Glossary

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 * Absolute advantage** In international trade, a condition in which one nation can produce more of a particular commodity with the same amount of resources as another nation uses for producing that commodity.
 * Aggregate demand curve** The plot of all points corresponding to the total amount of goods demanded in the economy at each overall level of prices.
 * Aggregate supply curve** The plot of all points corresponding to the total amount of goods supplied in the economy at each overall level of prices.
 * Alienation** The condition resulting from the separation of the worker from the means of production. Alienation from the worker's point of view results from no control over the product, no control of the means of producing it, and an antagonistic relationship of workers and owners.
 * Antitrust policy** Laws that attempt to limit the degree of monopoly in the economy and to promote competition. In the United States, the passage, interpretation, and enforcement of antitrust laws have involved varying degrees of emphasis on market performance, market conduct, and market structure. See //Sherman Act//.
 * Appreciation of currency** The relative strengthening of a currency in a flexible exchange rate system. The appreciated currency rises in cost and value relative to the depreciated currency.
 * Average cost** Total cost divided by the number of production units.
 * Average fixed cost** Total fixed cost divided by total units of output.
 * Average propensity to consume (APC)** Total consumption divided by total disposable income. This is the average consumption income ratio.
 * Average propensity to save (APS)** Total savings divided by total disposable income.
 * Average variable cost (AVC)** Total variable cost divided by total output.

B
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 * Balance of payments** A summary record of a country's transactions that typically involves payments and receipt of foreign exchange. Credit items and debit items must balance, since each good that a country buys or sells must be paid for in one way or another.
 * Balance of trade** The difference between the value of exports and the value of imports of visible items (goods and services).
 * Barriers to entry** Obstacles to a firm's entry into new industries or markets. These obstacles may be political (such as tariffs or trade restrictions), economic (economies of scale or limited resources, especially in oligopolies), or legal (patents, copyrights, or monopoly).
 * Board of Governors** A seven-member group appointed by the President and approved by the Congress to head the Federal Reserve. The board coordinates and regulates the nation's money supply. See //Federal Reserve//.
 * Breakeven point** (1) In national income accounting, the amount of income corresponding to consumption of the entire income. There is no saving or dissaving. (2) For an individual business, the amount of revenue corresponding to a production level at which revenues exactly equal costs. There are no profits or losses.
 * Bretton Woods Agreement** (1944) The international agreement that formed the basis for today's international financial organizations. After World War II, the Allied nations agreed that international financial affairs would be overseen by the International Monetary Fund. Gold became the ultimate means of settling balance-of-payment deficits.
 * Budget deficit** The amount by which government expenditures exceed government revenues during the accounting period.
 * Built-in stabilizers** Automatic, nondiscretionary forms of fiscal policy that compensate for particular trends of aggregate changes in national income.
 * Business cycle** Recurrent ups and downs of business activity, shown in a host of business indicators. Expansion and contraction phases are both thought to have certain cumulative features. They may also contain the seeds of the turning points at the cycle's peak and trough.

C
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 * Capital** A factor of production, along with labor and land; the stock of a society's produced means of production, including factories, buildings, machines, tools, and inventories of goods in stock.
 * Capital account** In balance-of-payments accounting, all capital flows other than investment income.
 * Capitalism** An economic system in which the basic resources and capital goods of the society are privately owned. Decisions are usually made by individual units, which may be relatively small (pure competition) or quite large (monopoly/oligopoly). Decisions tend to be based on profitability in the case of businesses, or economic self-interest in the case of individuals.
 * Cartel** An organization of producers designed to limit or eliminate competition among its members, usually by agreeing to restrict output in an effort to achieve noncompetitive prices. An example is OPEC.
 * Central bank** A Federal Reserve Board operation that serves the nation's banks. Besides its major responsibility—control of the money supply—it conducts some restriction, regulation, and investigation of the banking industry.
 * //Ceteris paribus//** Literally, "other things being equal"; a term used in economics to indicate that all variables except the ones specified are assumed not to change.
 * Class** In an economic sense, a group of people defined in terms of their relationship to production. For example, under capitalism, one class of people (proletariat) works the means of production, and another class (capitalists, bourgeoisie) owns the means of production. This concept was used largely by Karl Marx.
 * Classical economics** A school of economics that usually refers to the doctrines of the British Classical School of the late eighteenth and early nineteenth centuries, especially those of Adam Smith and followers. They emphasized competition, free trade, and minimal state intervention in the economy.
 * Collusion** Agreements to avoid competition or to set prices.
 * Commodity** Marketable item produced to satisfy wants. Commodities may be either tangible goods or intangible services. Marx considered labor under the wage contract a commodity because it orders wage contracts and responds to supply-and-demand conditions.
 * Communism** An economic system characterized by socialization of labor, centralization of the ownership of the means of production, centralized coordination of production, centralization of credit policy through a central bank, and reduction of alienation and exploitation of the worker.
 * Comparative advantage** In international trade, a country's productive advantage with respect to a particular commodity, based on its ability to give up fewer other commodities to produce a unit of the commodity than another country would have to give up. This relative cost of production is most significant in determining mutually beneficial patterns of trade among nations.
 * Competition** Theoretically, competition exists in a perfect and an imperfect form; the former is known as perfect competition, the latter as monopoly/oligopoly or as monopolistic competition. Perfect competition is characterized by small firms. Adam Smith called competition the "invisible hand" in capitalism. See "//Invisible hand//."
 * Concentration ratio** The percentage of total sales in an industry that is accounted for by a specific number of firms.
 * Conglomerate merger** Companies in unrelated industries merge.
 * Conservative economist** An economist who advocates classical theory, classical liberalism, and classical economics (i.e., that government should intervene only when necessary, and then only minimally).
 * Consumer Price Index (CPI)** A government statistic that measures inflation in terms of the weighted average composite of goods and services commonly consumed by average families.
 * Consumption** Expenditures by households and individuals on consumer goods.
 * Corporation** A form of business organization with a legal existence separate from that of the owners, in which ownership and financial responsibility are divided, limited, and shared among any number of individual and institutional shareholders.
 * Cost-push inflation** A general increase in prices associated with increases in the cost of production. Categorized as supply inflation.
 * Crowding out** Loss of funding as a result of the competition between economic units for the use of limited funds. The term usually refers to the federal budget deficit and the continuing borrowing of the U.S. Treasury. Funds used to finance government spending deprive businesses of necessary capital, thus crowding out investment.
 * Currency** Any recognized material accepted as national money; almost always paper or coin.
 * Cyclical budget deficit** The part of the federal deficit that fluctuates with the state of the economy. It increases when there is a downturn of the business cycle.
 * Cyclical unemployment** Measure of unemployment due to decreased demand during the troughs of business cycles, when output is curtailed. Workers who are cyclically unemployed are expected to be reinstated as the cycle moves upward.

D
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 * Deficit spending** Government spending when net government revenues are less than net government expenditures.
 * Demand** (1) Quantity demanded. (2) The whole relationship of the quantity demanded to variables that determine it, such as tastes, income, population, and price. (3) The demand curve.
 * Demand curve** A hypothetical construction depicting how many units of a particular commodity consumers would be willing to buy over a period of time at all possible prices, assuming that the prices of other commodities, money incomes of consumers, and other factors are unchanged.
 * Demand deposits** Checking accounts in commercial banks. These deposits can be turned into currency "on demand," i.e., by writing a check. Demand deposits are the main form of money in the United States.
 * Demand, law of** A principle concerning the relationship between price and quantity demanded: All other things constant, the lower the price, the higher the quantity demanded. In other words, price and quantity demanded are inversely related.
 * Demand-pull inflation** A general increase in prices arising from increasing excess demand for a given level of output.
 * Dependency model** A model that assumes that underdevelopment is a consequence of the historical evolution of capitalism and the integration of developing countries into the expanding sphere of capitalist production globally.
 * Depreciation** (1) Loss of value in capital equipment due to use or obsolescence. (2) The loss of value in any valuable good or commodity due to use or market forces (such as currency exchange rates).
 * Depression** A prolonged downswing of economic activity exemplified by mass unemployment, a level of national income well below the potential level, and great excess capacity. A depression is more severe and longer lasting than a recession. The economic breakdown of the industrialized world in the 1930s was called the Great Depression. See //Recession//.
 * Derived demand** Demand of a good for use in the production of goods and services.
 * Devaluation** A downward revision in the value at which a country's currency is pegged in terms of a foreign currency.
 * Discount rate** Interest rate charged on loans from the Federal Reserve Bank to its member banks; an instrument of Federal Reserve monetary policy.
 * Discretionary fiscal policy** A fiscal policy designed to respond to a particular situation in the macroeconomy. These policies are implemented to achieve specific goals, usually high output, high employment, and stable prices.
 * Diseconomies of scale** The phenomenon of disproportional increasing costs as a firm's long-run productive capacity grows. Simply put, the growth of production costs in an expanding firm outstrips the growth in production.
 * Disintermediation** Resource allocation, particularly investment, by a firm which excluded intermediary institutions such as savings and loan institutions, banks, or brokerage firms.
 * Disposable income** Amount of personal income remaining after payment of various federal, state, and local taxes and other nontax payments.
 * Dissaving** Deficit or negative spending; that is, borrowing or drawing down other financial assets in order to consume.
 * Distribution of income** The division of the total product of a society among its members. The distribution is sometimes described by a classification according to income size or by a classification including factor payments.
 * Division of labor** Subdivision of a productive process into its component parts, which are then handled by specially skilled or trained laborers. Adam Smith believed it was a major source of increased productivity over time.
 * Dumping** Sale by an exporting nation of its product at a lower price in an importing country than in its own country. Dumping tends to ruin the importer's domestic industry while strengthening the exporter's market share.

E
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 * Economic dependence** The relationship of unequal interdependence, endured by the less advanced countries with the developed countries. Theoretically, a country is in a state of economic dependence if the expansion of its economy depends on that of another country. See //Imperialism//.
 * Economic development** Progressive changes in a society's ability to meet its economic tasks of production and distribution. Development is characterized by increasing output and the growth of economic institutions, relationships, and methods that facilitate society's ability to generate economic growth.
 * Economic growth** Increase in productive capabilities beyond the necessary elements of survival. Expansion creates more jobs, goods, and income.
 * Economic planning** The planning of investment, consumption, and similar decisions by one or other bodies. Several variants (among which are corporate planning, command planning, and indicative planning) demonstrate variety in what is to be planned and who does the planning.
 * Economic profits** A return to capital above "normal profit"; profit remaining after opportunity costs have been taken into account.
 * Economic theory** A theory of economics or resource allocation. Examples are Marxist, classical, and Keynesian theory. See //Theory//.
 * Economics** The study of the allocation of resources, the production of goods and services, and their distribution in societies.
 * Economies of scale** The phenomenon of decreasing average costs in large-scale production (usually oligopolistic production). The growth of production in an expanding firm outstrips the growth in costs.
 * Elasticity** A function that describes the sensitivity of demand or supply of a product to changes in its price. Elasticity equals the percentage change in quantity demanded (supplied) divided by the percentage change in price.
 * Employment Act of 1946** Federal law that created a Council of Economic Advisers to advise the President on the state of the economy and on how best to achieve the goal of full employment.
 * Enclosure movement** In England during the Middle Ages, a series of parliamentary acts by which the feudal nobility fenced off or enclosed lands formerly used for communal grazing, destroying feudal ties and creating a large, new "landless" labor force.
 * Entrepreneur** In the classical liberal sense, an owner of the means of production. In the modern corporate world, a businessperson is often considered an entrepreneur.
 * Equation of exchange** The quantity theory of money, expressed as //MV = PQ//, where //M// is the money stock, //V// is velocity of money, //P// is price level, and //Q// is real national income. It is a tautology, because //V// is defined as //PQ/M//.
 * Equilibrium** A state of balance in which there are no endogenous pressures for change. A market equilibrium is said to exist at the price where the quantity demanded equals the quantity supplied.
 * Exchange rate** The price of a nation's currency in terms of another nation's currency.
 * Exhaustive spending** Governmental purchases of goods and services.
 * Exports** Any unit of production that leaves the country where it was produced for sale in another country.
 * Externalities** Costs of productive activity that the firm is not obliged to bear. The costs are borne by the public as social costs of production. Also known as third-party effect. Externalities may be detrimental (external costs) or beneficial (external benefits).

F
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 * Factor of production** Any implement or agent whose services are used in the production of economic goods and services. Three basic factors are land, labor, and capital.
 * Federal Reserve (Fed)** An independent agency of the federal government and instrumental in determining monetary policy. Its main tools are altering reserve requirements, changing the discount rate, and conducting open-market purchases and sales of governmental securities. See //Monetary policy; Reserve requirements; Discount rate//.
 * Feudalism** The economic system that directly preceded capitalism. Relations of class were between lord and serf. Feudalism existed in a society in which tradition and ceremony played the major roles.
 * Financial accounts** In balance-of-payments accounting, the accounts that summarize the flow of goods and services between the United States and the rest of the world.
 * Financial intermediaries** Institutions such as banks, savings and loans, insurance companies, mutual funds, pension funds and finance companies that borrow funds from people with savings and then make loans to others (borrowers).
 * Financial intermediation** Use of financial institutions to deposit or acquire funds from the public. Such institutions pool numerous funds and then provide them to businesses, governments, or individuals.
 * Firm** Unit that makes decisions regarding the employment of factors of production and production of goods and services.
 * Fiscal policy** Governmental policy concerned with the tax and expenditure activities of the federal government, including the size of public spending and the balancing or unbalancing of the federal budget. This policy is designed to promote certain macroeconomic objectives, usually full employment, stable prices, economic growth, and balance-of-payments equilibrium.
 * Fixed exchange rate** A rate at which a currency is fixed (set) to establish its price relative either to a universal exchange (gold) or to another currency.
 * Floating exchange rate** A currency exchange rate that rises or falls in response to the forces of international supply and demand. See //Exchange rate//.
 * Fractional reserve system** A banking system under which commercial banks are required to maintain reserves equal to a prescribed percentage of their demand or other deposits. See //Reserve requirements//.
 * Free trade** A situation in which all commodities can be freely imported and exported without special taxes or restrictions being levied because of their status as imports or exports.
 * Frictional unemployment** Loss of jobs caused by temporary mismatching of laborers with jobs due to differences between the needs of business and skills of labor.
 * Full employment** A condition under which those who wish to work at the prevailing wage are able to find work. In the United States, full employment is defined as 4 percent unemployment.

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 * General Agreement on Tariffs and Trade (GATT)** An association of countries that "sets and regulates the code of international trade conduct and promotes free trade."
 * Gini coefficient** A measure of inequality in income distribution derived from the Lorenz curve. To calculate it for a population, find the difference in area between a 45° line and the population's Lorenz curve, and divide the difference by the entire area below the 45° line.
 * Gross domestic product (GDP)** The market value of all final goods and services produced in an accounting period by factors of production located within a country.
 * Gross national product (GNP)** The market value of all final goods and services produced in an accounting period by factors of production owned by citizens of that country.

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 * Historical materialism** Developed by Karl Marx, an in-depth historical study of material relations of people. The basis of social and economic change resides in class relations of people. The base of a society is its mode of production, and all class struggle emanates out of the relations of people to the mode of production. The superstructure, which is determined by the base, includes the philosophy, religion, ideology, etc. of the specific epoch.
 * Horizontal merger** Companies in the same industry merge.

I
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 * Imperialism** One country's economic, social, political, and cultural dominance over another country. Imperialism, as developed by Lenin, Sweezy, Baran, Magdoff, and many others, is a historical problem and directly related to the growth and development of capitalism.
 * Imports** Goods brought into a country for sale, having been produced elsewhere.
 * Income flow** The path that income follows in the economy. Businesses pay rents, wages, interest, and profits to households, which in turn spend their incomes to continue the flow.
 * Income velocity of money** The rate of turnover of money in the economy. From the equation of exchange, velocity is GDP divided by the money supply. See //Equation of exchange//.
 * Incomes policy** A governmental policy designed to limit inflation by instituting direct and indirect controls over prices, wages, profits, and other types of income.
 * Index number** A weighted average of a given variable with a specified base number, usually 100.
 * Indirect business taxes** Taxes imposed on the production and sale of goods. Examples include sales tax, excise tax, custom duties, and property taxes.
 * Industry** The collective group of producers of a single good or service or closely related goods or services.
 * Inefficiency in production** A condition in a noncompetitive market in which output is not at minimum average cost.
 * Inefficiency in resource allocation** A condition in a noncompetitive market in which the good's price does not equal marginal cost.
 * Infant industry** An industry that has recently been established in a country and has not yet had time to exploit possible economies of scale and other efficiencies. Such industries provide one of the traditional arguments for tariff protection.
 * Inflation** A general rise in the average level of all prices in an economy as defined by some index (Consumer Price Index, wholesale price index, or GDP price deflator).
 * Infrastructure** Necessary supports for development, such as transportation routes and social services.
 * Innovation** A change for the better in technology or production. A change is considered "better" if it involves higher efficiency and/or lower production costs.
 * Interest** (1) The price of borrowing money. (2) The rate of return to owners of financial capital.
 * Interest rate** The amount of interest expressed as a percentage of the initial sum.
 * International Monetary Fund (IMF)** International organization founded with the goal of encouraging trade by establishing an orderly procedure for stabilizing foreign exchange rates and for altering those rates in the case of fundamental balance-of-payments disequilibrium.
 * International trade** Buying and selling of goods and services across national borders. The country that sells is the exporter, and the country that buys is the importer.
 * Inventories** Stocks of goods kept on hand to meet orders from other producers and customers.
 * Investment** An addition to a firm's or society's stock of capital (machines, buildings, inventories, etc.) in a certain period of time.
 * "Invisible hand"** Term coined by Adam Smith to suggest that individuals who are motivated only by private (not social) interest will nevertheless be guided invisibly by the market to actions and decisions beneficial to the welfare of society.

K
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 * Kanban** The "just-in-time" system in which services and supplies are produced and delivered only when needed.
 * Keiretsu** A production relation between a large core firm and its subsidiaries that allows for a stable, mutually beneficial long-term relationship.
 * Keynesian economics** Theory characterized by its emphasis on macroeconomic problems, the special role of aggregate expenditure in determining national income, and the possibility of unemployment equilibrium; its attempt to synthesize real and monetary analysis; and its argument for a greater government intervention in the economy.
 * Keynesian multiplier** The number of dollars by which a $1 increase in spending (//C, I, G//) will raise the equilibrium level of national income. Represented as //k//, it can be expressed mathematically in relation to the marginal propensity to consume (MPC) or the marginal propensity to save (MPS):
 * //k// = || __1__

L
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 * Labor** The physical and mental contributions of humans to the production process. Collectively, labor refers to all workers.
 * Labor force participation rate** Percentage of actual civilians participating in the labor force compared with the total number of civilians of working age.
 * Labor theory of value** Theory held by Marx (and Ricardo in differing form) that the value of a commodity is proportional to the labor embodied in its production.
 * Laissez-faire** A doctrine that the state should largely leave the economy to its own devices. Associated with Adam Smith.
 * Land** A means of production that includes raw materials and the land upon which productive activity takes place (i.e., factory, farm).
 * Law of diminishing returns** Principle that in the production of any commodity, as more units of a variable factor of production are added to a fixed quantity of other factors of production, the amount that each additional unit of the variable factor adds to the total product will eventually begin to diminish.
 * Liquidity** The ease with which an asset can be converted into cash. Considerations in measuring liquidity include the time necessary to acquire cash, the cost of conversion, and the predictability of the asset's value.
 * Liquidity preference** Demand for money as a function of the interest rate; the willingness to hold money on hand.
 * Liquidity trap** In Keynesian theory, the point in the economy when all economic agents desire to keep each additional dollar on hand. To them, the existing interest rate does not warrant the acquisition of bonds. The demand for money is thus perfectly elastic or horizontal, and monetary policy is completely ineffective in stimulating aggregate expenditures.
 * Long run** Any extended period, usually longer than three to five years. For a firm, the time necessary to effect changes in "fixed" resources. Economists view the long run as the period in which equilibrium is reached.
 * Lorenz curve** Graphs the extent of income inequality by charting the cumulative percentage of income against the cumulative percentage of families.

M
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 * Macroeconomics** The branch of economics concerned with large economic aggregates such as GDP, total employment, overall price level, and how these aggregates are determined.
 * Malthus, Thomas** Economist who developed a theory that population tends to grow at a geometric rate while food supplies can, at best, grow at an arithmetic rate. Thus, in Malthus's eyes, extreme poverty, famine, plague, and war would continually beset humanity.
 * Marginal cost (MC)** The increase in total cost resulting from raising the rate of production by one unit.
 * Marginal factor cost** The cost of an additional resource or factor of production (which in competition equals the price of the resource).
 * Marginal physical product** The additional output realized when one more unit of a variable input is used, assuming all other input levels are held constant.
 * Marginal propensity to consume (MPC)** The change in consumption divided by the change in income (MPC = D //C/// D //Y//).
 * Marginal propensity to save (MPS)** The change in saving divided by the change in income that brought it about (MPS = D //S/// D //Y//).
 * Marginal revenue (MR)** The change in a firm's total revenue arising from the sale of one additional unit.
 * Marginal revenue = marginal cost** In microeconomics, the point at which profits are maximized for a firm.
 * Marginal revenue product** The additional revenue realized when one more unit of a variable input is used, assuming all other input levels are held constant.
 * Market** (1) An area over which buyers and sellers negotiate the exchange of a well-defined commodity. (2) From the point of view of a household, the firms from which it can buy a well-defined product. (3) From the point of view of the firm, the buyers to whom it can sell a well-defined product.
 * Market economy** An economy functioning largely through market forces (supply, demand, etc.).
 * Market failure** The inability of the market to produce an efficient (or acceptable) result.
 * Market power** A condition in which the firm can exercise control over the price of a good or service because the firm supplies the total quantity.
 * Marxian economics** School of economics aimed at understanding the class system (or private property system), the methods of production and commodity exchange under capitalism.
 * Medium of exchange** The function of money as intermediary. Since money is accepted in payment for goods and services and is valued for the goods and services it buys, money is a medium of exchange.
 * Mercantilism** A characteristic European economic doctrine in the sixteenth to seventeenth centuries, emphasizing the role of money and trade in economic life and the desirability of active state intervention in the economy.
 * Microeconomics** Branch of economics that deals with the interrelationships of individual businesses, firms, industries, consumers, laborers, and other factors of production that make up the economy. Focuses on markets.
 * Mixed economy** An economy in which there are substantial public and private sectors, in which private enterprise and the market are significant determining factors, but in which the state also takes on certain basic economic responsibilities (e.g., full employment and business regulation). See //Capitalism//.
 * Monetary aggregates** Various measures of the money supply used by the Federal Reserve System and include //M//1, //M//2, //M//3, and //L//.
 * Monetary policy** Governmental policy concerned with the supply of money and credit in the economy and the rate of interest. This policy is designed to promote certain macroeconomic objectives, usually full employment, stable prices, economic growth, exchange rates, and balance-of-payments equilibrium.
 * Money** Anything that is generally accepted in payment for goods and services and in the repayment of debts.
 * Monopolistic competition** A market structure in which each firm is relatively small, but each has a monopoly on its particular version of the product in question. Competition in such a framework assumes the form of advertising, product differentiation, and other forms of nonprice competition.
 * Monopoly** A market structure in which there is a single seller of a commodity or service that has no close substitutes.
 * Monopoly capitalism** An economy that marks the dominance of imperfect competition; productive forces or factors are extremely concentrated, and markets are imperfect. See //Capitalism//.
 * Multinational corporation** A corporation that operates within more than one country.
 * Multiplier** See //Keynesian multiplier; Transfer multiplier//.

N
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 * National debt** The net accumulation of federal budget deficits; the total indebtedness of the federal government.
 * National income** The total income of factors of production in the current productive period.
 * Neoliberal model** A model that assumes that developing nations must adopt modern capital and technology to have strong economic growth.
 * Net national product (NNP)** Total output of final goods and services produced in an economy in a given period of time, including net rather than gross investment. NNP = GDP – depreciation or capital consumption allowances.
 * Newly Industrializing Countries (NIC)** A group of countries (Hong Kong, Taiwan, Singapore, Malaysia, the Philippines, South Korea, Brazil, Mexico, and Argentina) that have allowed foreign firms to set up operations favorably and have generated sizable export capabilities.

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 * Oligopoly** A market structure in which a few large firms dominate the industry. Some of these industries produce an undifferentiated product, others a differentiated product. In either case, a special feature of oligopoly is that the firms recognize their interdependence.
 * Open-market operations** Federal Reserve purchases and sales of government securities on the open market. These activities are an important instrument of monetary policy because sales of government securities reduce the money supply, while purchases increase it. See //Federal Reserve//.
 * Opportunity cost** The cost of an economic good as measured in terms of the alternative goods one must forgo to secure it.
 * Organization of Petroleum Exporting Countries (OPEC)** Organization of oil-producing nations, largely in the Middle East, that have joined together for the purpose of controlling the production, export, and price of petroleum.

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 * Paradox of thrift** Economic principle, identified by Keynes, that an increase in the desire to save decreases output, even though investment may also increase.
 * Peak (of business cycle)** The height of the business cycle; characterized by greatest economic activity and followed by contracting economic activity.
 * Per capita income** Total national income divided by total population.
 * Petrodollars** Dollars and currency in the form of monetary reserves controlled by the oil-exporting (largely OPEC) nations, accumulated by selling petroleum.
 * Phillips curve** Graph showing the relationship between inflation and unemployment.
 * Political business cycle** Distortion of the basic business cycle caused by the actions and policies of politicians bidding for reelection. Usually a four-year cycle in sequence with presidential elections.
 * Political economy** Social science dealing with political policies and economic processes, their interrelationships, and their mutual influence on social institutions.
 * Possessions** Personal items people own and use, including home, farm, or tools. Private property, in contrast, reflects ownership of impersonal property used by the owner only to collect rent on land, interest, and profits on capital; it is used (worked) by others.
 * Postindustrial society** A society that has encountered the processes of industrialization and has gone beyond industrialization in terms of benefits accruing to the people. Some people consider the United States a postindustrial society.
 * Praxis** Practical activity with an added twist, i.e., the dialectical interrelation of thought and practice. The term was used by the young Hegelians and especially Marx.
 * Precautionary demand for money** Holding money in order to cover unexpected or temporary expenses or losses of income.
 * Present value** The value today of a sum to be received or paid in the future, adjusted by a prevailing or assumed interest rate.
 * Price** An amount of money that guides resource allocation and reflects the value of a good or service. Prices are transmitted by markets through which producers make decisions about what factors of production to use, and consumers decide what to consume.
 * Price elasticity of demand** The sensitivity of demand for a product to changes in its price.
 * Price elasticity of supply** The sensitivity of supply of a product to changes in its price.
 * Price index** See //Consumer Price Index; Index//.
 * Price leadership** The practice of a single firm in an industry announcing a price change and other firms following suit.
 * Price stability** Price policy that aims to counter wide fluctuations in aggregate price levels. During a period of high inflation, for example, governments seeking price stability adopt anti-inflationary measures such as credit withdrawal, higher interest rates, and decreased government spending (or increased taxes).
 * Price wars** Progressive price cutting to increase sales.
 * Primitive accumulation** A way of accumulating wealth that fuels class conflict. In particular, the early formation of capital that accompanied the development of capitalism, often characterized by piracy and plunder.
 * Product differentiation** Business strategy in which substitute products retain some distinctive difference. Means of differentiating products include brand names, coloring, packaging, or advertising.
 * Production possibilities curve** Graph that illustrates scarcity and opportunity cost by showing that whenever society chooses to have more of one type of good, it must sacrifice some of another type of good.
 * Productivity (of labor)** The output produced per unit of input (output per hour of work).
 * Profits** Excess of revenues over costs. Normal profits are equal to the opportunity costs of management. Economic profits are the profits above the normal profit. Theoretically, in pure competition, economic profits equal zero in the long run. However, in imperfect market structures, they do not.
 * Progressive income tax** Tax that claims an ever-increasing percentage of income as the income level rises.
 * Property** Tangible or intangible possession that may be used to produce some product or aid in the selling of the product. Certain legal rights are attached to this "private property".
 * Property rights** In capitalism, where productive property is privately owned, owners' rights to control the use of these productive resources. See //Possessions//.
 * Protectionism** Policy that institutes high tariffs on incoming goods, so as to preserve domestic industry. Protectionism was prevalent during mercantilism. See //Infant industry; Tariff//.
 * Public debt** The amount of outstanding federal debt held by individuals, corporations, and nonfederal government agencies.
 * Public goods** Goods or resources that benefit the general public and are not necessarily directly paid for by all those who use them. Examples are street signs and public schools.
 * Public sector** Local, state, and federal governmental offices, organizations, and institutions.
 * Putting-out system** Labor system in which an owner would give workers the necessary materials and pay the worker to make a finished product. Replaced the handicraft type of industry and marked the emergence of private capital.

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 * Quantity demanded** The specific number of units of a product in the economy that is desired by economic agents at a given price level.
 * Quantity supplied** The specific number of units of a product in the economy that is provided by producers at a given price level.
 * Quantity theory of money** Theory that the quantity of money in the economy largely determines the level of prices. Stated as //MV = PQ//, where //M// is the quantity of money, //V// is the income velocity of money, //P// is the price level, and //Q// is real national income. The theory postulates that //V// is largely determined by institutional factors and //Q// is determined by factor supplies and technology; hence changes in //M// will be reflected in proportionate changes in //P//.
 * Quotas** Limits on the quantities of goods imported or exported.

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 * Radical economists** Economists who are critical of classical and neoclassical theory and view economic problems as resulting directly from the capitalist system itself. Thus, the only serious relief to these problems is a change of economic system.
 * Rational expectations** An economics-based theory about the nature of economic agents, stating that all agents are rational, logical, and aware of what is best for them and what the consequences of decisions and developments in the economy will mean for their well-being. Agents will act logically to take advantage of changes in the economy and enhance their position.
 * Real wages** Wages measured from a specific point; wages that reflect the rate of inflation. If a worker's wage level increases 10 percent and inflation increases 10 percent in the same period of time, then we say that the real wage remains the same. Usually contrasted with money wages, which in the example would reflect only the 10 percent increase in the worker's wage.
 * Recession** A slowing down of economic activity, resulting in an increase in unemployment and in excess industrial capacity. Less severe than a depression. Sometimes defined in the United States in terms of a decline in GDP for two or more successive quarters of a year.
 * Regulation Q** Federal regulation placing a ceiling on interest rates payable by banks on deposits. This regulation has been phased out.
 * Rent** (1) Payment for the services of a factor of production. (2) Payment for the use of land.
 * Reserve army (industrial)** A term developed by Marx to describe the functioning of capitalism in which worker strength was greatly decreased, in propoprtion to the amount of unemployment.
 * Reserve currency** A currency that is accepted in settlement of international exchanges.
 * Reserve requirements** In banking, the fraction of public deposits that a bank holds in reserves.
 * Ricardo, David** One of the reformers of classical liberalism, developed by Adam Smith. Ricardo's analysis was based on an economy composed of many small enterprises.

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 * Savings** All income received by households and not spent on the consumption of goods and services.
 * Say's law** The doctrine (named after J. B. Say) that "supply creates its own demand." The production of one good adds to both aggregate supply and aggregate demand. In this nonmonetary world, depression and mass unemployment are not possible.
 * Scarcity** Inability of a society to produce or secure enough goods to satisfy all the wants, needs, and desires people have for these goods.
 * Seasonal unemployment** Joblessness created by changing seasonal conditions or demand.
 * Services** Duties (or work) for others that do not necessarily render a good but are nevertheless worth payment.
 * Sherman Antitrust Act** A major U.S. antitrust law passed in 1890 prohibiting "every contract, combination in the form of trust or otherwise or conspiracy, in restraint of trade or commerce," and prescribing penalties for monopoly.
 * Shortage** Disequilibrium situation wherein quantity demanded exceeds quantity supplied. In such a situation, price will tend to rise until it reaches an equilibrium level (where quantity supplied equals quantity demanded).
 * Smith, Adam** Economist who in 1776 published //The Wealth of Nations//, noting the foundation of a new individualist philosophy, classical liberalism.
 * Special Drawing Rights (SDRs)** A bookkeeping device created by the International Monetary Fund to increase international liquidity. SDRs may be drawn by each country in proportion to its original contribution.
 * Specialization (of labor)** Methods of production in which individual workers specialize in particular tasks rather than making everything for themselves.
 * Speculative demand for money** Function that describes the amount of assets held by households and firms in the form of money, relative to the interest rate.
 * Stagflation** Term coined in the 1970s to describe the coexistence of unemployment (stagnation) and inflation afflicting the United States and other countries.
 * Standard of deferred payment** Acceptability as future payment; a characteristic of money.
 * Stock** Shares of ownership in a corporation. May be common stock and/or preferred stock.
 * Store of value** An asset that holds value into the future. Money has this characteristic.
 * Structural budget deficit** The federal budget deficit which remains if the economy were at full employment.
 * Structural unemployment** Type of permanent unemployment that stems from shifting demand and/or technological changes requiring new skills for workers. Disparities in geographic locations of workers and jobs also contribute to this phenomenon.
 * Structuralist model** A model that assumes that domestic political and economic factors affect development.
 * Supply** The amount of goods or services produced and available for purchase.
 * Supply curve** The set of all points representing the amount of goods or services that will be offered at different price levels.
 * Supply shock** Events that are unexpected and that affect the aggregate supply of goods and services.
 * Supply, law of** Economic principle that says the lower the price, the lower the quantity supplied, all other things being constant. Price and quantity supplied are positively related.
 * Surplus value** In Marxian terms, the amount by which the value of a worker's output exceeds his or her wage. Hence, a source of profit for the capitalist.
 * Surplus** A state of disequilibrium wherein quantity supplied exceeds quantity demanded. Price will tend to fall until it reaches equilibrium (where quantity supplied equals quantity demanded).

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 * Tariff** A tax applied to imports.
 * Terms of trade** The prices of a country's exports in relation to its imports. Any improvement in a country's terms of trade means a relative increase in its export prices, while deterioration in its terms of trade indicates a relative increase in its import prices.
 * Theory** A cogently expressed group of related propositions declared as principles for explanation of a set of phenomena.
 * Total cost** The cost of all factors of production involved in producing one good.
 * Total fixed costs** The sum of all costs that do not change with varying output (in the short run). A firm incurs these costs regardless of production levels.
 * Total revenue** The amount of funds credited to the firm for sales of its output; price multiplied by units sold.
 * Total variable costs** The sum of all costs that fluctuate in relation to the activity of the firm and the productive process. The two major variable costs are labor and resources.
 * Transactions demand for money** Function that indicates the amount of money balances that individuals desire for purchasing purposes. Considered relatively constant, given a level of income and consumption pattern.
 * Transfer multiplier** The ratio that relates the change in the equilibrium level of income (Yy) to a change in government transfer payments.
 * Transfer payments** Government payments to individuals that are not compensation for currently productive activity.
 * Trough (of business cycle)** The low point of the business cycle, representing the slowest level of business activity. Following this low point, the cycle begins an upward swing.

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 * Unemployed** A person 16 years of age or older who is not working and is available for work and has made an effort to find work during the previous four weeks.
 * Unemployment** A condition wherein workers who are ordinarily part of the labor force are unable to find work at prevailing wages. May take any of five specific forms: (1) Frictional unemployment arises from workers changing jobs, etc.; all labor markets have this kind. (2) Seasonal unemployment results from changing seasonal demand and supply for labor. (3) Structural unemployment results from changing or shifting product demand; i.e., it is a function of geographic and job skill mobility. (4) Cyclical unemployment arises from changes in demand of labor during the business cycle. (5) Hidden unemployment consists of frustrated potential workers who have given up looking for a job.
 * Unemployment rate** The number of people unemployed expressed as a percentage of the total number of people in the labor force.
 * Unit of account** A measure of value or the standard way of quoting prices and keeping accounts in an economy.

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 * Value added** Strictly, the value of a final product less the cost of production. Loosely, the increase in value due to the labor input.
 * Variable costs** Costs that fluctuate due to the activity of the firm and the productive process. The two major variable costs are labor and resources.
 * Vertical merger** Companies in different stages of an industry merge.

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 * Wage and price controls** Mandatory regulation of wages and prices by the government in order to contain inflation. The U.S. government applied such controls to certain segments of the economy with varying force from 1971 to 1974.
 * Wages** The price paid for units of labor or service supplied in the market per unit of time.
 * World Bank** A bank that assists poor countries by lending or by insuring private loans to finance development projects. Officially the International Bank for Reconstruction and Development (IBRD) established after World War II to promote postwar reconstruction and development of underdeveloped countries.