated by most national statistical agencies. The annual percentage change in a CPI is used as a measure of inflation. A CPI can be used to index (i.e. adjust for the effect of inflation) the real value of wages, salaries, and pensions; to regulate prices; and to deflate monetary magnitudes to show changes in real values. In most countries, the CPI, along with the population census, is one of the most closely watched national economic statistics.
the difference between the maximum price a consumer is willing to pay and the actual price they do pay. If a consumer is willing to pay more for a unit of a good than the current asking price, they are getting more benefit from the purchased product than they would if the price was their maximum willingness to pay. They are receiving the same benefit, the obtainment of the good, with a smaller cost as they are spending less than they would if they were charged their maximum willingness to pay.[76]
According to mainstream economists, only the final purchase of goods and services by individuals constitutes consumption, while other types of expenditure—in particular, fixed investment, intermediate consumption, and government spending—are placed in separate categories (see consumer choice). Other economists define consumption much more broadly, as the aggregate of all economic activity that does not entail the design, production and marketing of goods and services (e.g. the selection, adoption, use, disposal and recycling of goods and services).
In microeconomics, the contract curve is the set of points representing final allocations of two goods between two people that could occur as a result of mutually beneficial trading between those people given their initial allocations of the goods. All the points on this locus are Pareto efficient allocations, meaning that from any one of these points there is no reallocation that could make one of the people more satisfied with his or her allocation without making the other person less satisfied. The contract curve is the subset of the Pareto efficient points that could be reached by trading from the people's initial holdings of the two goods.
The study of how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information. Because of its connections with both agency and incentives, contract theory is often categorized within a field known as law and economics.
A type of business organization owned by many people but treated by law as though it were an individual person; it can own property, pay taxes, make contracts, and contribute to political causes.
1.The value of money that is used up to produce a good or deliver a service, and hence is no longer available for further use. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire a good or service is counted as the cost; in this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer and of further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price designated by the producer also includes a mark-up for profit over the cost of production.
2.More generally, a performance metric that is totaling up as a result of a process or as a differential for the result of a decision.[84] Hence cost is the metric used in the standard modeling paradigm applied to economic processes. Costs (pl.) are often further described based on their timing or their applicability.
A graph of the costs of production as a function of total quantity produced. In a free market economy, productively efficient firms optimize their production process by minimizing cost consistent with each possible level of production, and the result is a cost curve; and profit maximizing firms use cost curves to decide output quantities. There are various types of cost curves, all related to each other, including total and average cost curves; marginal ("for each additional unit") cost curves, which are equal to the differential of the total cost curves; and variable cost curves. Some are applicable to the short run, others to the long run.
The cost of maintaining a certain standard of living. Changes in the cost of living over time are often operationalized in a cost-of-living index. Cost of living calculations are also used to compare the cost of maintaining a certain standard of living in different geographic areas. Differences in cost of living between locations can also be measured in terms of purchasing power parity rates.
A situation involving unexpected incurred costs. A cost overrun occurs when an underestimation of the actual cost during budgeting results in costs that are in excess of budgeted amounts.
A systematic approach to estimating the strengths and weaknesses of alternative options (for example in transactions, activities, or functional business requirements). It is often used to determine the option or options that provide the best approach to achieve benefits while preserving savings.[85] Cost-benefit analysis may be used to compare potential (or completed) courses of actions, or estimate (or evaluate) the value against costs of a single decision, project, or policy. Common areas of application include commercial transactions, functional business decisions, policy decisions (especially government policy), and project investments.
The theory that the price of an object or condition is determined by the sum of the cost of the resources that went into producing it. The cost can comprise any of the factors of production (including labor, capital, or land) as well as taxation.
A payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them at a later time for the cost of the good or service plus other agreed-upon fees and charges.[86] The card issuer (usually a bank) creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance.
An evaluation of the credit risk of a prospective debtor (an individual, business, company, or government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting on the debt.[87] Credit rating represents an evaluation of a credit rating agency of the qualitative and quantitative information for the prospective debtor, including information provided by the prospective debtor and other non-public information obtained by the credit rating agency's analysts. A subset of credit rating called credit reporting or credit score is a numeric evaluation of an individual's credit worthiness, which is conducted by a credit bureau or consumer credit reporting agency.
A phenomenon that occurs when increased government involvement in a sector of a market economy substantially affects the remainder of the market, either on the supply or demand side of the market.
The branch of economics that studies the relationship between culture and economic outcomes. Here, "culture" is defined by shared beliefs and preferences of respective groups. Programmatic issues include whether and how much culture matters to economic outcomes and what its relation is to institutions.[88] As a growing field in behavioral economics, the role of culture in economic behavior is increasingly being demonstrated to cause significant differentials in decision-making and the management and valuation of assets.
Money in any form when in actual use or circulation as a medium of exchange, especially circulating banknotes and coins.[89][90] A more general definition is that a currency is a "system" of money (monetary units) in common use, especially within a particular nation.
A country's current account is one of the two components of its balance of payments, the other being the capital account (also known as the financial account). The current account consists of the balance of trade, net primary income or factor income (earnings on foreign investments minus payments made to foreign investors) and net cash transfers, that have taken place over a given period of time. The current account balance is one of two major measures of a country's foreign trade (the other being the net capital outflow). A current account surplus indicates that the value of a country's net foreign assets (i.e. assets less liabilities) grew over the period in question, and a current account deficit indicates that it shrank. Both government and private payments are included in the calculation. It is called the current account because goods and services are generally consumed in the current period.[91][92]
An entity that owes a debt to another entity. The entity may be an individual, a firm, a government, a company, or another legal person. The counterparty to which the debt is owed is called a creditor. When the counterparty of the arrangement is a bank, the debtor is more often referred to as a borrower.
The amount by which spending exceeds revenue over a particular period of time; it is the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual.
A decrease in the general price level of goods and services.[93] Deflation occurs when the inflation rate falls below 0% (a negative inflation rate); though inflation reduces the value of currency over time, 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, which occurs when the inflation rate decreases but is still positive.[94]
A value that allows data to be measured over time in terms of some base period, usually through a price index, in order to distinguish between changes in the money value of a gross national product (GNP) that come from a change in prices, and changes from a change in physical output. It is the measure of the price level for some quantity. A deflator serves as a price index in which the effects of inflation are nulled.[95][96][97] It is the difference between real and nominal GDP.[98][99]
The gradual decrease in the economic value of the capital stock of a firm, nation, or other entity, either through physical depreciation, obsolescence, or changes in the demand for the services of the capital in question. If the capital stock is in one period , gross (total) investment spending on newly produced capital is and depreciation is , the capital stock in the next period, , is . The net increment to the capital stock is the difference between gross investment and depreciation, and is called net investment.
A sustained, long-term decrease in economic activity in one or more economies. It is a more severe economic downturn than a recession, which is a slowdown in economic activity over the course of a normal business cycle.
The process of removing or reducing economic regulations, or the total repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a result of new trends in economic thinking about the inefficiencies of government regulation, and the risk that regulatory agencies would be controlled by the regulated industry to its benefit, and thereby hurt consumers and the wider economy.
The decrease in the marginal (incremental) output of a production process as the amount of a single factor of production is incrementally increased, while the amounts of all other factors of production stay constant. The law of diminishing returns states that in all productive processes, adding more of one factor of production while holding all others constant ("ceteris paribus"), will at some point yield lower incremental per-unit returns.[104] It does not imply that adding more of a factor will decrease the total production, a condition known as negative returns, though in practice this is common.
A decrease in the rate of inflation; a slowdown in the rate of increase of the general price level of goods and services in an economy's gross domestic product over time. It is the opposite of reflation. Disinflation is also distinct from deflation, which occurs when the inflation rate is negative.
Negative saving, which occurs when spending is greater than disposable income. This spending may be financed by already accumulated savings, such as money in a savings account, or it can be borrowed.
The application of statistical methods to economic data in order to give empirical content to economic relationships.[106] More precisely, it is "the quantitative analysis of actual economic phenomena based on the concurrent development of theory and observation, related by appropriate methods of inference".[107]
Broad improvement in the economic well-being or quality of life of a nation, region, or community, often but not necessarily as a consequence of economic growth.
A situation in which economic forces such as supply and demand are balanced and in which, in the absence of external influences, the values of economic variables do not change. For example, in the standard textbook model of perfect competition, equilibrium occurs at the point at which quantity demanded and quantity supplied are equal.[108]Market equilibrium in this case is a condition in which a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers. This price is often called the competitive price or market clearing price and will tend not to change unless demand or supply changes, and the quantity is called the "competitive quantity" or market clearing quantity. However, the concept of equilibrium in economics also applies to imperfectly competitive markets, where it takes the form of a Nash equilibrium.
An increase in the inflation-adjusted market value of the goods and services produced by an economy over time. It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.[109]
Any measurable unit of the economy which helps economists assess the past or make predictions about the future, such as unemployment rate and gross domestic product.
A theoretical construct representing an economic process by a set of variables and a set of logical and/or quantitative relationships between them. Economic models are usually simplified, often mathematical, frameworks designed to illustrate complex processes. Frequently, economic models posit structural parameters.[110] A model may have various exogenous variables, and those variables may change to create various responses by economic variables. Methodological uses of models include investigation, theorizing, and fitting theories to the world.[111]
A situation in which the demand for a particular good or service exceeds its supply within a particular market. A shortage is the opposite of a surplus.
A system of production, resource allocation, and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community. As such, an economic system is a type of social system. The mode of production is a related concept.[113] All economic systems have three basic questions to ask: what to produce, how to produce it, and in what quantities and who receives the output of production.
The cost advantages that enterprises obtain as a result of the increased efficiency offered by a certain scale of operation (typically measured by amount of output produced), with cost per unit of output decreasing with increasing scale. At the basis of economies of scale there may be technical, statistical, organizational, or related factors to the degree of market control.
The cost advantages that enterprises obtain as a result of the increased efficiency offered by variety rather than by volume, with cost per unit of output decreasing with increasing variety.[115] In economics, "scope" is synonymous with broadening production through diversified products. For example, a gas station that sells gasoline can also sell soda, milk, baked goods, etc. through their customer service representatives, which may make the sale of gasoline more efficient.[116]
An area of the production, distribution, trade, and consumption of goods and services by different agents. In its broadest sense, an economy may be defined as "a social domain that emphasizes the practices, discourses, and material expressions associated with the production, use, and management of resources".[117]
Demand that is sensitive to changes in price, such that changes in price have a relatively large effect on the quantity of the good demanded. Contrast inelastic demand.
The measurement of the proportional change of an economic variable in response to a change in another. Colloquially, elasticity is often interpreted as how easy it is for a supplier or consumer to change their behavior and substitute another good, the strength of an incentive over choices per the relative opportunity cost.
Previously known as engineering economy, is a subset of economics concerned with the use and "...application of economic principles"[118] in the analysis of engineering decisions.[119]
The efforts by a person, known as an entrepreneur, in organizing resources for the creation of something new or taking risks to create new innovations and production.
A state of fairness in which job applicants are treated similarly, unhampered by artificial barriers or prejudices or preferences, except when particular distinctions can be explicitly justified.[120]
The concept or idea of fairness in economics, particularly in regard to taxation or welfare economics. More specifically, it may refer to equal life chances regardless of identity, to provide all citizens with a basic and equal minimum of income, goods, and services or to increase funds and commitment for redistribution.[121]
A situation in which the quantity of a good or service supplied is more than the quantity demanded,[123] and the price is above the equilibrium level determined by supply and demand; that is, the quantity of the product that producers wish to sell exceeds the quantity that potential buyers are willing to buy at the prevailing price. It is the opposite of an economic shortage.
The rate at which one currency is exchanged for another. It is also commonly regarded as the value of one country's currency relative to another currency.[124]
An emerging field of economic enquiry that focuses on the rebuilding and reconstructing of economies in post-conflict nations and providing support to disaster-struck nations. It focuses on the need for good economic planning on the part of developed nations to help prevent the creation of failed states. It also emphasizes the need for the structuring on new firms to rebuild national economies.[125]
The twelve-member committee of the United States Federal Reserve that meets several times a year to decide the course of action that should be taken to control the money supply of the United States.
An economic system in which the prices for goods and services are self-regulated by the open market and by consumers. In a free market, the laws and forces of supply and demand are free from any intervention by a government or other authority and from all forms of economic privilege, monopolies, and artificial scarcities.[128] Proponents of the concept of the free market contrast it with a regulated market in which a government intervenes in supply and demand through various methods such as tariffs used to restrict trade and to protect the local economy. In an idealized free-market economy, prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy.
The four classic functions or uses of money as summarized by William Stanley Jevons in 1875: a medium of exchange, a common measure of value (or unit of account), a standard of value (or standard of deferred payment), and a store of value. This analysis later became a fundamental concept of macroeconomics. Most modern textbooks now list only three functions, that of medium of exchange, unit of account, and store of value, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in the others.
The sector of the economy which purchases goods from the product market and sells labor, land, and entrepreneurship ability to the factor market in the circular flow market.
Demand that is not very sensitive to changes in price, such that changes in price have a relatively small effect on the quantity of the good demanded. Contrast elastic demand.
A measure of how the overall level of prices in the economy changes over time. If the inflation rate is positive, prices are rising; if the inflation rate is negative, prices are falling.
Adam Smith’s famous idea that when constrained by competition, each firm’s greed causes it to act in a socially optimal way, as if guided to do the right thing by an invisible hand.
A diverse set of macroeconomic theories about how in the short run (and especially during recessions) economic output can be strongly influenced by the total amount of spending that occurs within an economy, known as aggregate demand. Keynesian economists generally argue that because aggregate demand is often unstable and behaves erratically, it does not necessarily or predictably equal the aggregate supply, which can cause market economies to experience inefficient macroeconomic outcomes in the form of recessions (when demand is low) and inflation (when demand is high), and that these outcomes can be mitigated by monetary policy actions by a central bank and fiscal policy actions by a government authority, which can help stabilize output over the business cycle.
A lack of any quantifiable knowledge about some possible occurrence, as opposed to the presence of quantifiable risk (e.g., that in statistical noise or a parameter's confidence interval). The concept acknowledges some fundamental degree of ignorance, a limit to knowledge, and an essential unpredictability of future events.
An economic rule stating that quantity demanded and price move in opposite directions, i.e. as demand increases, price decreases, and vice versa.
law of diminishing marginal utility
An economic rule stating that the additional satisfaction a consumer gets from purchasing one more unit of a product will decrease with each additional unit purchased.
A situation where a firm’s total revenues exceed its variable costs but are less than its total costs. The firm continues to operate until its fixed cost contracts expire.
The study of the economy as a whole, concentrating on economy-wide factors such as interest rates, inflation, and unemployment. Macroeconomics also encompasses the study of economic growth and how governments use monetary and fiscal policy to try to moderate the harm caused by recessions.
A bundle of goods and services selected to measure inflation. Economists define a market basket, such as the Consumer Price Index, and then track how much money it takes to buy this basket from one period to the next.
An economy in which almost all economic activity happens in markets, with little or no interference by the government; often referred to as a laissez-faire ("leave alone") economic system.
The structure of a market as a whole, taking into consideration two main factors: the number of firms in the market and whether goods offered are identical, similar, or differentiated.
market production
Term that economists use to capture what happens when one individual offers to make or sell something to another individual at a price agreeable to both.
A branch of economics that studies individual people and individual businesses. For people, microeconomics studies how they behave when faced with decisions about where to spend their money or how to invest their savings. For businesses, it studies how profit-maximising firms behave individually, as well as when competing against each other in markets.
An economic system blending elements of a market economy with elements of a planned economy, free markets with state interventionism, or private enterprise with public enterprise.
A school of thought in monetary economics which emphasizes the role of governments in controlling the amount of money in circulation (the money supply). Monetarists assert that variations in the money supply have major influences on national output in the short run and on price levels over longer periods, and that the objectives of monetary policy are best met by targeting the growth rate of the money supply rather than by engaging in discretionary policy.
A situation in which many firms with slightly different products compete. Production costs are above what may be achieved by perfectly competitive firms, but society benefits from the product differentiation.
A firm with no competitors in its industry. A monopoly firm produces less output, has higher costs, and sells its output for a higher price than it would if constrained by competition.
Any lack of perfect knowledge of the multiplier effect of a particular policy action, such as a monetary or fiscal policy change, upon the intended target of the policy.
An industry in which one large producer can produce output at a lower cost than many small producers. It undersells its rivals and ends up as the only firm surviving in its industry.
An industry with only a few firms. If these firms collude, they form a cartel, which may reduce output and drive up profits in the same way a monopoly does.
A situation where numerous small firms producing identical products compete against each other in a given industry. Perfect competition leads to firms producing the socially optimal output level at the minimum possible cost per unit.
A normalized average of price relatives for a given class of goods or services in a given region and during a given period of time. It is a statistic designed to help to compare how these price relatives, taken as a whole, differ between geographical locations or time periods. Notable price indices include consumer price index, producer price index, and GDP deflator.
Or economics of the public sector, is the study of government policy through the lens of economic efficiency and equity. Public economics builds on the theory of welfare economics and is ultimately used as a tool to improve social welfare.
Goods or services that cannot be profitably produced by private firms because they are impossible to provide to just one person; if you provide them to one person, you have to provide them to everybody. Public goods non-excludable (you can’t prevent anyone from consuming them) and non-rival (it costs no extra to supply one extra person).
The theory that people optimally change their behaviour in response to policy changes. Depending on the situation, their behavioural changes can greatly limit the effectiveness of policy changes.
Interest rates that compensate for inflation by measuring the returns to a loan in terms of units of stuff lent and units of stuff returned (as opposed to nominal interest rates).
The direct relationship between the risk of an investment and its expected return or profit; the higher the risk, the higher the opportunity for gain or loss and vice versa.
