and services in an economy. aggregate expenditures–domestic output approach Determination of the equilibrium gross domestic product by finding the real GDP at which aggregate expenditures equal domestic output. aggregate expenditures schedule A schedule or curve showing the total amount spent for final goods and services at different levels of real GDP. aggregate supply A schedule or curve showing the total quantity of goods and services supplied (produced) at different price levels. aggregate supply shocks Sudden, large changes in resource costs that shift an economy’s aggregate supply curve. agribusiness The portion of the agricultural and food product industries that is dominated by large corporations. Alcoa case A 1945 case in which the courts ruled that the possession of monopoly power, no matter how reasonably that power had been used, was a violation of the antitrust laws; temporarily overturned the rule of reason applied in the U.S. Steel case. allocative efficiency The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its m arginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized. anticipated inflation Increases in the price level (inflation) that occur at the expected rate. antitrust laws Legislation (including the Sherman Act and Clayton Act) that prohibits anticompetitive business activities such as price fixing, bid rigging, monopolization, and tying contracts. antitrust policy The use of the a ntitrust laws to promote competition and economic efficiency. appreciation (of the dollar) An increase in the value of the dollar relative to the currency of another nation, so a dollar buys a larger amount of the foreign currency and thus of foreign goods. arbitrage The activity of selling one asset and buying an identical or nearly identical asset to benefit from temporary differences in prices or rates of return; the practice that equalizes prices or returns on similar financial instruments and thus eliminates further opportunities for riskless financial gains. asset Anything of monetary value owned by a firm or individual. asset demand for money The amount of money people want to hold as a s tore of value; this amount varies inversely with the interest rate. asymmetric information A situation where one party to a market transaction has much more information about a product or service than the other. The result may be an under- or overallocation of resources.
economic matters (including the preparation of the annual Economic Report of the President). countercyclical payments (CCPs) Cash s ubsidies paid to farmers when market prices for certain crops drop below targeted prices. Payments are based on previous production and are received regardless of the current crop grown. craft union A labor union that limits its membership to workers with a particular skill (craft). creative destruction The hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies. credible threat In game theory, a statement of harmful intent by one party that the other party views as believable; often issued in conditional terms of “if you do this; we will do that.” credit An accounting item that increases the value of an asset (such as the foreign money owned by the residents of a nation). credit union An association of persons who have a common tie (such as being employees of the same firm or members of the same labor union) that sells shares to (accepts deposits from) its members and makes loans to them. cross elasticity of demand The ratio of the percentage change in q uantity demanded of one good to the percentage change in the price of some other good. A positive coefficient indicates the two products are s ubstitute goods; a negative coefficient indicates they are complementary goods. crowding model of occupational discrimination A model of labor markets suggesting that occupational discrimination has kept many women and minorities out of high-paying occupations and forced them into a limited number of low-paying occupations. crowding-out effect A rise in interest rates and a resulting decrease in p lanned investment caused by the Federal government’s increased borrowing to finance budget deficits and refinance debt. currency Coins and paper money. currency appreciation (See exchange-rate appreciation.) currency depreciation (See exchange-rate depreciation.) currency intervention A government’s buying and selling of its own currency or foreign currencies to alter international exchange rates. current account The section in a nation’s international balance of payments that records its exports and imports of goods and services, its net investment income, and its net transfers. cyclical asymmetry The idea that monetary policy may be more successful in slowing expansions and controlling inflation than in extracting the economy from severe recession. cyclical deficit A Federal budget deficit that is caused by a recession and the consequent decline in tax revenues.
produced when resources are instead used to make a particular product. economic efficiency The use of the minimum necessary resources to obtain the socially optimal amounts of goods and services; entails both productive efficiency and allocative efficiency. economic growth (1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita. economic immigrants International migrants who have moved to a country from another to obtain economic gains such as better employment opportunities. economic investment (See investment.) economic law An economic principle that has been tested and retested and has stood the test of time. economic model A simplified picture of economic reality; an abstract generalization. economic perspective A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions. economic policy A course of action intended to correct or avoid a problem. economic principle A widely accepted generalization about the economic behavior of individuals or institutions. economic profit The total revenue of a firm less its economic costs (which include both explicit costs and i mplicit costs); also called “pure profit” and “above-normal profit.” economic regulation (See industrial regulation and social regulation.) economic rent The price paid for the use of land and other natural resources, the supply of which is fixed (perfectly inelastic). economic resources The land, labor, capital, and entrepreneurial ability that are used in the production of goods and services; productive agents; factors of production. economics The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity. economic system A particular set of institutional arrangements and a coordinating mechanism for solving the economizing G-8 Glossary problem; a method of organizing an economy, of which the market system and the command system are the two general types. economic theory A statement of a cause-effect relationship; when accepted by all or nearly all economists, an economic principle. economies of scale Reductions in the average total cost of producing a product as the firm expands the size of plant (its output)
in the long run; the economies of mass production. economizing problem The choices necessitated because society’s economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce). efficiency factors (in growth) The capacity of an economy to combine resources effectively to achieve growth of real output that the s upply factors (of growth) make possible. efficiency gains from migration Additions to output from immigration in the destination nation that exceeds the loss of output from emigration from the origin nation. efficiency loss Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called deadweight loss. efficiency loss of a tax The loss of net benefits to society because a tax reduces the production and consumption of a taxed good below the level of allocative efficiency. Also called the deadweight loss of the tax. efficiency wage A wage that minimizes wage costs per unit of output by encouraging greater effort or reducing turnover. efficient allocation of resources That allocation of an economy’s resources among the production of different products that leads to the maximum satisfaction of consumers’ wants, thus producing the socially optimal mix of output with society’s scarce resources. elastic demand Product or resource demand whose price elasticity is greater than 1. This means the resulting change in quantity demanded is greater than the percentage change in price. elasticity coefficient The number obtained when the percentage change in q uantity demanded (or supplied) is divided by the percentage change in the price of the commodity. elasticity formula (See p rice elasticity of demand.) elasticity of resource demand A measure of the responsiveness of firms to a change in the price of a particular resource they employ or use; the percentage change in the quantity of the resource demanded divided by the percentage change in its price. elastic supply Product or resource supply whose price elasticity is greater than 1. This means the resulting change in quantity supplied is greater than the percentage change in price. electronic payments Purchases made by transferring funds electronically. Examples: Fedwire transfers, automated clearinghouse transactions (ACHs), payments via the PayPal system, and payments made through stored-value cards. emigration The exit (outflow) of residents from a country to reside in foreign countries. employment rate The percentage of the labor force employed at any time.
kinked-demand curve The demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will match a price decrease and will ignore a price increase. labor People’s physical and mental talents and efforts that are used to help produce goods and services. labor force Persons 16 years of age and older who are not in institutions and who are employed or are unemployed and seeking work. labor-force participation rate The percentage of the workingage population that is actually in the labor force. labor-intensive goods Products requiring relatively large amounts of labor to produce. labor productivity Total output divided by the quantity of labor employed to produce it; the average product of labor or output per hour of work. labor union A group of workers organized to advance the interests of the group (to increase wages, shorten the hours worked, improve working conditions, and so on). Laffer Curve A curve relating government tax rates and tax revenues and on which a particular tax rate (between zero and 100 percent) maximizes tax revenues. laissez-faire capitalism (See capitalism.) land Natural resources (“free gifts of nature”) used to produce goods and services. land-intensive goods Products requiring relatively large amounts of land to produce. land reform (Web chapter) A set of policies designed to create more efficient distribution of land ownership in developing countries; policies vary country to country and can involve everything from government purchasing large land estates and dividing the land into smaller farms to consolidating tiny plots of land into larger, more efficient private farms. law of demand The principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price. law of diminishing marginal utility The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases. law of diminishing returns The principle that as successive increments of a variable resource are added to a fixed resource, the marginal product of the variable resource will eventually decrease. law of increasing opportunity costs The principle that as the production of a good increases, the o pportunity cost of producing an additional unit rises. law of supply The principle that, other things equal, an increase
making by individual units such as a household, a firm, or an industry and with individual markets, specific goods and services, and product and resource prices. Microsoft case A 2002 antitrust case in which Microsoft was found guilty of violating the Sherman Act by engaging in a series of unlawful activities designed to maintain its monopoly in operating systems for personal computers; as a remedy the company was prohibited from engaging in a set of specific anticompetitive business practices. midpoint formula A method for calculating p rice elasticity of demand or price elasticity of supply that averages the two prices and two quantities as the reference points for computing percentages. minimum efficient scale (MES) The lowest level of output at which a firm can minimize long-run average total cost. minimum wage The lowest wage that employers may legally pay for an hour of work. modern economic growth The historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita. monetarism The macroeconomic view that the main cause of changes in aggregate output and price level is fluctuations in the money supply; espoused by advocates of a monetary rule. monetary multiplier The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securities); equal to 1 divided by the reserve requirement. monetary policy A central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth. monetary rule The rule suggested by monetarism. As traditionally formulated, the rule says that the money supply should be expanded each year at the same annual rate as the potential rate of growth of the real gross domestic product; the supply of money should be increased steadily between 3 and 5 percent per year. (Also see Taylor rule.) money Any item that is generally acceptable to sellers in exchange for goods and services. money capital Money available to purchase capital; simply money, as defined by economists. money income (See nominal income.) money market The market in which the demand for and the supply of money determine the interest rate (or the level of interest rates) in the economy. G-18 Glossary money market deposit accounts (MMDAs) Bank- and thriftprovided
more than once. multiplier The ratio of a change in the equilibrium GDP to the change in investment or in any other component of a ggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in the equilibrium GDP. multiplier effect The effect on equilibrium GDP of a change in aggregate expenditures or aggregate demand (caused by a change in the consumption schedule, investment, government expenditures, or net exports). mutual funds Portfolios of stocks and bonds selected and purchased by mutual fund companies, which finance the purchases by pooling money from thousands of individual fund investors; includes both index funds as well as actively managed funds. Fund returns (profits or losses) pass through to the individual fund investors who invest in the funds. mutual interdependence A situation in which a change in price strategy (or in some other strategy) by one firm will affect the sales and profits of another firm (or other firms). Any firm that makes such a change can expect the other rivals to react to the change. Nash equilibrium In game theory, an outcome from which neither firm wants to deviate; the outcome that once achieved is stable and therefore lasting. national bank A commercial bank authorized to operate by the U.S. government. National Credit Union Administration (NCUA) The federally chartered agency that insures deposit liabilities (up to $100,000 per account) in credit unions. national health insurance (NHI) A proposed program in which the Federal government would provide a basic package of health care to all citizens at no direct charge or at a low costsharing level. Financing would be out of general tax revenues. national income Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors’ income, and such taxes. national income accounting The techniques used to measure the overall production of the economy and other related variables for the nation as a whole. National Labor Relations Act (Wagner Act of 1935) As amended, the basic labor-relations law in the United States; defines the legal rights of unions and management and identifies unfair union and management labor practices; established the National Labor Relations Board. National Labor Relations Board (NLRB) The board established by the National Labor Relations Act of 1935 to investigate
and bonds, and other assets) owned by firms and households. proportional tax A tax whose average tax rate remains constant as the taxpayer’s income increases or decreases. proprietor’s income The net income of the owners of unincorporated firms (proprietorships and partnerships). protective tariff A tariff designed to shield domestic producers of a good or service from the competition of foreign producers. public assistance programs Government programs that pay benefits to those who are unable to earn income (because of permanent disabilities or because they have very low income and dependent children); financed by general tax revenues and viewed as public charity (rather than earned rights). public choice theory The economic analysis of government decision making, politics, and elections. public debt The total amount owed by the Federal government to the owners of government securities; equal to the sum of past government budget deficits less government budget surpluses. public good A good or service that is characterized by nonrivalry and nonexcludability; a good or service with these characteristics provided by government. public interest theory of regulation The presumption that the purpose of the regulation of an industry is to protect the public (consumers) from abuse of the power possessed by natural monopolies. public investments Government expenditures on public capital (such as roads, highways, bridges, mass-transit systems, and electric power facilities) and on human capital (such as education, training, and health). public sector The part of the economy that contains all government entities; government. public utility A firm that produces an essential good or service, has obtained from a government the right to be the sole supplier of the good or service in the area, and is regulated by that government to prevent the abuse of its monopoly power. purchasing power The amount of goods and services that a monetary unit of income can buy. purchasing power parity The idea that exchange rates between nations equate the purchasing power of various currencies. Exchange rates between any two nations adjust to reflect the pricelevel differences between the countries. pure competition A market structure in which a very large number of firms sells a s tandardized product, into which entry is very easy, in which the individual seller has no control over the product price, and in which there is no nonprice competition; a market characterized by a very large number of buyers and sellers. purely competitive labor market A resource market in which many firms compete with one another in hiring a specific kind of
trades (exports) it to obtain the other product. tragedy of the commons The tendency for commonly owned natural resources to be overused, neglected, or degraded because their common ownership gives nobody an incentive to maintain or improve them. transactions demand for money The amount of money people want to hold for use as a medium of exchange (to make payments); varies directly with nominal GDP. transfer payment A payment of money (or goods and services) by a government to a household or firm for which the payer receives no good or service directly in return. trough The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession has ended and an expansion (recovery) begins. tying contract A requirement imposed by a seller that a buyer purchase another (or other) of its products as a condition for buying a desired product; a practice forbidden by the Clayton Act. unanticipated inflation Increases in the price level (inflation) at a rate greater than expected. underemployment A situation in which workers are employed in positions requiring less education and skill than they have. undistributed corporate profits After-tax corporate profits not distributed as dividends to stockholders; corporate or business saving; also called retained earnings. unemployment The failure to use all available economic resources to produce desired goods and services; the failure of the economy to fully employ its labor force. unemployment compensation (See unemployment insurance). unemployment insurance The social insurance program that in the United States is financed by state payroll taxes on employers and makes income available to workers who become unemployed and are unable to find jobs. unemployment rate The percentage of the labor force unemployed at any time. unfulfilled expectations Situations in which households and businesses were expecting one thing to happen but instead find that something else has happened; unrealized anticipations or plans relating to future economic conditions and outcomes. uninsurable risk An event that would result in a loss and whose occurrence is uncontrollable and unpredictable. Insurance companies are not willing to sell insurance against such a loss. union (See labor union.) unionization rate The percentage of a particular population of workers that belongs to labor unions; alternatively, the percentage of the population of workers whom unions represent in collective bargaining.