Glossary of Selected Terms

Ability-to-pay principle: A principle of taxation stating that people with more income or wealth have a greater capacity to pay taxes than those with lesser income or wealth.

Absolute advantage: Occurs when one country is able to produce a product more efficiently than another country.

Academic economist: An economist employed mainly by colleges and universities to teach, conduct scholarly research, and publish.

Acquisition: Occurs when one firm buys sufficient ownership in a targeted firm to control the purchased firm.

Advanced economies: The richer, more industrialized economies of the world; also called advanced countries, developed economies, and developed countries.

Advertising: A paid announcement by a business or industry to inform consumers about a product and to convince people to purchase the product.

Aggregate demand: The total demand for all goods and services in an economy.

Aggregate supply: The total supply of all goods and services produced in an economy.

Agricultural revolution: The momentous shift from the nomadic lifestyle of the hunters and gatherers to a system based on permanent agriculture.

Appropriated programs: Categories of expenditures in the U.S. federal budget that require annual congressional legislation to fund, such as national defense; contrasted with mandatory programs.

Balanced budget: A budget in which receipts equal expenditures.

Balance of payments: A record of all transactions between people in one country and foreigners, including items such as international trade, foreign direct investment, and foreign aid.

Balance of trade: Measures the difference between the value of a nation's imports and exports.

Banking system: Consists of a central bank, commercial banks, and other depository institutions in a country.

Bankruptcy: The legal recognition that an individual, business, or local government is unable to repay its debts; different chapters of the U.S. bankruptcy code deal with different types of bankruptcy filings.

Barriers to entry: Factors that discourage or prevent firms from entering or exiting an industry.

Barter: A system of exchange in which one good is exchanged for a second good.

Basic economic questions: The universal questions that are answered by economic systems, including what to produce, how to produce, and for whom to produce.

Bear market: A sustained decrease in the value of stocks on a stock exchange.

Benefit-received principle: A principle of taxation that states that people who use certain government goods or services should pay for them.

Bond: A certificate of debt issued by corporations or governments as a means of borrowing money.

Bond market: A mechanism by which corporate bonds and government bonds are traded.

Brain drain: The exodus of skilled workers or other highly educated people from poorer countries to richer countries.

Budget constraint: The limits on consumer choice dictated by people's income and the price of goods.

Budget deficit: Occurs when government expenditures are greater than government receipts.

Budget surplus: Occurs when government receipts are greater than government expenditures.

Bull market: A sustained increase in the value of stocks on a stock exchange.

Business cycle: An illustration of the short-term ups and downs in the real gross domestic product, shown as expansions and contractions in the business cycle model.

Business economist: An economist employed by a firm to analyze economic data and help management make informed business decisions.

Capacity utilization rate: Measures the percentage of a nation's factory capacity that is currently being used in productive enterprise.

Capital deepening: Occurs when a nation's capital stock per worker increases.

Capital flight: Occurs when the wealthy in poorer countries invest their savings in safer, more profitable ventures abroad.

Capital flow management measures: Government policies that restrict or regulate the

flow of financial resources between countries.

Capital goods: Items that are used to produce other products; examples include business computers and delivery trucks; one of the three main factors of production.

Capitalism: A type of economic system in which the private sector owns and controls the factors of production.

Capital market: The network of financial institutions that channel savings from households to business firms for the purpose of productive investment.

Capital stock: The total amount of capital goods available to produce products in a nation.

Cartel: An agreement or organization that coordinates the production decisions of independent producers of similar or identical products to influence the product's supply and price; an example is the Organization of Petroleum Exporting Countries.

Ceteris paribus: An assumption made by economists that all factors except the variable being studied can be held constant for a moment in time; the assumption permits economists to study cause-effect relationships by temporarily excluding other variables.

Charge card: a payment card that allows the cardholder to purchase goods at a specific business and repay the borrowed money, typically at the end of each billing cycle.

Circular flow model: An economic model that shows how products and resources are exchanged for money payments in a market economy.

Classical school: A school of economic thought that favors laissez-faire economic principles, including a reliance on free and competitive markets and few government interventions in the economy.

Closed corporation: A type of corporation in which stock ownership is restricted to a small group such as family members.

Closed shop: An arrangement that required employers to hire only labor union members; the Taft-Hartley Act of 1947 banned the closed shop.

Collective bargaining: Empowers union representatives to negotiate with management on behalf of the union membership; increases the market power of union workers.

Collusion: An illegal conspiracy among rival firms designed to fix prices, agree on market share, or otherwise reduce competition.

Command economy: A type of economic system in which the government dictates the answers to the basic economic questions.

Commercial bank: A private for-profit financial corporation owned by stockholders and operated by professional management.

Commodity money: An item that is commonly accepted as a medium of exchange and also has value in itself; an example is tobacco money in colonial Virginia.

Common market: A type of regional trade agreement that eliminates trade barriers among member nations, has a common trade policy, and open national borders to permit other resource flows among members.

Communism: A type of command economy in which the government owns and controls most of the means of production; associated with Marxist doctrine.

Comparable worth: The process of equalizing pay rates between jobs in a workplace that require similar skills; designed mainly to reduce wage inequities based on gender.

Comparative advantage: Exists when a nation or economic region is able to produce a product at a lower opportunity cost compared to another nation; this theory supports regional specialization and free trade.

Competition: The economic rivalry that exists among producers of similar products.

Complementary good: A product that is normally used in conjunction with another product; a battery is a complementary good to a flashlight.

Conglomerate merger: A merger of firms from unrelated industries into a single business.

Constant dollars: The value of the dollar adjusted for inflation; enables fairer comparisons of a currency's value over time; contrasted with current dollars.

Consumerism: The protection of consumer interests.

Consumerists: Individuals or groups that actively support the goals of consumerism.

Consumer movement: The embodiment of the actions, programs, and other forms of activism by individual consumerists and consumerist organizations.

Consumer Price Index: Measures the percentage change in the price of a uniform market basket of products over time; used to calculate the rate of inflation or deflation.

Consumers: People who buy goods and services to satisfy personal wants or needs.

Consumer sovereignty: States that informed consumers exercise freedom of choice and, through their buying decisions, signal producers what to produce.

Consumer surplus: A measure of consumer well-being; the difference between the price a consumer is willing to pay for a product and the actual price of the item.

Consumption goods: The goods and services designed for immediate use by households such as food, electrical appliances, and medical services.

Cooperatives: Independent self-help organizations that are owned and operated by members; types include consumer, producer, and worker co-ops.

Corporate social responsibility: The responsibilities corporations have to their workers and families, consumers, investors, local peoples, governments, and the natural environment.

Corporation: A type of business that is incorporated under state law, owned by stockholders, and typically run by professional managers.

Corporation income tax: A federal tax on corporate profits; also called the corporate income tax.

Correlation-as-cause fallacy: Faulty reasoning that incorrectly assumes that because two events occurred at about the same time, one must have caused the other.

Cost-benefit analysis: A process by which the costs of providing or producing certain public or private goods are weighed against the anticipated benefits of providing or producing these goods; this type of analysis is used to make rational decisions in the public and private sectors.

Costs of production: The payments made by firms in exchange for the factors of production; includes wages, interest, rents, and entrepreneurial profits.

Cost-push inflation: A type of inflation that occurs when an increase in production costs pushes up prices in an economy.

Countervailing duty: A retaliatory tariff designed to offset a financial advantage gained through dumping or subsidization.

Craft union: A labor organization of skilled workers in a single trade such as carpenters or masons.

Credit: A type of voluntary transaction or agreement between a borrower and a lender.

Credit card: A payment card that allows the cardholder to purchase goods from a variety of venues and repay the money in monthly payments.

Credit union: A not-for-profit financial cooperative that is owned and operated by members.

Current dollars: The value of the dollar in the present, not adjusted for inflation; contrasted with constant dollars.

Customs union: A type of regional trade agreement that eliminates trade barriers among member nations and establishes uniform trade policies with nonmember nations.

Dead capital: Assets in the informal economy that cannot be used as collateral, gain credit, or otherwise be woven into the formal economy.

Debt ceiling: A legal limit on the total amount of debt the U.S. Department of the Treasury can issue to the public or to other federal agencies; also called the debt limit.

Debt servicing: The process of repaying debt; often applied to the interest payments on the U.S. national debt, and to the payments by developing countries to foreign creditors.

Deductive approach: A method of forming economic theories which begins with a hypothesis based on observations, followed by data collection and testing.

Default: Occurs when a debtor is not able or not willing to honor existing financial obligations; can apply to an individual, business, or government.

Deflation: An overall decline in the price level in an economy; also called negative inflation.

Demand: The amount of a good, service, or resource that people are willing and able to buy at a series of prices at a moment in time.

Demand-pull inflation: A type of inflation that occurs when excess demand pulls up the prices of products in an economy.

Democracy: A type of political system that relies on broad-based citizen participation, free elections, and the rule of law.

Democratic socialism: A type of economic system in which the government owns and controls some of the means of production and provides extensive social programs; traditionally found in western European countries.

Depression: A severe and prolonged recession.

Derived demand: The demand for a resource, such as labor, is derived from the demand for the product produced by that resource.

Developing countries: The poorer, less industrialized countries; also called developing economies or, more broadly, emerging market and developing countries.

Development plan: A type of economic blueprint that outlines a nation's path toward sustainable economic development.

Differentiated oligopoly: A type of oligopoly in which rival firms produce similar but not identical products; an example is the U.S. breakfast cereal industry.

Diminishing marginal utility, law of: An economic law stating that consumer satisfaction declines as additional units of the same good are consumed in a specified period of time.

Diminishing returns, law of: An economic law stating that as additional inputs (resources) are used in production, they will generate progressively smaller amounts of additional output.

Discount rate: A monetary policy tool used by the Federal Reserve System that involves changes in the interest rate charged by the Fed to banks for short-term loans.

Discretionary fiscal policy: Congressional policies to raise and spend money to achieve macroeconomic goals such as economic growth, full employment, and stable prices.

Division of labor: Specialization applied to labor with the goal of increasing worker productivity; the division of labor becomes more sophisticated as economies become more advanced.

Domestic system: A system of production that relies on small-scale production in people's homes.

Dumping: An illegal trade practice that occurs when a producer from one country sells a product in a second country at a price lower than its production costs or lower than the price in the country of origin.

Easy money policy: The Fed's use of monetary policy tools to expand the nation's money supply to stimulate business activity; contrasted with tight money policy.

Econometrics: The use of sophisticated mathematical models to draw conclusions, explain events, or predict economic behaviors.

Economic and monetary union: The most integrated form of regional trade agreement.

Economic choice: The freedom people have to use their resources or other property as they see fit.

Economic efficiency: The production of products that people are willing to buy and at the lowest possible cost.

Economic growth: A sustained increase in the nation's gross domestic product; sometimes measured by a sustained increase in the real GDP per capita, or real GNI per capita.

Economic indicators: Economic data used to predict and assess the duration of business cycles; the three types of indicators are leading, coincident, and lagging.

Economic law: An economic theory or generalization that has survived repeated testing, such as the law of demand.

Economic model: A simplified version of reality designed to focus on a specific relationship between variables; often shows a cause-effect relationship.

Economics: The study of how people choose to use their scarce resources to satisfy their needs; the study deals with production, distribution, and consumption decisions.

Economic system: The sum total of all economic activity that takes place within a society; economic systems answer the basic economic questions of what, how, and for whom to produce. Economies of scale: The decline in the average cost of producing a good as the firm's rate

of output increases; the concept of economies of scale is used to defend the existence of

natural monopolies.

Embargo: The cessation of trade or other commercial contacts with a country for a period of time.

Emerging market and developing economies: A broad range of economies that have not yet entered the ranks of the advanced economies; also called emerging market and developing countries.

Employer firm: A firm that hires employees; contrasted with nonemployer firms.

Employment rate: The percentage of the labor force that has a job.

Entrepreneur: A person who starts a new business, develops a new product, or devises a new way to produce a product; a risk-taker and innovator.

Entrepreneurship: Occurs when a person creates or otherwise advances a business venture independently or within an existing business; the actions of an entrepreneur.

Equilibrium wage: The point of intersection between the labor demand curve and the labor supply curve in a particular labor market.

European Union: The world's most integrated economic and monetary union, consisting of 28 member nations in 2013.

Evidence fallacy: Faulty reasoning that occurs when conclusions are based on insufficient, irrelevant, or inaccurate information.

Exchange rates: States the value of one currency compared to a second currency.

Excise tax: A tax on a specific product such as gasoline, alcohol, or cigarettes.

Expansionary fiscal policy: The use of fiscal policy tools to inject money into a slumping economy to increase business activity; contrasted with restrictive fiscal policy.

Export: A product that is sold to another country.

Expropriation: A government seizure of resources, firms, or other private assets without compensating the previous owner.

External debt: The money owed by one country to foreign governments, banks, multilateral organizations, or other creditors; also called foreign debt.

Factor market: Represents all purchases of resources in an economy; factor market exchanges are illustrated on the circular flow model; also called the resource market.

Factors of production: The resources needed to produce products including natural resources, human resources, and capital goods; entrepreneurship is often considered a fourth factor of production.

Factory system: A system of production that relies on large-scale, capital-intensive production in an industrial setting; a system that relies on specialization and a division of labor.

Fair trade: Involves the purchase of imported goods that were produced in a socially responsible and environmentally friendly manner.

Fallacy: An error in research or reasoning that results in an erroneous conclusion.

Fallacy of composition: Faulty reasoning assuming that what is true for a piece is true for the whole.

Federal budget: A document that outlines how the federal government plans to raise and spend money during a fiscal year.

Federal funds rate: The interest rate that banks charge to other banks for short-term loans.

Federal Reserve System: The U.S. central bank with responsibility for maintaining the stability of the nation's banking and monetary system; also called the Fed.

Fiat money: A type of money that derives its value by government decree; an example is the paper currency used in the United States.

Financial contagion: The spread of a financial crisis from one country to other countries or regions; viewed as a threat to global financial stability.

Firm: A business entity that produces a good or service; also called a business or a business firm.

Fiscal policy: The use of taxes and government spending by Congress to promote economic growth and stability.

Fixed costs: Business costs that do not change with a change in a firm's rate of output; examples include rents, leases, and interest payments on debts; contrasted with variable costs.

Fixed exchange rate system: A system of foreign exchange trading based on a fixed conversion rate among the world's currencies.

Flexible exchange rate system: A system of foreign exchange trading in which market forces determine the relative value of the world's currencies.

Foreign aid: Cross-border transfers to financial resources, technical advice, and other assistance mainly from richer countries to poorer countries.

Foreign direct investment: The long-term cross-border investments by one company to gain ownership or control of production facilities in another country; FDI occurs through mergers and acquisitions, and greenfield investments.

Foreign exchange market: A highly integrated global network of financial institutions that converts currencies and trades currencies for profit.

Foreign exchange trading: The buying and selling of national currencies for profit; forex trading takes place in the foreign exchange market.

Franchise: A business consisting of a parent company called a franchiser and satellite firms called franchisees; examples include Subway and McDonald's.

Free trade: International trade that is not restricted by trade barriers such as import quotas or tariffs.

Free trade area: A type of regional trade agreement that eliminates most trade barriers among member nations but permits members to devise their own trade policies with nonmember countries; the FTA is least integrated type of regional trade agreement.

Futures market: A mechanism by which contracts for items are traded; also called a futures exchange.

General Agreement on Tariffs and Trade: A multilateral agreement that established rules for international trade from 1947 to 1994; GATT supported free trade.

General purpose technology: A technology created through government-funded research and development; GPTs create new technologies with potential for further commercial development; an example is the Internet.

Geographic monopoly: Exists when a single firm is the exclusive provider of a product or service to a certain region.

Global economy: The international network of individuals, businesses, governments, multilateral organizations, and others that make or influence production, distribution, and consumption decisions.

Globalization: The process of creating a more integrated and interdependent global economy through expanded international trade, foreign direct investment, cross-border financial flows, and other flows of resources and ideas.

Good governance: Honest and competent government that enforces the rule of law.

Goods-producing sector: Consists of firms that supply tangible items in an economy such as final goods, intermediate goods, and resources.

Government economist: An economist employed by any level of government to collect and analyze data necessary for the operation of government or the formation of public policy.

Government monopoly: Exists when any level of government becomes the sole provider or producer of a good or service; examples include local government control of water and sewage services.

Gross capital formation: Investments that increase the country's fixed assets such as roads, schools, and factories.

Gross domestic product: Measures the total value of all final goods and services produced in a country in a given year; includes the output of domestic and foreign firms within the country.

Gross investment: The sum total of private investment and public investment in an economy in a given year.

Gross national income: Measures people's total income by adding the value of all final goods and services produced in the economy with the net receipts from other wage or investment income from abroad.

Gross national product: Measures the total value of all final goods and services produced by a country's firms operating anywhere in the world; excludes the value of output produced by foreign firms within the country.

Gross saving: The sum total of savings by individuals, businesses, and the government in a country in a given year.

Horizontal merger: A merger of firms that sell similar products in the same market.

Human capital: The expanded abilities and skills of workers in a country due to education or other training.

Human resources: The people engaged in production; examples include teachers, factory workers, and farmers; one of the three main factors of production.

Import: A product that is purchased from another country.

Import quota: A trade barrier that limits the quantity of an imported good.

Incentives: Factors that motivate people to pursue certain actions or behaviors and discourage other actions or behaviors.

Income effect of a price change: States the inverse relationship between the price of good and a household's economic well-being; an increase in a good's price makes a household worse off, while a decrease in a good's price makes the household better off.

Income effect of a wage increase: States that as the wage rate of a worker increases, the worker will work fewer hours and therefore have more leisure time; contrasted with the substitution effect of a wage increase.

Indicative planning: A collaborative, inclusive economic planning process traditionally used by democratic socialist countries.

Inductive approach: A method of forming economic theories, which begins with the identification of a problem, followed by data collection, generalizations, and testing.

Industrialization: The economic transition of an economy from small-scale, laborintensive production to large-scale, capital-intensive production; historically industrialization occurred in conjunction with the Industrial Revolution.

Industrial union: A labor organization composed of all workers in a firm or industry, regardless of skill level or job description.

Industry: Represents all firms that produce a similar product; an example is the U.S. auto industry.

Inflation: An increase in the overall price level in an economy over time.

Inflation rate: Measures the percentage increase in the overall price level in an economy over time.

Informal economy: Business activity in a country that is neither reported to the government nor subject to government rules or regulations.

Information and communications technologies: The technological advances that radically increase the ability to collect, store, retrieve, and share information; ICTs have transformed business activity and connectivity within the global economy.

Innovation: The process of converting scientific discoveries and technological advances into profitable products or improved methods of production.

Installment credit: Enables consumers to buy goods in the present and repay the dollar amount of the purchase, plus interest, in regular monthly installments.

Interlocking directorate: Occurs when members of one corporate board of directors also sit on a competitor's board of directors; an anticompetitive business practice.

International investment agreement: A bilateral or multilateral treaty that establishes rules and responsibilities of parties involved in a cross-border investment.

International Monetary Fund: A multilateral organization that promotes international cooperation, financial stability, and growth in the global economy; the IMF is a specialized agency within the United Nations system.

International trade: The cross-border exchange of goods or services; trade is conducted by importing and exporting products.

Investment protectionism: Occurs when a government imposes regulations or other restrictions on foreign direct investment.

Joint venture: A business agreement between two or more companies to jointly produce or sell a product; typically a temporary business arrangement.

Keynesian school: A school of economic thought based on the works of John M. Keynes; Keynesians favor government interventions in the economy to influence aggregate demand as a means achieving economic growth and stability.

Labor force: Consists of individuals who are 16 years of age or older and who are employed or actively seeking employment.

Labor force participation rate: The percentage of work-age individuals who are a part of the labor force.

Labor market: A situation in which individuals voluntarily supply their labor in exchange for a wage or salary.

Labor union: A formal association of workers empowered by members to negotiate a labor contract with a firm's management.

Laissez-faire: The belief that market forces, rather than the government, should determine the use of society's resources; often used in conjunction with the term capitalism (laissezfaire capitalism) to denote the importance of marketplace freedoms within a capitalist economic system.

Large business:A firm that satisfies certain criteria in terms of total revenues or number of employees; in common usage a firm with 500 or more employees; contrasted with small business.

Law of demand: An economic law that explains the inverse relationship between the price of a good and the quantity demanded.

Leisure: All uses of time that are not directly related to paid employment.

Limited liability company: A hybrid business organization that combines features from corporations, partnerships, and sole proprietorships.

M1: A narrower measurement of the money supply that includes coin, paper currency, demand deposits, and traveler's checks; also called transactions money.

M2: A broader measurement of the money supply that includes M1, plus near monies such as savings deposits, small time deposits, and money market mutual funds.

Macroeconomics: The branch of economics that deals with economic performance in the overall economy such as the price level, employment, and national output.

Mandatory programs: Categories of expenditures in the U.S. federal budget that do not require annual congressional legislation to fund such as Social Security and Medicare; contrasted with appropriated programs.

Marginalism: An economic analysis that considers the impact of the next or additional unit of consumption or production on an economic decision; most economic decisions are made at the margin.

Marginalist school: A school of economic thought that emphasizes rational decision making at the margin by producers and consumers of products.

Marginally attached worker: A person who is willing to work but who has not been employed during the previous 12 months and who has recently stopped looking for paid employment.

Marginal utility: The additional satisfaction that is derived from the consumption of additional units of the same good during a specific time period.

Market: A situation in which people freely exchange goods, services, financial instruments, or other transferable items.

Market economy: A type of economic system that relies on the private sector to answer the basic economic questions; often used interchangeably with free enterprise system and capitalism.

Market equilibrium: The point at which the demand curve and the supply curve for a product intersect, establishing a market clearing price.

Market structure: The competitive environments under which industries are organized; types include perfect competition, monopolistic competition, oligopoly, and monopoly.

Marxism: A school of economic thought based on the works of Karl Marx; Marxism is grounded in socialist principles and committed to the overthrow of capitalism.

Mercantilism: The belief that a country's wealth is derived from its ability to accumulate gold and silver.

Merger: The union of two firms to form a larger firm; often called a merger of equals such as the 1999 merger of Exxon and Mobil into ExxonMobil.

Microeconomics: The branch of economics that focuses on the interactions among individual decision-making units in an economy such as consumers, workers, or firms.

Microfinance institutions: Organizations that provide microloans and other financial services to the poor, mainly in the developing world.

Minimum wage: A price floor that sets a minimum hourly wage for employees.

Mixed economy: An economy that combines features from the market model and the command model; the term “mixed economy” is often used to describe economies that lean heavily toward the market model, such as the U.S. economy.

Monetarism: A school of economic thought that supports a fixed, predictable rate of growth in the nation's money supply.

Monetary policy: The actions of the Federal Reserve System to alter the money supply and the cost of credit in pursuit of national macroeconomic goals, mainly economic growth and stability.

Money: Any item that is commonly accepted in payment for goods or services, or in payment of debts.

Money supply: The total amount of money in an economy; the two measurements of the money supply are M1 and M2.

Monopolistic competition: A type of market structure in which many firms—perhaps 25, 50, or more—produce similar but differentiated products.

Monopoly: A type of market structure in which one firm dominates the production of a unique product.

Multilateral organization: A group or organization comprised of members from more than one country; often these organizations address global issues.

Mutual fund: A company that creates and manages a diversified portfolio of financial assets; viewed as a more secure investment option than individual stocks.

National debt: The accumulated debt of the federal government over time; also called the federal debt.

Nationalization: A government takeover of a private enterprise with compensation to the previous owner.

Natural monopoly: A single producer of a good or service that exists mainly because the economies of scale reduces the average cost of production as additional units of output are made; natural monopolies, such as local power companies, are regulated by the government.

Natural rate of unemployment: The percentage of the labor force that is frictionally and structurally unemployed.

Natural resources: The gifts of nature used in production; examples include sunlight, natural forests, and rivers; one of the three main factors of production.

Net interest: The amount of money the U.S. government pays in interest on the national debt minus the interest payments and fees it receives from other federal agencies.

Net worth: The difference between a household's gross assets and its liabilities.

Nominal gross domestic product: The gross domestic product not adjusted for inflation; the GDP in current dollars; contrasted with real GDP.

Nondiscretionary fiscal policy: The automatic stabilizers built into the existing tax system and federal spending programs.

Nonemployer firms: Firms that are owned by one person, earn at least $1,000 in revenue in a year, and do not hire employees; contrasted with employer firms.

Nongovernmental organizations: Groups that research issues, share their findings, and advocate for reforms; examples include Oxfam and Amnesty International.

Nonprofit organizations: Organizations designed to provide goods or services to people but not to earn profits for shareholders, employees, or other stakeholders; examples include the Red Cross and Veterans of Foreign Wars.

Nonrenewable resources: Resources that are consumed during production and cannot be replenished, such as natural gas and petroleum.

Normative economics: A type of economics concerned with what ought to be or what ought not be; normative statements are subjective and cannot be objectively tested; also called prescriptive economics.

North American Free Trade Agreement: A free trade area comprised of the Canada, Mexico, and the United States.

Offshoring: Occurs when a producer in one country outsources production to another country.

Oligopoly: A type of market structure in which several firms—perhaps three, six, or 10— dominate the output of an industry; economists often say an oligopoly exists when the top four firms in an industry produce at least 40 percent of the industry's output; the two types of oligopolies are differentiated and pure.

Open market operations: A monetary policy tool used by the Federal Reserve System, which involves the sale or purchase of government securities; open market operations is the most used Fed tool.

Opportunity cost: The second best use of limited resources; the good or service that is not produced or consumed; also called the real cost.

Organization for Economic Cooperation and Development: An association of 34 countries that discuss issues of global concern and coordinate official development assistance to poorer countries.

Partnership: A type of business that is owned by two or more people, called partners, each of whom has a financial interest in the firm.

Perfect competition: A type of market structure in which thousands of independently operating firms produce and sell a homogeneous product; an example is the U.S. wheat industry.

Personal income tax: A federal progressive tax on people's taxable income; many states also have a personal income tax; often called the individual income tax.

Physiocratic school: An economic school of thought that stresses the primacy of agriculture and free markets to guide society's use of resources.

Positive economics: A type of economics concerned with what is; positive economic statements can be objectively tested; also called descriptive economics.

Post-hoc fallacy: A type of faulty economic reasoning that assumes a preceding event necessarily causes a subsequent event when, in fact, no causal relationship exists.

Poverty: A condition that exists when a family's income falls below the official government-determined poverty line.

Poverty line: The annual income level set by the government to distinguish the poor from the nonpoor; also called the poverty threshold.

Poverty rate: The percentage of a nation's total population that falls below the official poverty line.

Price ceiling: A government-imposed maximum price that a seller may charge for a good or service; an example is rent control on apartment units.

Price elasticity of demand: Measures the impact of a price change on the quantity demanded of a product.

Price elasticity of supply: Measures the impact of a price change on the quantity supplied of a product.

Price system: The largely invisible price signals that coordinate most production and consumption decisions in a market economy.

Private property: Any good, resource, or other asset that is owned and controlled by an individual or a firm.

Private property rights: Legal codes and other protections that guarantee people's right to own, control, buy, sell, and profit from their private property.

Producer cooperative: A not-for-profit business that is owned and operated collectively by the firm's members mainly to minimize production costs or expand distribution channels.

Producer price index: Measures the percentage change in the prices of raw materials, intermediate goods, and other items used in the production process.

Producers: Firms that make or sell goods and services, mainly to earn profits.

Producer sovereignty: A theory popular in the 1950s and 1960s that consumer choice is manipulated by big business through advertising and marketing campaigns.

Production: The process of converting the factors of production into goods and services.

Production possibilities frontier: An economic model that illustrates the range of possible production choices producers (nations or firms) might make at a specific moment in time; used to show the opportunity cost of production decisions.

Production sharing: The production of a product in stages, often in a number of different countries, to minimize production costs.

Productivity: A measurement of output per unit of input; typically measured in terms of output per unit of labor employed in a production process.

Product market: Represents all purchases of goods and services in an economy; product market exchanges are illustrated on the circular flow model.

Profit: Occurs when a firm's total revenues are greater than its total costs.

Progressive tax: A tax that takes a larger percentage of income from higher-income households than from lower-income households.

Property tax: A local tax on assets such as a house, business, undeveloped property, or car.

Proportional tax: A tax that takes the same percentage of income from all households regardless of income level.

Public corporation: A corporation in which shares of ownership are widely traded.

Public goods: Goods provided by the government that are nonexclusionary and nonrival in consumption; examples include schools and national defense.

Purchasing power parity: A conversion process for nations' currencies that assesses and compares the buying power of money within individual economies.

Pure oligopoly: A type of oligopoly in which rival firms produce an identical product; an example is the U.S. steel industry.

Quality of life: A measure of people's well-being based on income level and other features of the human condition such as access to health services and educational opportunities.

Quantitative easing: A tool of the Federal Reserve System to inject money into the banking system through the purchase of bank assets such as mortgage-backed securities and government securities; designed to increase the availability of loanable funds in an economy.

Race to the bottom theory: A theory critical of transnational corporations and others involved in globalization for the perceived harm that globalization inflicts on workers, the environment, and others in the global economy.

Real GDP per capita: The real GDP divided by a nation's total population; often used as a measure of economic growth.

Real gross domestic product: The gross domestic product that is adjusted for inflation; contrasted with nominal GDP.

Recession: A relatively short-term economic downturn in an economy marked by a decline in real gross domestic product and negative changes in employment, investment, incomes, and retail sales.

Regional development banks: Member-owned, multilateral lending institutions that promote economic development in world regions, including Africa, Asia, Latin America, and Europe.

Regional specialization: Occurs when firms in a geographic region produce one product or a narrow range of products, which are often determined by a country's comparative advantage.

Regional trade agreement: An agreement that creates reciprocal trade concessions for member countries; designed to increase trade among members.

Regressive tax: A tax that takes a larger percentage of income from lower-income households than from upper-income households.

Remittances: Transfers of money sent by people working outside their native country to people living in their native country; viewed today as a major source of foreign aid.

Renewable resources: Resources that can be replenished, such as sunlight and forests.

Representative money: A type of money that has no inherent value but represents something of value; an example was U.S. silver certificates that were redeemable for silver in the past.

Reserve requirement: A monetary policy tool used by the Federal Reserve System; it involves a change in the percentage of transaction accounts that banks must hold as reserves. Restrictive fiscal policy: The use of fiscal policy tools to withdraw money from an over-

heated economy to slow business activity or inflation; contrasted with expansionary fiscal


Right-to-work laws: Allows workers at a unionized firm to reject union membership and the payment of union dues but benefit from union-negotiated labor contracts.

Sales tax: A state or local tax on the consumption of certain products.

Savings and loan association: A savings institution designed to meet the needs of households rather than businesses; a type of thrift institution.

Savings bank: A savings institution design to provide home mortgages and other personal loans; a type of thrift institution.

Scarcity: A condition that exists when people have unlimited wants or needs but limited resources to satisfy these material desires; also called the universal economic problem.

School of economic thought: A group of economists who share common ideas about how scarce resources should be used to achieve society's goals.

Services-producing sector: Consists of firms that supply productive activities in areas such as transportation, communications, and retail trade.

Single cause fallacy: Faulty economic reasoning that identifies just one cause of a problem when, in fact, there are multiple causes.

Small business:A firm that satisfies certain criteria in terms of total revenues or number of employees; in common usage a firm with fewer than 500 employees; contrasted with large business.

Social insurance payroll taxes: Federal taxes including the Social Security tax and Medicare tax, which are used mainly provide income and health security for the elderly.

Socialism: A type of economic system based on public ownership and control of key resources and industries; major strands include democratic socialism and authoritarian socialism.

Sole proprietorship: A type of business organization that is owned by one person, the proprietor.

Specialization: Occurs when individuals or firms, economic regions, or nations produce a specific product or narrow range of products (regional specialization); also applies to production processes involving the assembly of interchangeable parts, and specialized use of labor (division of labor).

Stagflation: The simultaneous occurrence of recession and inflation.

Standard of living: A measurement of people's economic well-being based on household income.

Stock: A certificate of ownership in a corporation.

Stock market: A mechanism by which corporate stocks are traded; also called a stock exchange.

Substitute good: A product that can be used in place of a similar product; for example, one brand of energy drink can be substituted for a second brand.

Substitution effect of a price change: States that as the price of a good falls, people will buy more of the good and less of the substitute good; and vice versa.

Substitution effect of a wage increase: States that as the wage rate increases, the worker will work additional hours and therefore will have less leisure; contrasted with the income effect of a wage increase.

Supply: The amount of a product or resource that producers are willing and able to sell at a series of prices at a moment in time.

Supply-side economics: A school of economic thought that stresses the role of incentives, such as tax cuts, to stimulate productive investment and business activity.

Sustainable consumption: Consumption based on the efficient purchase and use of resources and products by consumers, firms, and government so as not to undermine consumption of future generations.

Tariff: A federal tax on an imported product; also called a customs duty.

Tax: A mandatory payment by individuals and businesses to the federal, state, or local government.

Technological monopoly: A single firm that produces a good or service mainly because it alone has access to patented technology used in the good's production.

Third world socialism: A strand of socialism that emphasizes land reform, the elimination of most private property, and central planning.

Tight money policy: The Fed's use of monetary policy tools to contract the nation's money supply to slow business activity and inflation; contrasted with easy money policy.

Total cost: The sum total of a firm's fixed costs and variable costs.

Trade barriers: Government policies mainly designed to discourage or prohibit imports; examples include tariffs and import quotas.

Trade deficit: Occurs when the value of a country's exports is less than the value of its imports; also called an unfavorable balance of trade.

Trade-off: Occurs when people choose to use a resource in one way rather than another way due to the scarcity of the resource.

Trade surplus: Occurs when the value of a country's exports is greater than the value of its imports; also called a favorable balance of trade.

Traditional economy: A type of economic system that relies on custom or tradition to answer the basic economic questions.

Transfer payment: Payment of money, goods, or services by the government to people; the two main categories of transfer payments are social insurance programs and public assistance programs.

Tying agreement: An anticompetitive business arrangement that requires buyers of one good to likewise buy related products, mainly complementary goods, from the same supplier.

Underemployment: The underutilization of employed workers in an economy.

Unemployment: The number of people in the labor force without a job.

Unemployment rate: The percentage of the labor force that is without a job.

Union membership rate: The percentage of workers that belong to a labor union in a country; also used to measure the percentage of workers that belong to a labor union in a sector of an economy, such as the private sector or the public sector.

Union shop: An arrangement that requires workers to join an existing union after they are hired by a firm or other employer.

United Nations System: The world's leading public forum for the discussion of issues of global concern; consists of six main branches and numerous specialized agencies, programs, and funds.

Unsustainable external debt: A foreign debt than cannot be repaid without incurring horrific consequences for the debtor country.

Utility: The amount of satisfaction a person derives from the consumption of a good or service.

Variable costs: Business costs that change along with changes in the firm's rate of output; examples include costs associated with the number of laborers and the amount of materials used in production; contrasted with fixed costs.

Venture initiation: The creation of a new business through entrepreneurial activity. Vertical merger: A merger of firms that produce different items needed at different phases in the production of a product.

Virtuous cycle: The upward spiral of savings, investment, and production needed for sustainable economic development.

Welfare state: The provision of extensive social programs by the government to provide at least a minimal standard of living for the people; most commonly associated with government welfare policies in democratic socialist economies.

Work: Productive activity in a paid job.

Worker cooperative: A firm owned and operated by its employees.

World Bank Group: A multilateral development organization comprised of five mutually supporting institutions; the main goals of the World Bank Group are to reduce global poverty and promote sustainable economic development; the World Bank is a specialized agency within the United Nations System.

World Trade Organization: A multilateral organization that oversees the operation of the rules-based multilateral trading system; the WTO replaced the General Agreement on Tariffs and Trade in 1995 as the leading proponent of free trade in global markets.

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