Glossary
Every term, in plain English.
275 micro and macro terms, each defined in one to three sentences a first-year student can read without a second glossary. Every entry links to the lesson that teaches it and, where a diagram shows it, to the graph where you can watch it move.
275 terms
Economic foundations
- Accounting costMicroOnly the money actually paid out: wages, rent, materials, interest.
- CapitalMicro · MacroGoods made in order to make other goods: machines, tools, factories, software.
- Command economyMicro · MacroAn economy where the government owns most resources and a central plan decides what gets produced, how and for whom.
- Economic costMicroThe full cost of a choice: the money you pay out (explicit cost) plus the value of what you gave up to make it (implicit cost).
- Economic profitMicroRevenue minus economic cost, so revenue minus every explicit and implicit cost.
- EntrepreneurshipMicroThe work of spotting an opportunity, combining land, labor and capital to chase it, and bearing the risk if it fails.
- Factors of productionMicro · MacroThe four inputs every economy combines to make goods and services: land (natural resources), labor (people's work), capital (tools, machines and buildings) and entrepreneurship (the people who organise the other three and take the risk).
- Increasing opportunity costMicroThe reason a production possibilities curve bows outward: as you make more of one good, each extra unit costs more of the other good, because you keep pulling in resources that were better suited to what you are giving up.
- Marginal analysisMicroDeciding by comparing the extra benefit and the extra cost of one more unit, not the total.
- Marginal benefit (MB)MicroThe extra satisfaction or revenue from one more unit of something.
- Marginal cost (MC)MicroThe extra cost of producing one more unit.
- Market economyMicro · MacroAn economy where individuals and firms own resources and decide what to make and buy, with prices coordinating the whole thing.
- Mixed economyMicro · MacroAn economy that relies mostly on markets but has the government provide some goods, regulate others and redistribute income.
- Opportunity costMicro · MacroThe value of the best alternative you give up when you choose something.
- Production possibilities curve (PPC)Micro · MacroA graph showing every combination of two goods an economy can make when it uses all its resources fully.
- ScarcityMicro · MacroThe gap between what people want and what there is to go around.
- The three fundamental questionsMicro · MacroEvery economy has to answer what to produce, how to produce it and who gets it.
Supply and demand
- ComplementsMicroTwo goods used together, so when one gets pricier demand for the other falls.
- Demand curveMicroThe line on a price-quantity graph that shows how much buyers want at every price.
- Demand scheduleMicroA table listing how much buyers would purchase at each of several prices.
- Demand shiftersMicroThe five things that move the whole demand curve: tastes, prices of related goods, income, buyers' expectations and the number of buyers.
- Double shiftMicroWhen demand and supply move at the same time.
- Income effectMicroWhen a good's price rises your money does not stretch as far, so you feel poorer and buy less even though your paycheck has not changed.
- Inferior goodMicroA good people buy less of as their income rises, because they can now afford something they like better.
- Invisible handMicroAdam Smith's image for how self-interested buyers and sellers, guided only by prices, end up producing what society wants as if led by an unseen hand.
- Law of demandMicroAll else equal, when the price of a good rises people buy less of it, and when the price falls they buy more.
- Law of supplyMicroAll else equal, when the price of a good rises sellers offer more of it, and when the price falls they offer less.
- Market demandMicroThe total quantity all buyers in a market want at each price.
- Market equilibriumMicroThe price at which the quantity buyers want equals the quantity sellers offer, so nothing is left over and nobody is left wanting.
- Market supplyMicroThe total quantity all sellers offer at each price, found by adding every firm's quantity supplied at that price.
- Movement along the curveMicroA change in quantity demanded or supplied caused only by a change in the good's own price.
- Normal goodMicroA good people buy more of when their income rises and less of when it falls.
- Price mechanismMicroThe way prices coordinate an economy without anyone in charge.
- Quantity demandedMicroThe amount of a good buyers are willing and able to buy at one particular price.
- Quantity suppliedMicroThe amount of a good sellers are willing and able to offer at one particular price.
- Self-correcting marketMicroA market where a shortage pushes the price up and a surplus pushes it down, so the price finds its way back to equilibrium on its own.
- Shift of the curveMicroThe whole demand or supply curve moves to a new position because something other than the good's own price changed: income, tastes, the price of a related good, input costs, technology, expectations or the number of buyers or sellers.
- Shortage (excess demand)MicroWhen the price sits below equilibrium, buyers want more than sellers offer and the difference is the shortage.
- SubstitutesMicroTwo goods that do the same job for the buyer, so when one gets pricier demand for the other rises.
- Substitution effectMicroWhen a good gets pricier, buyers switch toward cheaper alternatives, so they buy less of it.
- Supply curveMicroThe line on a price-quantity graph showing how much sellers offer at every price.
- Supply scheduleMicroA table listing how much sellers would offer at each of several prices.
- Supply shiftersMicroThe things that move the whole supply curve: input prices, the number of sellers, technology, sellers' expectations, prices of related goods in production, and government taxes, subsidies and regulation.
- Surplus (excess supply)MicroWhen the price sits above equilibrium, sellers offer more than buyers want and the difference is the surplus.
Elasticity
- Cross-price elasticity of demand (XED)MicroHow demand for one good responds to a change in the price of another, measured as the percentage change in quantity of good X divided by the percentage change in the price of good Y.
- Determinants of PEDMicroWhat makes demand for a good more or less elastic: how many close substitutes it has, whether it is a necessity or a luxury, how big a share of income it takes, how narrowly the good is defined, and how much time buyers have to adjust.
- Determinants of PESMicroWhat makes supply more or less elastic: the time firms have to adjust, whether they hold spare capacity or stocks, how easily inputs can be found, and how mobile resources are between uses.
- Elastic demandMicroDemand where quantity responds more than proportionally to price, so PED is greater than 1.
- Income elasticity of demand (YED)MicroHow strongly demand responds to a change in income, measured as the percentage change in quantity demanded divided by the percentage change in income.
- Inelastic demandMicroDemand where quantity barely responds to price, so PED is less than 1.
- Luxury goodMicroA good whose demand rises faster than income, so its income elasticity is above 1.
- Midpoint formulaMicroA way to compute percentage changes that gives the same elasticity whether the price goes up or down: divide the change by the average of the start and end values rather than the starting value.
- Perfectly elastic demandMicroDemand where buyers will take any amount at one price and nothing at a higher price, so PED is infinite and the curve is a horizontal line.
- Perfectly inelastic demandMicroDemand where quantity does not change at all when price changes, so PED is zero and the curve is a vertical line.
- Price elasticity of demand (PED)MicroHow strongly quantity demanded responds to a change in price, measured as the percentage change in quantity divided by the percentage change in price.
- Price elasticity of supply (PES)MicroHow strongly quantity supplied responds to a change in price, measured as the percentage change in quantity supplied divided by the percentage change in price.
- Total revenue (TR)MicroEverything a seller takes in: price times quantity sold, TR = P × Q.
- Total revenue testMicroA shortcut for judging elasticity from what happens to revenue.
- Unit elastic demandMicroDemand where a given percentage change in price produces exactly the same percentage change in quantity, so PED equals 1.
Consumer theory
- Axioms of consumer preferenceMicroThe three assumptions that let us draw indifference curves: completeness (you can always rank two bundles), transitivity (if you prefer A to B and B to C you prefer A to C) and more is better (a bundle with more of everything wins).
- Budget lineMicroEvery combination of two goods a consumer can just afford with a given income at given prices.
- Corner solutionMicroA best bundle that contains none of one good, sitting at the end of the budget line rather than at a tangency.
- Engel curveMicroA graph of how much of a good a consumer buys at each level of income, prices held fixed.
- Giffen goodMicroA rare good people buy more of when its price rises, so its demand curve slopes up.
- Indifference curveMicroA line joining every bundle of two goods that gives a consumer the same satisfaction.
- Marginal rate of substitution (MRS)MicroHow much of one good a consumer will give up for one more unit of the other while staying equally happy.
- Marginal utility (MU)MicroThe extra satisfaction from one more unit of a good.
- Network effectsMicroWhen the value of a good to one person depends on how many others use it.
- Ordinal vs cardinal utilityMicroOrdinal utility only ranks bundles (this one is better than that one).
- Perfect substitutes and perfect complementsMicroTwo limiting kinds of preference.
- Price-consumption curve (PCC)MicroThe path of best bundles traced out as the price of one good changes while income and the other price stay fixed.
- Slutsky equationMicroThe formula that splits the total effect of a price change on quantity into a substitution effect (the swap toward the cheaper good at fixed satisfaction) and an income effect (the change in buying power).
- Tangency conditionMicroThe rule for the best affordable bundle: pick the point where the budget line just touches the highest indifference curve.
- UtilityMicroThe satisfaction a person gets from consuming something.
Production and costs
- Average fixed cost (AFC)MicroFixed cost per unit of output, AFC = FC / Q.
- Average product of labor (APL)MicroOutput per worker: total output divided by the number of workers.
- Average total cost (ATC)MicroTotal cost per unit of output, ATC = TC / Q.
- Average variable cost (AVC)MicroVariable cost per unit of output, AVC = VC / Q.
- Cobb-Douglas production functionMicroThe workhorse formula Q = A K L, where output depends on capital K and labor L raised to fixed powers and scaled by technology A.
- Economies and diseconomies of scaleMicroEconomies of scale: cost per unit falls as the firm grows, because fixed costs spread out and big firms can specialise and buy in bulk.
- Fixed cost (FC)MicroA cost that does not change with output in the short run, like rent on the factory.
- IsoquantMicroA curve showing every combination of two inputs, such as workers and machines, that produces the same amount of output.
- Law of diminishing marginal returnsMicroAdd more of one input to a fixed amount of the others and eventually each extra unit adds less output than the one before.
- Long-run average cost (LRAC)MicroThe lowest cost per unit at each output once the firm can choose any plant size.
- Marginal product of labor (MPL)MicroThe extra output from hiring one more worker, holding other inputs fixed.
- Minimum efficient scale (MES)MicroThe smallest output at which a firm reaches the bottom of its long-run average cost curve.
- Production functionMicroThe relationship between the inputs a firm uses and the most output it can get from them.
- Returns to scaleMicroWhat happens to output when a firm scales up every input by the same proportion.
- Short run vs long runMicroThe short run is the period in which at least one input, usually the factory or its machines, cannot be changed.
- Sunk costMicroA cost already paid that cannot be recovered whatever you do next.
- Total cost (TC)MicroFixed cost plus variable cost, TC = FC + VC.
- Variable cost (VC)MicroA cost that rises with output, like materials and hourly wages.
Perfect competition
- Long-run competitive equilibriumMicroThe resting point of a competitive industry once firms have finished entering and leaving.
- Marginal revenue (MR)MicroThe extra revenue from selling one more unit.
- Market structureMicroHow a market is organised: how many sellers there are, whether their products are identical, and how easy it is to enter.
- MR = MC ruleMicroThe profit-maximising rule for any firm: produce every unit whose marginal revenue exceeds its marginal cost and stop at the output where the two are equal.
- Perfect competitionMicroA market with many small buyers and sellers, an identical product, and free entry and exit, so no single firm can influence the price.
- Price takerMicroA firm so small relative to its market that it must accept the going price and can sell as much as it likes at that price.
- Short-run supply curveMicroFor a competitive firm, the part of its marginal cost curve that lies above average variable cost.
- Shutdown ruleMicroIn the short run a firm should keep producing as long as price covers average variable cost, even if it is making a loss, because fixed costs are owed either way.
Market analysis and welfare
- Allocative efficiencyMicroProducing exactly the quantity where the value buyers place on the last unit equals what it costs to make, so total surplus is as big as it can be.
- Consumer surplusMicroThe gain buyers get from paying less than the most they would have paid.
- Deadweight loss (DWL)MicroTotal surplus that disappears when a market produces more or less than the efficient quantity.
- Market failureMicroAny situation where a free market on its own produces an inefficient outcome.
- Negative externalityMicroA cost that a transaction imposes on someone outside it, like factory smoke breathed by neighbours.
- Price ceilingMicroA legal maximum price.
- Price floorMicroA legal minimum price.
- Producer surplusMicroThe gain sellers get from receiving more than the least they would have accepted.
- SubsidyMicroA payment from the government per unit produced or bought.
- Tax incidenceMicroWho really bears a tax, as opposed to who hands the money to the government.
- Tax wedgeMicroThe gap a per-unit tax opens between the price buyers pay and the price sellers keep.
- Total surplusMicroConsumer surplus plus producer surplus: the whole gain a market creates for buyers and sellers together.
- Willingness to payMicroThe most a buyer would hand over for a unit of a good.
Monopoly
- Barriers to entryMicroWhatever stops new firms from coming in to compete away a monopolist's profit: control of a key resource, a patent or licence, economies of scale so large that one firm can serve the market cheapest, or network effects.
- Deadweight loss of monopolyMicroThe surplus lost because a monopolist sells fewer units than a competitive market would.
- Market powerMicroA firm's ability to raise its price above marginal cost without losing all its customers.
- MonopolyMicroA market with a single seller and no close substitutes for its product.
- Monopoly profit maximizationMicroThe monopolist picks the quantity where marginal revenue equals marginal cost, then reads the price off the demand curve above that quantity.
- Natural monopolyMicroAn industry where one firm can supply the whole market at a lower cost per unit than two or more could, because average cost keeps falling over the entire range of demand.
- Price discriminationMicroCharging different buyers different prices for the same product for reasons unrelated to cost.
- The monopolist's demand and marginal revenueMicroA monopolist's demand curve is the market demand curve, and its marginal revenue lies below it.
- Third-degree price discriminationMicroSplitting customers into groups with different elasticities and charging each group its own price, like student and adult cinema tickets.
Oligopoly and game theory
- Bertrand modelMicroA model of oligopoly where firms choose prices rather than quantities.
- CartelMicroA group of firms that agree to restrict output or fix prices so they can act like a single monopolist and share the profit.
- Cournot modelMicroA model of oligopoly where firms choose quantities at the same time and the market price follows from the total.
- Dominant strategyMicroA choice that is best for a player no matter what the other players do.
- Monopolistic competitionMicroA market with many firms selling similar but not identical products, like restaurants or clothing brands, with easy entry.
- Nash equilibriumMicroA set of choices, one per player, where nobody can do better by changing only their own choice given what everyone else is doing.
- OligopolyMicroA market dominated by a few large firms whose decisions affect each other, like airlines or mobile networks.
- Payoff matrixMicroA table showing each player's outcome for every combination of choices in a game.
- Prisoner's dilemmaMicroA game in which each player's dominant strategy leads to an outcome worse for both than if they had cooperated.
- Repeated gameMicroA game the same players play over and over.
- Strategic interactionMicroA situation where the best choice for one player depends on what the other players choose.
Factor markets
- Backward-bending labor supplyMicroA labor supply curve that slopes up at low wages and then bends back at high ones.
- Derived demandMicroDemand for an input that exists only because there is demand for what the input makes.
- Equilibrium wageMicroThe wage at which the number of workers firms want to hire equals the number who want the job.
- Labor demandMicroHow many workers firms want to hire at each wage.
- Labor supplyMicroHow many hours or workers are offered at each wage.
- Marginal factor cost (MFC)MicroThe extra cost of hiring one more worker.
- Marginal revenue product (MRP)MicroThe extra revenue a firm earns from hiring one more worker: the worker's marginal product times the marginal revenue from selling that output.
- Minimum wageMicroA legal floor under the wage.
- MonopsonyMicroA market with a single buyer, such as the only hospital in a town hiring nurses.
Risk and behavioral economics
- Certainty equivalentMicroThe sure amount of money a person would accept instead of a gamble.
- Expected valueMicroThe average outcome you would get if a gamble were repeated many times: each possible payoff weighted by its probability and added up.
- Framing effectMicroMaking a different choice depending on how the same options are described.
- InsuranceMicroA contract that trades a small certain payment (the premium) for protection against a large uncertain loss.
- Prospect theoryMicroA description of how people actually judge risky choices.
- Risk aversionMicroPreferring a sure thing to a gamble with the same expected value.
- Risk premiumMicroThe amount a risk-averse person would pay to swap a gamble for its expected value with certainty, or equivalently the extra expected return they demand for holding a risky asset.
- Variance and standard deviationMicroMeasures of how spread out a gamble's outcomes are around its expected value.
Efficiency and trade
- Absolute advantageMicro · MacroBeing able to produce more of a good than someone else with the same resources.
- AutarkyMicro · MacroComplete self-sufficiency: a person or country consuming only what it produces itself, with no trade.
- Comparative advantageMicro · MacroBeing able to produce a good at a lower opportunity cost than someone else, giving up less of other things to make it.
- Contract curve and the coreMicroThe contract curve is the set of every Pareto efficient division in an Edgeworth box, where the two people's indifference curves just touch.
- Edgeworth boxMicroA diagram for two people sharing fixed amounts of two goods.
- First welfare theoremMicroIf everyone maximises, markets are perfectly competitive, and there are no externalities or public goods, then the competitive equilibrium is Pareto efficient.
- Pareto efficiencyMicroAn allocation where nobody can be made better off without making someone else worse off.
- Partial vs general equilibriumMicroPartial equilibrium studies one market on its own with everything else held fixed.
- Second welfare theoremMicroAny Pareto efficient allocation can be reached as a competitive equilibrium if you first redistribute starting wealth with lump-sum transfers.
- Specialization and gains from tradeMicro · MacroEach producer focusing on its comparative-advantage good and trading for the rest.
- Terms of tradeMicro · MacroThe rate at which one good is exchanged for another, like one fish for one coconut.
Information economics
- Adverse selectionMicroWhen the people most likely to take a deal are the ones the other side least wants.
- Asymmetric informationMicroWhen one side of a deal knows something important that the other does not.
- Moral hazardMicroWhen being protected from a risk makes someone take less care, because they no longer bear the full cost.
- Principal-agent problemMicroWhen one person (the principal) hires another (the agent) to act for them but cannot fully watch what the agent does, and the agent's interests differ.
- ScreeningMicroWhen the uninformed side of a deal designs a menu of options so that people sort themselves by what they choose.
- SignalingMicroWhen the informed side of a deal takes a costly action to reveal what it knows.
- The lemons problemMicroAkerlof's used-car story.
Macro foundations
- Circular flow of incomeMacroA diagram showing money moving round the economy: households sell labor and other resources to firms and spend the income on the goods firms make.
- Leakages and injectionsMacroLeakages are income that leaves the spending circle: saving, taxes and imports.
- MacroeconomicsMacroThe study of the economy as a whole: total output, the overall price level, unemployment, growth and the policies that move them.
- MicroeconomicsMicro · MacroThe study of individual choices and single markets: how a household spends, how a firm sets output, how the price of coffee is set.
GDP and output
- Components of GDPMacroEverything bought in an economy sorted by who bought it: consumption by households (C), investment by firms in capital and inventories (I), government purchases (G), and net exports, which is exports minus imports (NX).
- GDP deflatorMacroA price index for everything in GDP: nominal GDP divided by real GDP, times 100.
- Gross domestic product (GDP)MacroThe market value of all final goods and services produced inside a country in a year.
- Human Development Index (HDI)MacroA United Nations score that combines income per person with life expectancy and years of schooling, so wellbeing is not judged by money alone.
- Nominal GDPMacroGDP measured at the prices of the year it was produced.
- Real GDPMacroGDP measured at the prices of a fixed base year, so it changes only when the quantity of goods and services changes.
- What GDP missesMacroGDP leaves out unpaid work at home, the underground economy, leisure, the quality of the environment and how income is shared.
Inflation
- Consumer price index (CPI)MacroThe cost of a fixed basket of goods a typical household buys, expressed relative to a base year set at 100.
- Cost-push inflationMacroInflation caused by production costs rising, usually a jump in oil or wages, so firms charge more at every level of output.
- DeflationMacroA sustained fall in the overall price level.
- Demand-pull inflationMacroInflation caused by total spending growing faster than the economy can produce, so buyers bid prices up.
- Headline vs core inflationMacroHeadline inflation is the change in the full CPI.
- HyperinflationMacroInflation so fast, conventionally more than 50 percent a month, that money stops working.
- InflationMacroA sustained rise in the overall level of prices, which is the same as a fall in what each unit of money buys.
- Laspeyres price indexMacroA price index that values a basket fixed at base-year quantities at today's prices.
- Menu costsMacroThe cost of changing prices: reprinting menus, relabelling shelves, updating catalogues and systems.
- Redistribution from unexpected inflationMacroInflation that nobody planned for moves wealth from lenders to borrowers, because loans are repaid in money that buys less, and from people on fixed incomes to everyone else.
- Shoe-leather costsMacroThe time and effort people spend keeping less cash on hand when inflation is high, like making extra trips to the bank.
- Substitution biasMacroThe CPI's tendency to overstate inflation because its basket is fixed.
Unemployment
- Cyclical unemploymentMacroJoblessness caused by a downturn in the whole economy, when total spending falls and firms lay people off.
- Discouraged workersMacroPeople who want a job but have stopped looking because they believe none is available.
- Frictional unemploymentMacroShort spells of joblessness while people move between jobs or look for their first one.
- Labor forceMacroEveryone of working age who either has a job or is looking for one.
- Labor-force participation rateMacroThe share of the working-age population that is in the labor force, working or looking.
- Natural rate of unemploymentMacroThe unemployment rate when the economy is at full employment: frictional plus structural, with no cyclical unemployment.
- Okun's lawMacroThe rule of thumb linking output to unemployment: each percentage point of unemployment above the natural rate goes with output roughly 2 percent below potential.
- Structural unemploymentMacroJoblessness caused by a mismatch between the skills workers have and the skills employers want, or between where the workers are and where the jobs are.
- Unemployment rateMacroThe share of the labor force that has no job and is actively looking for one.
Aggregate demand and supply
- Aggregate demand (AD)MacroThe total amount of a country's output that households, firms, the government and foreigners plan to buy at each price level.
- Business cycleMacroThe rise and fall of real GDP around its long-run trend: expansion, peak, recession, trough, and back to expansion.
- Inflationary gapMacroWhen real GDP sits above potential output, so the short-run equilibrium lies to the right of LRAS.
- Long-run aggregate supply (LRAS)MacroA vertical line at potential output.
- Macroeconomic equilibriumMacroShort-run equilibrium is where aggregate demand crosses short-run aggregate supply, fixing the price level and real GDP for now.
- Output gapMacroThe distance between actual real GDP and potential output.
- Potential outputMacroThe real GDP an economy produces when every worker who wants a job at the going wage has one and factories run at normal capacity.
- Recessionary gapMacroWhen real GDP sits below potential output, so the short-run equilibrium lies to the left of LRAS.
- Self-correctionMacroThe economy's own way of closing an output gap.
- Short-run aggregate supply (SRAS)MacroThe total output firms are willing to produce at each price level while wages and some other input costs are stuck.
- StagflationMacroRising prices and falling output at the same time, the signature of a negative supply shock.
- What shifts aggregate demandMacroAnything that changes spending at a given price level: consumer confidence and wealth, business expectations, interest rates set by the central bank, government spending and taxes, and foreign income and exchange rates.
Fiscal policy
- Automatic stabilizersMacroParts of the budget that soften the cycle without anyone voting: in a recession tax receipts fall and unemployment benefits rise on their own, propping up demand.
- Budget deficit and national debtMacroA budget deficit is the amount government spending exceeds tax revenue in a year, which it covers by borrowing.
- Crowding outMacroWhen government borrowing to fund a deficit pushes up interest rates and squeezes out private investment that would otherwise have happened.
- Fiscal policyMacroThe government using its budget, spending and taxes, to steer total demand.
- Marginal propensity to consume (MPC)MacroThe fraction of an extra dollar of income that a household spends rather than saves.
- Policy lagsMacroThe delays that make stabilization hard: recognising the problem, deciding what to do, and waiting for the effect.
- Spending multiplierMacroHow much total output rises for each dollar of new spending, because the first dollar becomes someone's income, part of which they spend, and so on.
- Tax multiplierMacroHow much output changes per dollar of tax cut.
Money and banking
- Commodity money vs fiat moneyMacroCommodity money has value in itself, like gold coins.
- Fisher equationMacroThe link between the two interest rates: nominal rate equals real rate plus expected inflation, i = r + .
- Fractional-reserve bankingMacroA system where banks keep only a fraction of deposits as reserves and lend out the rest.
- Loanable funds marketMacroThe market where savers supply funds and borrowers, mainly firms investing and governments running deficits, demand them.
- MoneyMacroAnything widely accepted in payment.
- Money demandMacroHow much money people want to hold as cash and checking balances rather than as bonds or other assets.
- Money marketMacroThe graph where a downward-sloping money demand curve meets the vertical money supply set by the central bank.
- Money multiplierMacroHow many dollars of deposits the banking system can create from each dollar of new reserves: at most (1)/(reserve ratio).
- Money supply (M1 and M2)MacroThe total amount of money in the economy, counted in nested baskets.
- National savingMacroEverything a country sets aside rather than consumes: private saving by households and firms plus public saving, which is the government's surplus (or, if it runs a deficit, a negative number).
- Nominal interest rateMacroThe interest rate as quoted, before adjusting for inflation.
- Real interest rateMicro · MacroThe nominal interest rate minus the inflation rate: the true reward for lending and the true cost of borrowing in terms of goods.
- Reserve requirementMacroThe minimum share of deposits a bank must hold back as reserves rather than lend.
Monetary policy
- Central bank credibilityMacroWhether people believe the central bank will do what it says about inflation.
- Central bank toolsMacroThe levers a central bank pulls to change the money supply: buying or selling government bonds (open market operations), setting the discount rate on loans to banks, setting the reserve requirement, and, in recent years, paying interest on reserves and buying assets outright.
- Discount rateMacroThe interest rate a central bank charges commercial banks that borrow reserves from it directly.
- Forward guidanceMacroA central bank telling the public what it plans to do with interest rates in the future, so that expectations shift today.
- Inflation biasMacroThe extra inflation an economy ends up with when the central bank has discretion and everyone expects it to give in to the temptation to overstimulate.
- Interest on reserves (IOR)MacroInterest the central bank pays banks on the reserves they keep with it.
- Liquidity trapMacroA situation where interest rates are already near zero, so pumping in more money just gets held as cash and does nothing to spending.
- Lucas critiqueMacroThe warning that you cannot predict the effect of a new policy from patterns in old data, because people change their behaviour once the policy changes.
- Monetary policyMacroThe central bank steering the economy by changing the money supply and interest rates.
- Monetary policy transmissionMacroThe chain from a central bank decision to the real economy: a lower policy rate lowers market interest rates, cheaper borrowing lifts investment and consumer spending, aggregate demand shifts right, and output and prices rise.
- Open market operations (OMO)MacroThe central bank buying or selling government bonds.
- Policy rate (federal funds rate)MacroThe short-term interest rate a central bank targets, in the United States the federal funds rate at which banks lend reserves to each other overnight.
- Quantitative easing (QE)MacroA central bank buying long-term bonds and other assets in bulk to push down long-term interest rates once the short-term policy rate is already at zero.
- Time inconsistencyMacroThe problem that the best plan announced in advance stops being the best plan once people have acted on it.
- Zero lower boundMacroThe floor under nominal interest rates.
Phillips curve
- DisinflationMacroA fall in the inflation rate, prices still rising but more slowly.
- Inflation expectationsMacroWhat people think inflation will be, which feeds straight into the wages they ask for and the prices they set.
- Long-run Phillips curve (LRPC)MacroA vertical line at the natural rate of unemployment.
- Short-run Phillips curve (SRPC)MacroThe downward-sloping trade-off between inflation and unemployment that holds while expected inflation is fixed.
Economic growth
- Capital deepeningMacroRaising the amount of capital per worker, giving each worker more machines to work with.
- Economic growthMacroA sustained rise in real GDP per person, which is the same thing as the production possibilities curve or LRAS shifting outward.
- Endogenous growthMacroGrowth theory in which technology is not a gift from outside but the result of choices inside the economy: research spending, education, patents.
- Golden-rule saving rateMacroThe saving rate that makes long-run consumption per person as high as possible.
- InstitutionsMacroThe rules of the game that decide whether effort pays: secure property rights, honest courts, stable government, open markets.
- Lorenz curve and Gini coefficientMacroThe Lorenz curve plots the share of total income earned by the poorest x percent of people.
- Rule of 70MacroA shortcut for compounding: divide 70 by an annual growth rate to get the years it takes to double.
- Solow growth modelMacroThe standard model of growth.
- Sustainable developmentMacroGrowth that meets today's needs without wrecking the ability of future generations to meet theirs.
- Total factor productivity (TFP)MacroThe part of output growth that cannot be explained by adding more workers or more capital: better technology, better organisation, better institutions.
Open economy
- AppreciationMacroA rise in a currency's price in terms of others, so each dollar buys more euros.
- Balance of paymentsMacroThe record of every transaction between a country and the rest of the world in a year, split into the current account (trade and income) and the capital and financial account (investment flows).
- Capital and financial accountMacroThe part of the balance of payments that records purchases of assets across borders: foreigners buying a country's bonds, shares and factories, and residents buying assets abroad.
- Current accountMacroThe part of the balance of payments that records trade in goods and services plus income flows and transfers.
- DepreciationMacroA fall in a currency's price in terms of others, so each dollar buys fewer euros.
- Exchange rateMacroThe price of one currency in terms of another, like 0.9 euros per dollar.
- Fixed vs floating exchange ratesMacroUnder a floating rate the market sets the currency's price and it moves every day.
- Impossible trinityMacroA country can have at most two of three things: a fixed exchange rate, free movement of capital across its borders, and an independent monetary policy.
- J-curveMacroThe path the trade balance follows after a currency depreciates: it gets worse first, because contracts and habits take time to change while imports are already pricier, then improves as exports pick up.
- Purchasing power parity (PPP)MacroThe idea that in the long run exchange rates settle where the same basket of goods costs the same in every country.
- Real exchange rateMacroThe nominal exchange rate adjusted for price levels: how many foreign baskets of goods one domestic basket buys.
- TariffMacroA tax on imports.
- What moves exchange ratesMacroAnything that changes who wants the currency: relative interest rates (higher rates attract foreign savers), relative inflation (higher inflation erodes a currency), relative income (richer countries import more), tastes for each country's goods, and speculation about where the rate is heading.
Definitions are the start. The course is the rest.
Every term here is taught in context in the full Econ Academy course, with worked examples, interactive graphs and practice that remembers what you get wrong.
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