N O P Q R S T U V W X Y Z
N
NAIRU
The nonaccelerating
inflation rate of unemployment.
Nash Equilibrium
In game theory, the
result of all players playing their best strategy given what
their competitors are doing.
National Income
The total income
earned by the factors of production owned by a countrys
citizens.
National Income and
Product Accounts
Data collected and
published by the government describing the various components of
national income and output in the economy.
Natural Monopoly
An industry that
realizes such large economies of scale in producing its product
that single-firm production of that good or service is most
efficient.
Natural Rate of
Population Increase
The difference
between the birth rate and the death rate. It does not take
migration into account.
Natural Rate of
Unemployment
The unemployment
that occurs as a normal part of the functioning of the economy.
Sometimes taken as the sum of frictional unemployment and
structural unemployment.
Near Monies
Close substitutes
for transactions money, such as savings accounts and money market
accounts.
Negative Demand Shock
Something that
causes a negative shift in consumption or investment schedules or
that leads to a decrease in U.S. exports.
Net Exports (EX-IM)
The difference
between exports (sales to foreigners of U.S. produced goods and
services) and imports (U.S. purchases of goods and services from
abroad). i.e. The difference between a countrys total
exports and total imports. (This figure can be either positive or
negative.)
Net Factor Payments to
the Rest of the World
Payments of factor
income to the rest of the world minus the receipt of factor
income from the rest of the world.
Net Interest
The interest paid by
business.
Net Investment
Gross investment
minus depreciation.
Net National Product (NNP)
Gross national
product minus depreciation; a nations total product minus
what is required to maintain the value of its capital stock.
Nominal GDP
Gross domestic
product measured in current dollars.
Nominal Wage Rate
Nondurable Goods
Goods that are used
up fairly quickly, such as food and clothing.
Nonexcludable
A characteristic of
most public goods: Once a good is produced, no one can be
excluded from enjoying its benefits.
Nonlabor, or Nonwage,
Income
Any income received
from sources other than workinginheritances, interest,
dividends, transfer payments, and so on.
Nonresidential
Investment
Expenditures by
firms for machines, tools, plants, and so on.
Nonrival in Consumption
A characteristic of
public goods: One persons enjoyment of the benefits of a
public good does not interfere with anothers consumption of
it.
Nonsynchronization of
Income and Spending
The mismatch between
the timing of money inflow to the household and the timing of
money outflow for household expenses.
Normal Goods
Goods for which
demand goes up when income is higher and for which demand goes
down when income is lower.
Normal Rate of Return
A rate of return on
capital that is just sufficient to keep owners and investors
satisfied. For relatively risk-free firms, it should be nearly
the same as the interest rate on risk-free government bonds.
Normative Economics
An approach to
economics that analyzes outcomes of economic behavior, evaluates
them as good or bad, and may prescribe courses of action. Also
called policy economics.
North American Free-Trade
Agreement (NAFTA)
An agreement signed
by the United States, Mexico, and Canada in which the three
countries agreed to establish all North America as a free-trade
zone.
Not In the Labor Force
A person who is not
looking for work, either because he or she does not want a job or
has given up looking.
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O
Ockhams Razor
The principle that
irrelevant detail should be cut away.
Okuns Law
The theory, put
forth by Arthur Okun, that the unemployment rate decreases about
1 percentage point for every 3 percent increase in real GDP.
Later research and data have shown that the relationship between
output and unemployment is not as stable as Okuns Law
predicts.
Oligopoly
A form of industry (market)
structure characterized by a few dominant firms. Products may be
homogeneous or differentiated. The behavior of any one firm in an
oligopoly depends to a great extent on the behavior of others.
Open Market Desk
The office in the
New York Federal Reserve Bank from which government securities
are bought and sold by the Fed.
Open Market Operations
The purchase and
sale by the Fed of government securities in the open market; a
tool used to expand or contract the amount of reserves in the
system and thus the money supply.
Operating Profit (or
Loss) or net operating revenue
Total revenue minus
total variable cost (TR-TVC).
Opportunity Cost
The best alternative
that we forgo, or give up, when we make a choice or a decision.
Optimal Level of
Provision for Public Goods
The level at which
resources are drawn from the production of other goods and
services only to the extent that people want the public good and
are willing to pay for it. At this level, societys
willingness to pay per unit is equal to the marginal cost of
producing the good.
Optimal Method of
Production
The production
method that minimizes cost.
Optimal Scale of Plant
The scale of plant
that minimizes average cost.
Output Effect of a
Factor Price Increase (Decrease)
When a firm
decreases (increases) its output in response to a factor price
increase (decrease), this decreases (increases) its demand for
all factors.
Outputs
Usable products.
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P
Pareto Efficiency or
Pareto Optimality
A condition in which
no change is possible that will make some members of society
better off without making some other members of society worse off.
Partial Equilibrium
Analysis
The process of
examining the equilibrium conditions in individual markets and
for households and firms separately.
Patent
A barrier to entry
that grants exclusive use of the patented product or process to
the inventor.
Per Capita GDP or GNP
A countrys GDP
or GNP divided by its population.
Per Se Rule
A rule enunciated by
the courts declaring a particular action or outcome to be a per
se (intrinsic) violation of antitrust law, whether the result is
reasonable or not.
Perfect Competition
An industry
structure in which there are many firms, each small relative to
the industry, producing virtually identical products and in which
no firm is large enough to have any control over prices. In
perfectly competitive industries, new competitors can freely
enter and exit the market.
Perfect Knowledge
The assumption that
households possess a knowledge of the qualities and prices of
everything available in the market, and that firms have all
available information concerning wage rates, capital costs, and
output prices.
Perfect Substitutes
Identical products.
Perfectly Contestable
Market
A market in which
entry and exit are costless.
Perfectly Elastic Demand
Demand in which
quantity demanded drops to zero at the slightest increase in
price.
Perfectly Inelastic
Demand
Demand in which
quantity demanded does not respond at all to a change in price.
Permanent Income
The average level of
ones expected future income stream.
Personal Consumption
Expenditures (C)
A major component of
GDP: expenditures by consumers on goods and services.
Personal Income
The total income of
households. Equals (national income) minus (corporate profits
minus dividends) minus (social insurance payments) plus (interest
income received from the government and households) plus (transfer
payments to households). The income received by households after
paying social insurance taxes but before paying personal income
taxes.
Personal Saving
The amount of
disposable income that is left after total personal spending in a
given period.
Personal Saving rate
The percentage of
disposable personal income that is saved. If the personal saving
rate is low, households are spending a large amount relative to
their incomes; if it is high, households are spending cautiously.
Phillips Curve
A graph showing the
relationship between the inflation rate and the unemployment rate.
Physical or Tangible,
Capital
Material things used
as inputs in the production of future goods and services. The
major categories of physical capital are nonresidential
structures, durable equipment, residential structures, and
inventories.
Planned Aggregate
Expenditure (AE)
The total amount the
economy plans to spend in a given period. Equal to consumption
plus planned investment: AE=C+I.
Plant-and-Equipment
Investment
Purchases by firms
of additional machines, factories, or buildings within a given
period.
Policy Mix
The combination of
monetary and fiscal policies in use at a given time.
Positive Economics
An approach to
economics that seeks to understand behavior and the operation of
systems without making judgments. It describes what exists and
how it works.
Post Hoc, Ergo Propter
Hoc
Literally, after
this (in time), therefore because of this. A common
error made in thinking about causation: If Event A happens before
Event B, it is not necessarily true that A caused B.
Potential Output, or
Potential GDP
The level of
aggregate output that can be produced given full employment of
resources.
Poverty Line
The officially
established income level that distinguishes the poor from the
nonpoor. It is set at three times the cost of the Department of
Agricultures minimum food budget.
Price
The amount that a
product sells for per unit. It reflects what society is willing
to pay.
Price Ceiling
A maximum price that
sellers may charge for a good, usually set by government.
Price Elasticity of
Demand
The ratio of the
percentage of change in quantity demanded to the percentage of
change in price; measures the responsiveness of demand to changes
in price.
Price Feedback Effect
The process by which
a domestic price increase in one country can feed back
on itself through export and import prices. An increase in the
price level in one country can drive up prices in other countries.
This in turn further increases the price level in the first
country.
Price Leadership
A form of oligopoly
in which one dominant firm sets prices and all the smaller firms
in the industry follow its pricing policy.
Price Rationing
The process by which
the market system allocates goods and services to consumers when
quantity demanded exceeds quantity supplied.
Price Surprise
Actual price level
minus expected price level.
Private Goods
Products produced by
firms for sale to individual households.
Privately Held Federal
Debt
The privately held (non-government-owned)
debt of the U.S. government.
Producer Price Indexes (PPIs)
Measures of prices
that producers receive for products at all stages in the
production process.
Producers
Those people or
groups of people, whether private or public, who transform
resources into usable products.
Product Differentiation
A strategy that
firms use to achieve market power. Accomplished by producing
products that have distinct positive identities in consumers
minds.
Product or Output
Markets
The markets in which
goods and services are exchanged.
Production
The process by which
inputs are combined, transformed, and turned into outputs.
Production Function or
Total Product Function
A numerical or
mathematical expression of a relationship between inputs and
outputs. It shows units of total product as a function of units
of inputs.
Production Possibility
Frontier (PPF)
A graph that shows
all the combinations of goods and services that can be produced
if all of societys resources are used efficiently.
Production Technology
The quantitative
relationship between inputs and outputs.
Productivity of an Input
The amount of output
produced per unit of an input.
Productivity, or Labor
Productivity
Output per worker
hour; the amount of output produced by an average worker in 1
hour.
Profit
The excess of
revenues over cost in a given period.
Profit (Economic Profit)
The difference
between total revenue and total cost.
Property Income
Income from the
ownership of real property and financial holdings. It takes the
form of profits, interest, dividends, and rents.
Proprietors Income
The income of
unincorporated businesses.
Protection
The practice of
shielding a sector of the economy from foreign competition.
Public Assistance, or
Welfare
Government transfer
programs that provide cash benefits to (1) families with
dependent children whose incomes and assets fall below a very low
level and (2) the very poor regardless of whether or not they
have children.
Public Choice Theory
An economic theory
that the public officials who set economic policies and regulate
the players act in their own self-interest, just as firms do.
Public Goods, or Social
Goods
Goods or services
that bestow collective benefits on members of society. Generally,
no one can be excluded from enjoying their benefits. The classic
example is national defense.
Purchasing-Power-Parity
Theory
A theory of
international exchange holding that exchange rates are set so
that the price of similar goods in different countries is the
same.
Pure Monopoly
An industry with a
single firm that produces a product for which there are no close
substitutes and in which significant barriers to entry prevent
other firms from entering the industry to compete for profits.
Pure Rent
The return to any
factor of production that is in fixed supply.
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Q
Quantity Demanded
The amount (number
of units) of a product that a household would buy in a given
period if it could buy all it wanted at the current market price.
Quantity Supplied
The amount of a
particular product that a firm would be willing and able to offer
for sale at a particular price during a given time period.
Quantity Theory of Money
The theory based on
the identity M3V=P3Y and the assumption that the velocity of
money (V) is constant (or virtually constant).
Queuing
Waiting in line as a
means of distributing goods and services; a nonprice rationing
mechanism.
Quota
A limit on the
quantity of imports.
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R
Ration Coupons
Tickets or coupons
that entitle individuals to purchase a certain amount of a given
product per month.
Rational-Expectations
Hypothesis
The hypothesis that
people know the true model of the economy and that
they use this model to form their expectations of the future.
Rawlsian Justice
A theory of
distributional justice that concludes that the social contract
emerging from the original position would call for an
income distribution that would maximize the well-being of the
worst-off member of society.
Real Business Cycle
Theory
An attempt to
explain business cycle fluctuations under the assumptions of
complete price and wage flexibility and rational expectations. It
emphasizes shocks to technology and other shocks.
Real Interest Rate
The difference
between the interest rate on a loan and the inflation rate.
Real Wage Rate
The amount that the
nominal wage rate can buy in terms of goods and services.
Real Wealth, or Real
Balance, Effect
The change in
consumption brought about by a change in real wealth that results
from a change
Recession
Roughly, a period in
which real GDP declines for at least two consecutive quarters.
Marked by falling output and rising unemployment.
Recognition Lag
The time it takes
for policy makers to recognize the existence of a boom or a slump.
Relative-Wage
Explanation of Unemployment
An explanation for
sticky wages (and therefore unemployment): If workers are
concerned about their wages relative to other workers in other
firms and industries, they may be unwilling to accept a wage cut
unless they know that all other workers are receiving similar
cuts.
Rent-Seeking Behavior
Actions taken by
households or firms to preserve positive profits.
Rental Income
The income received
by property owners in the form of rent.
Required Reserve Ratio
The percentage of
its total deposits that a bank must keep as reserves at the
Federal Reserve.
Reserves
The deposits that a
bank has at the Federal Reserve bank plus its cash on hand.
Residential Investment
Expenditures by
households and firms on new houses and apartment buildings.
Resources or Inputs
Anything provided by
nature or previous generations that can be used directly or
indirectly to satisfy human wants.
Response Lag
The time that it
takes for the economy to adjust to the new conditions after a new
policy is implemented; the lag that occurs because of the
operation of the economy itself.
Rule of Reason
The criterion
introduced by the Supreme Court in 1911 to determine whether a
particular action was illegal ('unreasonable') or legal ('reasonable')
within the terms of the Sherman Act.
Run on a Bank
Occurs when many of
those who have claims on a bank (deposits) present them at the
same time.
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S
Saving (S)
The part of its
income that a household does not consume in a given period.
Distinguished from savings, which is the current stock of
accumulated saving.
Services
The things we buy
that do not involve the production of physical things, such as
legal and medical services and education.
Shares of Stock
Financial
instruments that give to the holder a share in the firm's
ownership and therefore the right to share in the firm's profits.
Sherman Act
Passed by Congress
in 1890, the act declared every contract or conspiracy to
restrain trade among states or nations illegal and declared any
attempt at monopoly, successful or not, a misdemeanor.
Interpretation of which specific behaviors were illegal fell to
the courts.
Shift of a Demand Curve
The change that
takes place in a demand curve corresponding to a new relationship
between quantity demanded of a good and price of that good. The
shift is brought about by a change in the original conditions.
Shock Therapy
The approach to
transition from socialism to market capitalism that advocates
rapid deregulation of prices, liberalization of trade, and
privatization.
Short Run
The period of time
for which two conditions hold: The firm is operating under a
fixed scale (fixed factor) of production, and firms can neither
enter nor exit an industry.
Short-Run Industry
Supply Curve
The sum of marginal
cost curves (above AVC) of all the firms in an industry.
Shut-Down Point
The lowest point on
the average variable cost curve. When price falls below the
minimum point on AVC, total revenue is insufficient to cover
variable costs and the firm will shut down and bear losses equal
to fixed costs.
Smoot-Hawley Tariff
The U.S. tariff law
of the 1930s, which set the highest tariffs in U.S. history (60
percent). It set off an international trade war and caused the
decline in trade that is often considered a cause of the
worldwide depression of the 1930s.
Social Capital, or
Infrastructure
Capital that
provides services to the public. Most social capital takes the
form of public works (roads and bridges) and public services (police
and fire protection).
Social Choice
The problem of
deciding what society wants. The process of adding up individual
preferences to make a choice for society as a whole.
Social Overhead Capital
Basic infrastructure
projects such as roads, power generation, and irrigation systems.
Social Security System
The federal system
of social insurance programs. It includes three separate programs
that are financed through separate trust funds: the Old Age and
Survivors Insurance program (OASI), the Disability Insurance
program (DI), and the Health Insurance program (HI, or Medicare).
Social, or Implicit,
Contracts
Unspoken agreements
between workers and firms that firms will not cut wages.
Socialist Economy
An economy in which
most capital is owned by the government private citizens. Also
called social ownership.
Speculation Motive
One reason for
holding bonds instead of money: Because the market value of
interest-bearing bonds is inversely related to the interest rate,
investors may wish to hold bonds when interest rates are high
with the hope of selling them when interest rates fall.
Spreading Overhead
The process of
dividing total fixed costs by more units of output. Average fixed
cost declines as quantity rises.
Stability
A condition in which
output is steady or growing, with low inflation and full
employment of resources.
Stabilization Policy
Describes both
monetary and fiscal policy, the goals of which are to smooth out
fluctuations in output and employment and to keep prices as
stable as possible.
Stabilization Program
An agreement between
a borrower country and the International Monetary Fund in which
the country agrees to revamp its economic policies to provide
incentives for higher export earnings and lower imports.
Stagflation
Occurs when the
overall price level rises rapidly (inflation) during periods of
recession or high and persistent unemployment (stagnation).
Sticky Prices
Prices that do not
always adjust rapidly to maintain equality between quantity
supplied and quantity demanded.
Sticky Wages
The downward
rigidity of wages as an explanation for the existence of
unemployment.
Store of Value
An asset that can be
used to transport purchasing power from one time period to
another.
Structural Adjustment
A series of programs
in developing nations designed to (1) reduce the size of their
public sectors through privatization and/or expenditure
reductions, (2) decrease their budget deficits, (3) control
inflation, and (4) encourage private saving and investment
through tax reform.
Structural Deficit
The deficit that
remains at full employment.
Structural Unemployment
The portion of
unemployment that is due to changes in the structure of the
economy that result in a significant loss of jobs in certain
industries.
Subsidies
Payments made by the
government for which it receives no goods or services in return.
Substitutes
Goods that can serve
as replacements for one another; when the price of one increases,
demand for the other goes up.
Sunk Costs
Costs that cannot be
avoided, regardless of what is done in the future, because they
have already been incurred.
Supply Curve
A graph illustrating
how much of a product a firm will supply at different prices.
Supply Schedule
A table showing how
much of a product firms will supply at different prices.
Supply-Side Policies
Government policies
that focus on stimulating aggregate supply instead of aggregate
demand.
Sustained Inflation
Occurs when the
overall price level continues to rise over some fairly long
period of time.
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T
Tacit Collusion
Collusion occurs
when price- and quantity-fixing agreements among producers are
explicit. Tacit collusion occurs when such agreements are
implicit.
Tariff
A tax on imports.
Tax Multiplier
The ratio of change
in the equilibrium level of output to a change in taxes.
Technological Change
The introduction of
new methods of production or new products intended to increase
the productivity of existing inputs or to raise marginal products.
Terms of Trade
The ratio at which a
country can trade domestic products for imported products.
Theory of Comparative
Advantage
Ricardo's theory
that specialization and free trade will benefit all trading
partners (real wages will rise), even those that may be
absolutely less efficient producers.
Three Basic Questions
The questions that
all societies must answer: (1) What will be produced? (2) How
will it be produced? (3) Who will get what is produced?
Tiebout Hypothesis
An efficient mix of
public goods is produced when local land/housing prices and taxes
come to reflect consumer preferences just as they do in the
market for private goods.
Tight Monetary Policy
Fed policies that
contract the money supply in an effort to restrain the economy.
Time Lags
Delays in the
economy's response to stabilization policies.
Total Cost (Total
Economic Cost)
The total of (1) out-of-pocket
costs, (2) normal rate of return on capital, and (3) opportunity
cost of each factor of production.
Total Cost (TC)
Fixed costs plus
variable costs.
Total Fixed Costs (TFC)
or overhead
The total of all
costs that do not change with output, even if output is zero.
Total Revenue (TR)
The total amount
that a firm takes in from the sale of its product: The price per
unit times the quantity of output the firm decides to produce (P3q).
Total Utility
The total amount of
satisfaction obtained from consumption of a good or service.
Total Variable Cost (TVC)
The total of all
costs that vary with output in the short run.
Total Variable Cost
Curve
A graph that shows
the relationship between total variable cost and the level of a
firm's output.
Trade Deficit
Occurs when a
country's exports of goods and services are less than its imports
of goods and services in a given period.
Trade Feedback
EffectThe tendency
for an increase in the economic activity of one country to lead
to a worldwide increase in economic activity, which then feeds
back to that country.
Trade Surplus
The situation when a
country exports more than it imports.
Tragedy of Commons
The idea that
collective ownership may not provide the proper private
incentives for efficiency because individuals do not bear the
full costs of their own decisions but do enjoy the full benefits.
Transaction Motive
The main reason that
people hold moneyÑto buy things.
Transfer Payments
Cash payments made
by the government to people who do not supply goods, services, or
labor in exchange for these payments. They include social
security benefits, veterans' benefits, and welfare payments.
Treasury Bonds, Notes,
and Bills
Promissory notes
issued by the federal government when it borrows money.
Trust
An arrangement in
which shareholders of independent firms agree to give up their
stock in exchange for trust certificates that entitle them to a
share of the trust's common profits. A group of trustees then
operates the trust as a monopoly, controlling output and setting
price.
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U
U.S.-Canadian Free-Trade
Agreement
An agreement in
which the United States and Canada agreed to eliminate all
barriers to trade between the two countries by 1998.
Unconstrained Supply of
Labor
The amount a
household would like to work within a given period at the current
wage rate if it could find the work.
Underground Economy
The part of the
economy in which transactions take place and in which income is
generated that is unreported and therefore not counted in GDP.
Unemployed
A person 16 years
old or older who is not working, is available for work, and has
made specific efforts to find work during the previous 4 weeks.
Unemployment
Compensation
A state government
transfer program that pays cash benefits for a certain period of
time to laid-off workers who have worked for a specified period
of time for a covered employer.
Unemployment Rate
The ratio of the
number of people unemployed to the total number of people in the
labor force.
Unit of Account
A standard unit that
provides a consistent way of quoting prices.
Unitary Elasticity
A demand
relationship in which the percentage change in quantity of a
product demanded is the same as the percentage change in price in
absolute value (a demand elasticity of 21).
Utilitarian Justice
The idea that 'a
dollar in the hand of a rich person is worth less than a dollar
in the hand of a poor person.' If the marginal utility of income
declines with income, transferring income from the rich to the
poor will increase total utility.
Utility Possibilities
Frontier
A graphic
representation of a two-person world that shows all points at
which A's utility can be increased only if B's utility is
decreased.
Utility
The satisfaction, or
reward, a product yields relative to its alternatives. The basis
of choice.
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V
Value Added
The difference
between the value of goods as they leave a stage of production
and the cost of the goods as they entered that stage.
Variable
A measure that can
change from time to time or from observation to observation.
Variable Cost
A cost that depends
on the level of production chosen.
Velocity of Money
The number of times
a dollar bill changes hands, on average, during a year; the ratio
of nominal GDP to the stock of money.
Vicious-Circle-of-Poverty
Hypothesis
Suggests that
poverty is self-perpetuating because poor nations are unable to
save and invest enough to accumulate the capital stock that would
help them grow.
Voting Paradox
A simple
demonstration of how majority-rule voting can lead to seemingly
contradictory and inconsistent results. A commonly cited
illustration of the kind of inconsistency described in the impossibility
theorem.
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W
Wealth or Net Worth
The total value of
what a household owns minus what it owes. It is a stock measure.
Weight
The importance
attached to an item within a group of items.
Wheeler-Lea Act (1938)
Extended the
language of the Federal Trade Commission Act to include
'deceptive' as well as 'unfair' methods of competition.
World Bank
An international
agency that lends money to individual countries for projects that
promote economic development.
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X
X-Axis
The horizontal axis
in the Cartesian Coordinate System
YZ
Y-Axis
The vertical axis in
the Cartesian Coordinate System
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