Chapter #
1
Term
<b>barter</b>
1
<b>command
economy</b>
1
<b>consumption</b
>
<b>division of
labour</b>
1
1
<b>economy</b>
1
<b>factors of
production</b>
1
<b>free-market
economy</b>
1
<b>goods</b>
1
<b>macroeconomics
</b>
1
<b>microeconomics
</b>
1
<b>mixed
economy</b>
1
<b>opportunity
cost</b>
1
<b>production
possibilities
boundary</b>
1
1
<b>production</b>
<b>resource
allocation</b>
1
<b>services</b>
1
<b>specialization
of labour</b>
1
<b>traditional
economy</b>
<b>transnational
corporations
(TNCs)</b>
1
Definition
An economic system in which goods and
services are traded directly for other
goods and services.
An economy in which most economic
decisions are made by a central planning
authority.
The act of using goods or services to
satisfy wants.
The breaking up of a production process
into a series of specialized tasks, each
done by a different worker.
A system in which scarce resources are
allocated among competing uses.
Resources used to produce goods and
services; frequently divided into the
basic categories of land, labour, and
capital.
An economy in which most economic
decisions are made by private households
and firms.
Tangible commodities, such as cars or
shoes.
The study of the determination of
economic aggregates such as total output,
the price level, employment, and growth.
The study of the allocation of resources
as it is affected by the workings of the
price system.
An economy in which some economic
decisions are made by firms and
households and some by the government.
The cost of using resources for a certain
purpose, measured by the benefit given up
by not using them in their best
alternative use.
A curve showing which alternative
combinations of commodities can just be
attained if all available resources are
used efficiently; it is the boundary
between attainable and unattainable
output combinations.
The act of making goods or services.
The allocation of an economy's scarce
resources of land, labour, and capital
among alternative uses.
Intangible commodities, such as haircuts
or medical care.
The specialization of individual workers
in the production of particular goods or
services.
An economy in which behaviour is based
mostly on tradition.
Firms that have operations in more than
one country. Also called <i>multinational
enterprises (MNEs).</i>
Sound File
2
<b>crosssectional
data</b>
2
<b>economic
model</b>
2
<b>endogenous
variable</b>
2
<b>exogenous
variable</b>
2
<b>index
number</b>
2
<b>normative
statement</b>
<b>positive
statement</b>
2
2
<b>scatter
diagram</b>
2
<b>time-series
data</b>
2
<b>variable</b>
3
<b>absolute
price</b>
3
<b>change in
demand</b>
3
<b>change in
quantity
demanded</b>
3
<b>change in
quantity
supplied</b>
A set of measurements or observations
made at the same time across several
different units (such as households,
firms, or countries).
A term used in several related ways:
sometimes for an abstraction designed to
illustrate some point but not designed to
generate testable hypotheses, and
sometimes as a synonym for theory.
A variable that is explained within a
theory. Sometimes called an <i>induced
variable</i>or a <i>dependent
variable.</i>
A variable that is determined outside the
theory. Sometimes called an <i>autonomous
variable</i> or an <i>independent
variable.</i>
An average that measures change over time
of such variables as the price level and
industrial production; conventionally
expressed as a percentage relative to a
base period, which is assigned the value
100.
A statement about what ought to be as
opposed to what actually is.
A statement about what actually is (was
or will be), as opposed to what ought to
be.
A graph of statistical observations of
paired values of two variables, one
measured on the horizontal and the other
on the vertical axis. Each point on the
coordinate grid represents the values of
the variables for a particular unit of
observation.
A set of measurements or observations
made repeatedly at successive periods of
time.
Any well-defined item, such as the price
or quantity of a commodity, that can take
on various specific values.
The amount of money that must be spent to
acquire one unit of a commodity. Also
called <i>money price.</i>
A change in the quantity demanded at each
possible price of the commodity,
represented by a shift in the whole
demand curve.
A change in the specific quantity of the
good demanded, represented by a change
from one point on a demand curve to
another point, either on the original
demand curve or on a new one.
A change in the specific quantity
supplied, represented by a change from
one point on a supply curve to another
3
<b>change in
supply</b>
3
<b>comparative
statics</b>
3
<b>complements</b
>
<b>demand
curve</b>
3
3
<b>demand
schedule</b>
3
<b>demand</b>
3
<b>disequilibrium
price</b>
<b>disequilibrium
</b>
<b>equilibrium
price</b>
3
3
3
<b>excess
demand</b>
3
<b>excess
supply</b>
3
<b>market</b>
3
<b>quantity
demanded</b>
3
<b>quantity
supplied</b>
<b>relative
price</b>
3
3
<b>substitutes</b
>
3
<b>supply
curve</b>
3
<b>supply
schedule</b>
point, either on the original supply
curve or on a new one.
A change in the quantity supplied at each
possible price of the commodity,
represented by a shift in the whole
supply curve.
The derivation of predictions by
analyzing the effect of a change in some
exogenous variable on the equilibrium.
Goods that tend to be used jointly.
The graphical representation of the
relationship between quantity demanded
and the price of a commodity, other
things being equal.
A table showing the relationship between
quantity demanded and the price of a
commodity, other things being equal.
The entire relationship between the
quantity of a commodity that buyers wish
to purchase and the price of that
commodity, other things being equal.
A price at which quantity demanded does
not equal quantity supplied.
A situation in a market in which there is
excess demand or excess supply.
The price at which quantity demanded
equals quantity supplied. Also called the
market-clearing price.
A situation in which, at the given price,
quantity demanded exceeds quantity
supplied.
A situation in which, at the given price,
quantity supplied exceeds quantity
demanded.
Any situation in which buyers and sellers
can negotiate the exchange of goods or
services.
The amount of a good or service that
consumers wish to purchase in some time
period.
The amount of a commodity that producers
wish to sell in some time period.
The ratio of the money price of one
commodity to the money price of another
commodity; that is, a ratio of two
absolute prices.
Goods that can be used in place of
another good to satisfy similar needs or
desires.
The graphical representation of the
relationship between quantity supplied
and the price of a commodity, other
things being equal.
A table showing the relationship between
quantity supplied and the price of a
3
<b>supply</b>
4
<b>cross
elasticity of
demand</b>
4
<b>excise tax</b>
4
<b>income
elasticity of
demand</b>
<b>normal
good</b>
4
4
<b>inferior
good</b>
4
<b>inelastic
demand</b>
4
<b>elastic
demand</b>
4
<b>price
elasticity of
demand(η)</b>
<b>price
elasticity of
supply</b>
<b>tax
incidence</b>
4
4
5
<b>black
market</b>
5
<b>generalequilibrium
analysis</b>
<b>partialequilibrium
analysis</b>
<b>sellers'
preferences</b>
<b>consumer
surplus</b>
5
5
6
6
<b>Giffen
good</b>
commodity, other things being equal.
The entire relationship between the
quantity of some commodity that producers
wish to sell and the price of that
commodity, other things being equal.
A measure of the responsiveness of the
quantity of one commodity demanded to
changes in the price of another
commodity.
A tax on the sale of a particular
commodity.
A measure of the responsiveness of
quantity demanded to a change in income.
A good for which quantity demanded rises
as income rises—its income elasticity is
positive.
A good for which quantity demanded falls
as income rises—its income elasticity is
negative.
Following a given percentage change in
price, there is a smaller percentage
change in quantity demanded; elasticity
less than 1.
Following a given percentage change in
price, there is a greater percentage
change in quantity demanded; elasticity
greater than 1.
A measure of the responsiveness of
quantity demanded to a change in the
commodity's own price.
A measure of the responsiveness of
quantity supplied to a change in the
commodity's own price.
The location of the burden of a tax; that
is, the identity of the ultimate bearer
of the tax.
A situation in which goods are sold
illegally at prices that violate a legal
price control.
The analysis of all the economy's markets
simultaneously, recognizing the
interactions among the various markets.
The analysis of a single market in
isolation, taking as given the outcomes
in all other markets.
Allocation of commodities in excess
demand by decisions of the sellers.
The difference between the total value
that consumers place on all units
consumed of a commodity and the payment
that they actually make to purchase that
amount of the commodity.
An inferior good for which the negative
income effect outweighs the substitution
effect so that the demand curve is
6
<b>income
effect</b>
6
<b>real
income</b>
6
<b>substitution
effect</b>
6
<b>total
utility</b>
6
<b>marginal
utility</b>
6
<b>utility</b>
7
<b>average
variable cost
(<i>AVC</i>)</b>
<b>marginal cost
(<i>MC</i>)</b>
7
7
7
7
<b>marginal
product(<i>MP</i>
)</b>
<b>average total
cost
(<i>ATC</i>)</b>
7
<b>average fixed
cost
(<i>AFC</i>)</b>
<b>bond</b>
7
<b>dividends</b>
7
<b>economic
profits</b>
7
<b>fixed
factor</b>
<b>intermediate
7
positively sloped.
The change in the quantity of a good
demanded resulting from a change in real
income (holding relative prices
constant).
Income expressed in terms of the
purchasing power of money income, that
is, the quantity of goods and services
that can be purchased with the money
income.
The change in the quantity of a good
demanded resulting from a change in its
relative price (holding real income
constant).
The total satisfaction resulting from the
consumption of a given commodity by a
consumer.
The additional satisfaction obtained by a
consumer from consuming one unit more of
a good or service.
The satisfaction or well-being that a
consumer receives from consuming some
good or service.
Total variable costs divided by the
number of units of output.
The increase in total cost resulting from
increasing output by one unit. Also
called <i>incremental cost.</i>
The change in total output that results
from using one more unit of a variable
factor.
Total cost of producing a given output
divided by the number of units of output;
it can also be calculated as the sum of
average fixed costs and average variable
costs. Also called<i> unit cost</i>or<i>
average cost.</i>
Total fixed costs divided by the number
of units of output.
A debt instrument carrying a specified
amount and schedule of interest payments
and (usually) a date for redemption of
its face value.
Profits paid out to shareholders of a
corporation. Sometimes called distributed
profits.
The difference between the revenues
received from the sale of output and the
opportunity cost of the inputs used to
make the output. Negative economic
profits are called economic losses.
An input whose quantity cannot be changed
in the short run.
All outputs that are used as inputs by
products</b>
7
<b>law of
diminishing
returns</b>
7
<b>long run</b>
7
<b>ordinary
partnership</b>
7
<b>limited
partnership</b>
7
<b>corporation</b
>
7
<b>state-owned
enterprise</b>
7
<b>production
function</b>
7
<b>short run</b>
7
<b>single
proprietorship</b
>
7
<b>total cost
(<i>TC</i>)</b>
7
<b>total fixed
cost
(<i>TFC</i>)</b>
<b>total variable
cost
(<i>TVC</i>)</b>
<b>total product
(<i>TP</i>)</b>
<b>average
product
(<i>AP</i>)</b>
<b>transnational
corporations
7
7
7
7
other producers in a further stage of
production.
The hypothesis that if increasing
quantities of a variable factor are
applied to a given quantity of fixed
factors, the marginal product of the
variable factor will eventually decrease.
A period of time in which all inputs may
be varied but the existing technology of
production cannot be changed.
A form of business organization in which
the firm has two or more joint owners,
each of whom is personally responsible
for all of the firm's actions and debts.
A form of business organization in which
the firm has two classes of owners:
general partners, who take part in
managing the firm and are personally
liable for all of the firm's actions and
debts, and limited partners, who take no
part in the management of the firm and
risk only the money that they have
invested.
A form of business organization in which
the firm has a legal existence separate
from that of the owners.
A firm that is owned by the government.
In Canada, these are called <i>Crown
corporations.</i>
A functional relation showing the maximum
output that can be produced by each and
every combination of inputs.
A period of time in which the quantity of
some inputs cannot be increased beyond
the fixed amount that is available.
A form of business organization in which
the firm has one owner who is personally
responsible for all of the firm's actions
and debts.
The total cost of producing any given
level of output; it can be divided into
<i>total fixed cost</i> and <i>total
variable cost.</i>
All costs of production that do not vary
with the level of output.
Total costs of production that vary
directly with the level of output.
Total amount produced by a firm during
some time period.
Total product divided by the number of
units of the variable factor used in its
production.
Firms that have operations in more than
one country. Also called multinational
7
7
(TNCs)</b>
<b>variable
factor</b>
<b>very long
run</b>
8
<b>constant
returns (to
scale)</b>
8
<b>economies of
scale</b>
8
<b>minimum
efficient scale
(MES)</b>
8
<b>technical
efficiency</b>
8
<b>cost
minimization</b>
8
<b>decreasing
returns (to
scale)</b>
8
<b>envelope</b>
8
<b>increasing
returns (to
scale)</b>
8
<b>long-run
average cost
(<i>LRAC</i>)
curve</b>
<b>principle of
substitution</b>
8
8
8
9
<b>technological
change</b>
<b>productivity</
b>
<b>constant-cost
enterprises (<i>MNEs</i>).
An input whose quantity can be changed in
the short run.
A period of time that is long enough for
the technological possibilities available
to a firm to change.
A situation in which output increases in
proportion to inputs as the scale of
production is increased. A firm in this
situation is a constant-cost firm.
Reduction of long-run average costs
resulting from an expansion in the scale
of a firm's operations so that more of
all inputs is being used.
The smallest output at which <i>LRAC</i>
reaches its minimum. All available
economies of scale have been realized at
this point.
When a given number of inputs are
combined in such a way as to maximize the
level of output.
An implication of profit maximization
that firms choose the production method
that produces any given level of output
at the lowest possible cost.
A situation in which output increases
less than in proportion to inputs as the
scale of a firm's production increases. A
firm in this situation is an increasingcost firm.
Any curve that encloses, by being tangent
to, a series of other curves. In
particular, the <i>LRAC</i> curve is an
envelope curve because it encloses the
various <i>SRATC</i> curves.
A situation in which output increases
more than in proportion to inputs as the
scale of a firm's production increases. A
firm in this situation is a decreasingcost firm.
The curve showing the lowest possible
cost of producing each level of output
when all inputs can be varied.
The principle that methods of production
will change if relative prices of inputs
change, with relatively more of the
cheaper input and relatively less of the
more expensive input being used.
Any change in the available techniques of
production.
Output produced per unit of some input;
frequently used to refer to labour
productivity, measured by total output
divided by the amount of labour used.
An industry in which each firm's
industry </b>
9
<b>shut-down
price</b>
9
<b>average
revenue
(<i>AR</i>)</b>
<b>break-even
price</b>
9
9
<b>declining-cost
industry</b>
9
<b>homogeneous
product</b>
9
<b>increasingcost industry</b>
9
<b>internal
economies of
scale</b>
9
<b>external
economies of
scale</b>
9
<b>long-run
industry supply
(<i>LRS</i>)
curve</b>
9
<b>marginal
revenue
(<i>MR</i>)</b>
9
<b>market
power</b>
9
<b>market
structure</b>
9
<b>perfect
competition</b>
9
<b>price
taker</b>
<i>LRAC</i>curve remains constant as the
entire industry expands or contracts in
the long run.
The price below which a competitive firm
will shut down its operations. The shutdown price is equal to the minimum of the
firm's average variable cost.
Total revenue divided by quantity sold;
this is the market price when all units
are sold at the same price.
The price at which a firm is just able to
cover all of its costs, including the
opportunity cost of capital.
An industry in which each firm's
<i>LRAC</i> curve shifts downward as the
entire industry expands in the long run.
In the eyes of purchasers, every unit of
the product is identical to every other
unit.
An industry in which each firm's
<i>LRAC</i>curve shifts upward as the
entire industry expands in the long run.
Scale economies that result from the
firm's own actions and hence are
available to it by raising its own
output.
Scale economies that cause the firm's
costs to fall as industry output rises
but are external to the firm and so
cannot be obtained by the firm's
increasing its own output.
A curve showing the relationship between
the market price and the quantity
supplied by a competitive industry when
all the firms in that industry are at the
minimum of their <i>LRAC</i> curves.
The change in a firm's total revenue
resulting from a change in its sales by
one unit. Also called <i>incremental
revenue.</i>
The ability of a firm to influence the
price of a product or the terms under
which it is sold.
All features of a market that affect the
behaviour and performance of firms in
that market, such as the number and size
of sellers, the extent of knowledge about
one another's actions, the degree of
freedom of entry, and the degree of
product differentiation.
A market structure in which all firms in
an industry are price takers and in which
there is freedom of entry into and exit
from the industry.
A firm that can alter its rate of
production and sales without affecting
9
<b>short-run
equilibrium</b>
9
<b>short-run
supply curve</b>
9
<b>shut-down
price</b>
9
<b>total revenue
(<i>TR</i>)</b>
<b>monopoly</b>
<b>cartel</b>
10
10
10
<b>entry
barrier</b>
10
<b>monopolist</b>
10
<b>natural
monopoly</b>
10
<b>price
discrimination</b
>
11
<b>administered
price</b>
11
<b>price
setter</b>
11
<b>collusion</b>
11
<b>concentration
ratio</b>
11
<b>cooperative
(collusive)
outcome</b>
<b>differentiated
product</b>
11
the market price of its product.
For a competitive industry, the price and
output at which industry demand equals
short-run industry supply, and all firms
are maximizing their profits. Either
profits or losses for individual firms
are possible.
A curve showing the relationship between
quantity supplied and market price, with
one or more fixed factors; it is the
horizontal sum of marginal cost curves
(above the level of average variable
costs) of all firms in a perfectly
competitive industry.
The price that is equal to the minimum of
a firm's average variable costs. At
prices below this, a profit-maximizing
firm will produce no output.
Total receipts from the sale of a
product; price times quantity.
A market containing a single firm.
An organization of producers who agree to
act as a single seller in order to
maximize joint profits.
Any barrier to the entry of new firms
into an industry. An entry barrier may be
natural or created.
A firm that is the only seller in a
market.
An industry characterized by economies of
scale sufficiently large that only one
firm can cover its costs while producing
at its minimum efficient scale.
The sale by one firm of different units
of a commodity at two or more different
prices for reasons not associated with
differences in cost.
A price set by the conscious decision of
the seller rather than by impersonal
market forces.
A firm that faces a downward sloping
demand curve for its product. It chooses
which price to set.
An agreement among sellers to act jointly
in their common interest. Collusion may
be overt or covert, explicit or tacit.
The fraction of total market sales (or
some other measure of market occupancy)
controlled by a specified number of the
industry's largest firms.
A situation in which existing firms
cooperate to maximize their joint
profits.
A group of commodities that are similar
enough to be called the same product but
dissimilar enough that all of them do not
11
11
<b>duopoly</b>
<b>excesscapacity
theorem</b>
11
<b>game
theory</b>
11
<b>monopolistic
competition</b>
11
<b>Nash
equilibrium</b>
11
<b>noncooperative
outcome</b>
<b>oligopoly</b>
11
11
<b>strategic
behaviour</b>
12
<b>Crown
corporations</b>
<b>productive
efficiency for
the firm</b>
<b>productive
efficiency for
the industry</b>
12
12
12
12
<b>allocative
efficiency</b>
<b>competition
policy</b>
12
<b>marginal-cost
pricing</b>
12
<b>natural
monopoly</b>
have to be sold at the same price.
An industry that contains only two firms.
The property of long-run equilibrium in
monopolistic competition that firms
produce on the falling portion of their
long-run average cost curves. This
results in excess capacity, measured by
the gap between present output and the
output that coincides with minimum
average cost.
The theory that studies decision making
in situations in which one player
anticipates the reactions of other
players to its own actions.
Market structure of an industry in which
there are many firms and freedom of entry
and exit but in which each firm has a
product somewhat differentiated from the
others, giving it some control over its
price.
An equilibrium that results when each
firm in an industry is currently doing
the best that it can, given the current
behaviour of the other firms in the
industry.
An industry outcome reached when firms
maximize their own profit without
cooperating with other firms.
An industry that contains two or more
firms, at least one of which produces a
significant portion of the industry's
total output.
Behaviour designed to take account of the
reactions of one's rivals to one's own
behaviour.
In Canada, business concerns owned by the
federal or a provincial government.
When the firm chooses among all available
technologies and produces a given level
of output at the lowest possible cost.
When the industry is producing a given
level of output at the lowest possible
cost. This requires that marginal cost be
equated across all firms in the industry.
A situation in which the market price for
a good is equal to its marginal cost.
Policy designed to prohibit the
acquisition and exercise of monopoly
power by business firms.
Setting price equal to marginal cost so
that buyers for the last unit are just
willing to pay the amount that it cost to
make that unit.
An industry characterized by economies of
scale sufficiently large that one firm
can most efficiently supply the entire
12
<b>producer
surplus</b>
12
<b>two-part
tariff</b>
13
<b>factor
mobility</b>
13
<b>Lorenz
curve</b>
<b>transfer
earnings</b>
13
13
<b>compensating
differential</b>
13
<b>derived
demand</b>
13
<b>economic
rent</b>
13
<b>functional
distribution of
income</b>
<b>size
distribution of
income</b>
<b>marginal
revenue
product(<i>MRP</i
>)</b>
<b>collective
bargaining</b>
<b>human
capital</b>
13
13
14
14
14
14
<b>minimum
wages</b>
<b>monopsony</b>
14
<b>union</b>
15
<b>present
value</b>
16
<b>asymmetric
information</b>
market demand.
The price of a good minus the marginal
cost of producing it, summed over the
quantity produced.
A method of charging for a good or a
service in which the consumer pays a flat
access fee and a specified amount per
unit purchased.
The ease with which a factor of
production can move between firms,
industries, occupations, or regions.
A graph showing the extent of inequality
of income distribution.
The payment required by a factor in order
to prevent it from leaving to other uses.
Any payment in excess of the transfer
earnings is economic rent.
A difference in the financial payment to
a factor of production (usually labour)
across two jobs to compensate the factor
for differences in non-monetary aspects
of the two jobs.
The demand for a factor of production
that results from the demand for the
products that it is used to make.
The surplus of total earnings over what
must be paid to prevent a factor from
moving to another use.
The distribution of national income among
the major factors of production: labour,
capital, and land.
The distribution of income among
households, without regard to source of
income.
The extra revenue that results from using
one unit more of a variable factor.
The process by which unions and employers
arrive at and enforce agreements.
The acquired skills that individuals
have; usually from formal education or
on-the-job training.
Legally specified minimum rate of pay for
labour.
A market situation in which there is a
single buyer.
An association authorized to represent
workers in bargaining with employers.
Also called a <i>labour union.</i>
The value today of a future stream of
payments discounted using the market
interest rate.
A situation in which one party to a
transaction has more or better
information about the transaction than
16
<b>moral
hazard</b>
16
<b>cost-benefit
analysis</b>
16
<b>private
goods</b>
<b>commonproperty
resource</b>
<b>rational
ignorance</b>
16
16
16
<b>rivalrous</b>
16
<b>excludable</b>
16
<b>adverse
selection</b>
16
<b>Coase
Theorem</b>
16
<b>externality</b
>
16
<b>market
failure</b>
<b>paternalism</b
>
16
16
<b>private
cost</b>
16
<b>social
cost</b>
16
<b>public
goods</b>
16
<b>rent
seeking</b>
the other party.
A situation in which an individual or a
firm takes advantage of special knowledge
while engaging in socially inefficient
behaviour.
An approach for evaluating the
desirability of a given policy, based on
comparing total (opportunity) costs with
total benefits.
Goods or services that are both rivalrous
and excludable.
A resource that is rivalrous but not
excludable.
When agents have no incentive to become
informed about some government policy
because the costs of becoming informed
exceed the benefits of any well-informed
action the agent might take.
A good or service is rivalrous if, when
one person consumes one unit of it, there
is one less unit available for others to
consume.
A good or service is excludable if its
owner can prevent others from consuming
it.
Self-selection, within a single risk
category, of persons of above-average
risk.
The idea (originally put forward by
Ronald Coase) that bargaining in private
markets can prevent externalities from
leading to allocative inefficiency.
An effect, either good or bad, on parties
not directly involved in the production
or use of a commodity. Also called
<i>third-party effects.</i>
Failure of the unregulated market system
to achieve allocative efficiency.
Intervention in the free choices of
individuals by others (including
governments) to protect them against
their own ignorance or folly.
The value of the best alternative use of
resources used in production as valued by
the producer.
The value of the best alternative use of
resources used in production as valued by
society.
Goods or services that can simultaneously
provide benefits to a large group of
people. Also called <i>collective
consumption goods</i>.
Behaviour whereby private firms and
individuals try to use the powers of the
government to enhance their own economic
17
17
18
18
18
18
<b>internalizing
the
externality</b>
<b>tradable
pollution
permits</b>
<b>tax
bracket</b>
<b>average tax
rate</b>
<b>marginal tax
rate</b>
<b>demogrants</b>
18
<b>income-tested
benefits</b>
18
<b>direct
burden</b>
<b>excess
burden</b>
<b>equalization
payments</b>
18
18
18
<b>poverty
line</b>
18
<b>poverty
trap</b>
18
<b>tax
expenditures</b>
18
<b>progressive
tax</b>
<b>proportional
tax</b>
18
18
18
<b>regressive
tax</b>
<b>tax-rental
arrangements</b>
18
<b>transfer
payment</b>
19
<b>foreign
exchange</b>
well-being.
A process that results in a producer or
consumer taking account of a previously
external effect.
Government-granted rights to emit
specific amounts of specified pollutants
that private firms may buy and sell among
themselves.
A range of income for which there is a
constant marginal tax rate.
The ratio of total taxes paid to total
income earned.
The fraction of an additional dollar of
income that is paid in taxes.
Social benefits paid to anyone meeting
only minimal requirements such as age or
residence; in particular, <i>not</i>
income-tested.
Social benefits paid to recipients who
qualify because their income is less than
some critical level.
Amount of money for a tax that is
collected from taxpayers.
The allocative inefficiency or deadweight
loss generated by a tax.
Transfers of tax revenues from the
federal government to the low-income
provinces to compensate them for their
lower per capita tax yields.
The official government estimate of the
annual family income that is required to
maintain a minimum adequate standard of
living.
Occurs whenever individuals have little
incentive to increase their pre-tax
income because the resulting loss of
benefits makes them worse off.
Tax exemptions or reductions designed to
induce market responses considered to be
desirable.
A tax that takes a larger percentage of
income the higher the level of income.
A tax that takes a constant percentage of
income at all levels of income and is
thus neither progressive nor regressive.
A tax that takes a lower percentage of
income the higher the level of income.
An agreement by which the federal
government makes a per capita payment to
the provinces for the right to collect
income taxes.
A payment to a private person or
institution that is not made in exchange
for a good or service.
Actual foreign currencies or various
claims on them, such as bank balances or
19
19
<b>foreignexchange
market</b>
<b>depreciation</
b>
19
<b>appreciation</
b>
19
<b>nominal
national
income</b>
<b>potential
output
<i>(Y*)</i></b>
19
19
<b>balance-ofpayments
account</b>
19
<b>business
cycle</b>
19
<b>Consumer Price
Index (CPI)</b>
19
<b>employment</b>
19
<b>unemployment</
b>
19
<b>labour
force</b>
19
<b>unemployment
rate</b>
<b>exchange
rate</b>
19
19
<b>inflation</b>
19
<b>interest
rate</b>
19
<b>interest</b>
19
<b>macroeconomics
</b>
promises to pay, that are traded on the
foreign-exchange market.
The market where different national
currencies, or claims to these
currencies, are traded.
A rise in the exchange rate—it takes more
units of domestic currency to purchase
one unit of foreign currency.
A fall in the exchange rate—it takes
fewer units of domestic currency to
purchase one unit of foreign currency.
Total national income measured in current
dollars. Also called current-dollar
national income.
The real gross domestic product that the
economy would produce if its productive
resources were employed at their normal
levels of utilization. Also called
<i>potential GDP</i>.
A summary record of a country's
transactions with the rest of the world,
including the buying and selling of
goods, services, and assets.
Fluctuations of national income around
its trend value that follow a wavelike
pattern.
An index of the average prices of goods
and services commonly bought by
households.
The number of persons 15 years of age and
older who hold jobs.
The number of persons 15 years of age and
older who are not employed and are
actively searching for a job.
The total number of persons employed in
both civilian and military jobs, plus the
number of persons who are unemployed.
Unemployment expressed as a percentage of
the labour force, denoted <i>U</i>.
The number of units of domestic currency
required to purchase one unit of foreign
currency.
A rise in the average level of all
prices.
The price paid per dollar borrowed per
period of time, expressed either as a
proportion (e.g., 0.06) or as a
percentage (e.g., 6 percent).
The payment for the use of borrowed
money.
The study of the determination of
economic aggregates, such as total
output, total employment, the price
level, and the rate of economic growth,
and of how government policy may
influence these aggregates.
19
19
19
19
19
19
19
<b>nominal
interest rate</b>
<b>output gap</b>
<b>recessionary
gap</b>
<b>inflationary
gap</b>
<b>price
level</b>
<b>purchasing
power of
money</b>
<b>real interest
rate</b>
19
<b>real national
income</b>
19
<b>recession</b>
19
<b>depression</b>
20
<b>imports</b>
20
<b>exports</b>
20
<b>capital
stock</b>
<b>consumption
expenditure</b>
20
20
<b>investment
expenditure</b>
20
<b>depreciation</
b>
20
<b>disposable
personal
income</b>
<b>double
counting</b>
20
The price paid per dollar borrowed per
period of time.
Actual national income minus potential
national income, <i>Y–Y*.</i>
A situation in which actual output is
less than potential output.
A situation in which actual output
exceeds potential output.
The average level of all prices in the
economy, expressed as an index number.
The amount of goods and services that can
be purchased with a unit of money.
The nominal rate of interest adjusted for
the change in the purchasing power of
money. Equal to the nominal interest rate
minus the rate of inflation.
National income measured in constant
(base-period) dollars. It changes only
when quantities change.
A downturn in the level of economic
activity. Often defined precisely as two
consecutive quarters in which real GDP
falls.
A persistent period of very low economic
activity with very high unemployment and
high excess capacity.
The value of all goods and services
purchased from firms, households, or
governments in other countries.
The value of all goods and services sold
to firms, households, and governments in
other countries.
The aggregate quantity of capital goods.
Household expenditure on all goods and
services. Represented by the symbol
<i>C</i> as one of the four components of
aggregate expenditure.
Expenditure on the production of goods
not for present consumption. Represented
by the symbol <i>I.</i>
The amount by which the capital stock is
depleted through its contribution to
current production. Also called
<i>capital consumption allowance.</i>
The part of national income that accrues
to households and is available to spend
or save.
In national income accounting, adding up
the total outputs of all the sectors in
the economy so that the value of
intermediate goods is counted in the
sector that produces them as well as
every time they are purchased as an input
by another sector.
20
<b>intermediate
goods</b>
20
<b>final
goods</b>
20
<b>value
added</b>
20
<b>fixed
investment</b>
<b>GDP
deflator</b>
20
20
<b>government
purchases</b>
20
<b>gross domestic
product (GDP)</b>
20
<b>gross national
product (GNP)</b>
20
<b>inventories</b
>
20
<b>net
exports</b>
20
<b>per capita
output</b>
<b>transfer
payment</b>
20
21
21
<b>aggregate
expenditure
(<I>AE</I>)
function</b>
<b>autonomous
expenditure</b>
21
<b>induced
expenditure</b>
21
<b>average
propensity to
consume
(<i>APC</i>)</b>
<b>marginal
propensity to
consume
21
All outputs that are used as inputs by
other producers in a further stage of
production.
Goods that are not used as inputs by
other firms but are produced to be sold
for consumption, investment, government,
or exports during the period under
consideration.
The value of a firm's output minus the
value of the inputs that it purchases
from other firms.
The creation of new plant and equipment.
An index number derived by dividing
nominal GDP by real GDP. Its change
measures the average change in price of
all the items in the GDP.
All government expenditure on currently
produced goods and services, exclusive of
government transfer payments. Represented
by the symbol <i>G.</i>
The total value of goods and services
produced in the economy during a given
period.
The value of total incomes earned by
domestically based producers and factors
of production.
Stocks of raw materials, goods in
process, and finished goods held by firms
to mitigate the effect of short-term
fluctuations in production or sales.
The value of total exports minus the
value of total imports. Represented by
the symbol <i>NX</i>.
GDP divided by total population.
A payment to a private person or
institution not made in exchange for a
good or service.
The function that relates desired
aggregate expenditure to actual national
income.
Elements of expenditure that do not
change systematically with national
income.
Any component of expenditure that is
systematically related to national
income.
The level of consumption divided by the
level of disposable income.
The change in consumption divided by the
change in disposable income that brought
it about.
21
21
21
21
21
21
(<i>MPC</i>)</b>
<b>average
propensity to
save
(<i>APS</i>)</b>
<b>marginal
propensity to
save
(<i>MPS</i>)</b>
<b>closed
economy</b>
<b>consumption
function</b>
<b>desired
aggregate
expenditure
(<i>AE</i>)</b>
<b>marginal
propensity to
spend</b>
21
<b>saving</b>
21
<b>simple
multiplier</b>
22
<b>marginal
propensity to
import</b>
<b>net tax
rate</b>
22
22
22
22
22
22
<b>budget
surplus</b>
<b>budget
deficit</b>
<b>private
saving</b>
<b>public
saving</b>
<b>fiscal
policy</b>
22
<b>national asset
formation</b>
22
<b>national
The proportion of disposable income
devoted to saving; total saving divided
by total disposable income.
The change in total desired saving
divided by the change in disposable
income that brought it about.
An economy that has no foreign trade.
The relationship between desired
consumption expenditure and all the
variables that determine it; in the
simplest case, the relationship between
consumption expenditure and disposable
income.
The sum of desired or planned spending on
domestic output by households, firms,
governments, and foreigners.
The change in desired aggregate
expenditure on domestic output divided by
the change in national income that
brought it about.
All disposable income that is not spent
on consumption.
The ratio of the change in equilibrium
national income to the change in
autonomous expenditure that brought it
about, calculated for a constant price
level.
The increase in import expenditures
induced by a $1 increase in national
income. Denoted by <i>m</i>.
The increase in net tax revenue generated
when national income rises by one dollar.
Also called the <i>marginal propensity to
tax</i>.
Any excess of current revenue over
current expenditure.
Any shortfall of current revenue below
current expenditure.
Saving on the part of households&#150;the
part of disposable income that is not
spent on current consumption.
Saving on the part of governments equal
to the government budget surplus.
The use of the government's tax and
spending policies in an effort to
influence the level of GDP.
The sum of investment and net exports.
The extent to which the domestic economy
is accumulating (domestic and foreign)
assets.
The sum of public saving (<i>T</i> –
22
saving</b>
<b>net taxes</b>
22
<b>stabilization
policy</b>
23
<b>aggregate
supply
(<i>AS</i>)
curve</b>
23
<b>unit cost</b>
23
<b>aggregate
demand shock</b>
<b>aggregate
demand
(<i>AD</i>)
curve</b>
<b>aggregate
supply shock</b>
<b>automatic
stabilizers</b>
23
23
24
24
<b>decision
lag</b>
24
<b>execution
lag</b>
<b>fine
tuning</b>
24
24
<b>gross
tuning</b>
24
<b>Phillips
curve</b>
26
<b>aggregate
production
function</b>
<b>constant
returns to
scale</b>
<b>economic
growth</b>
<b>embodied
technical
change</b>
<b>human
capital</b>
26
26
26
26
<i>G</i>) and private saving (<i>S</i>).
Total tax revenue minus transfer
payments, denoted <i>T</i>.
Any policy designed to reduce the
economy's cyclical fluctuations and
thereby stabilize national income.
A curve showing the relation between the
price level and the quantity of aggregate
output supplied on the assumption that
technology and all factor prices are held
constant.
Cost per unit of output, equal to total
cost divided by total output.
Any event that causes a shift in the
aggregate demand curve.
A curve showing combinations of real GDP
and the price level that make desired
aggregate expenditure equal to actual
national income.
Any event that causes a shift in the
aggregate supply (<i>AS</i>) curve.
Elements of the tax-and-transfer systems
that automatically lessen the magnitude
of the fluctuations in national income
caused by changes in autonomous
expenditures.
The period of time between perceiving
some problem and reaching a decision on
what to do about it.
The time that it takes to put policies in
place after a decision has been made.
The attempt to maintain output at its
potential level by means of frequent
changes in fiscal or monetary policy.
The use of macroeconomic policy to
stabilize the economy such that large
deviations from potential output do not
persist for extended periods of time.
Originally, a relationship between the
unemployment rate and the rate of change
of money wages. Now often drawn as a
relationship between GDP and the rate of
change of money wages.
The relation between the total amount of
each factor of production employed in the
nation and the nation's total GDP.
A situation in which output increases in
proportion to the change in all inputs as
the scale of production is increased.
Ongoing increases in the level of real
potential GDP.
Technical change that is intrinsic to the
particular capital goods in use.
The set of skills workers acquire through
formal education and on-the-job-training.
26
<b>law of
diminishing
marginal
returns</b>
27
27
<b>bank notes</b>
<b>bank run</b>
27
<b>fiat money</b>
27
<b>legal
tender</b>
27
<b>gold
standard</b>
27
<b>barter</b>
27
<b>central
bank</b>
27
<b>clearing
house</b>
27
<b>commercial
bank</b>
27
<b>deposit
money</b>
<b>excess
reserves</b>
<b>fractionalreserve
system</b>
27
27
27
<b>Gresham's
law</b>
27
<b>medium of
exchange</b>
<b>money
substitute</b>
<b>money
supply</b>
27
27
The hypothesis that if increasing
quantities of a variable factor are
applied to a given quantity of fixed
factors, the marginal product of the
variable factor will eventually decrease.
Paper money issued by commercial banks.
A situation in which many depositors rush
to withdraw their money, possibly leading
to a bank's financial collapse.
Paper money or coinage that is neither
backed by nor convertible into anything
else but is decreed by the government to
be accepted as legal tender.
Anything that by law must be accepted for
the purchase of goods and services or in
discharge of a debt.
A currency standard whereby a country's
currency is convertible into gold at a
fixed rate of exchange.
A system in which goods and services are
traded directly for other goods and
services.
A bank that acts as banker to the
commercial banking system and often to
the government as well. Usually a
government-owned institution that
controls the banking system and is the
sole money-issuing authority.
An institution where interbank
indebtedness, arising from the transfer
of cheques between banks, is computed and
offset and net amounts owing are
calculated.
A privately owned, profit-seeking
institution that provides a variety of
financial services, such as accepting
deposits from customers and making loans
and other investments.
Money held by the public in the form of
demand deposits with commercial banks.
Reserves held by a commercial bank in
excess of its target reserves.
A banking system in which commercial
banks keep only a fraction of their
deposits in cash or on deposit with the
central bank.
The theory that “bad,&” or debased, money
drives “good,” or undebased, money out of
circulation.
Anything that is generally acceptable in
return for goods and services sold.
Something that serves as a medium of
exchange but is not a store of value.
The total quantity of money in an economy
at a point in time. Also called the
<i>supply of money.</i>
27
<b>near money</b>
27
<b>reserve
ratio</b>
27
<b>target reserve
ratio</b>
27
<b>term
deposit</b>
27
27
<b>M1</b>
<b>M2</b>
27
<b>M2+</b>
28
<b>money
neutrality</b>
28
<b>demand for
money</b>
28
<b>monetary
equilibrium</b>
<b>monetary
transmission
mechanism</b>
<b>present value
(<i>PV</i>)</b>
28
28
29
29
29
<b>monetary
policy
instruments</b>
<b>monetary
policy
targets</b>
<b>open-market
operations</b>
29
<b>overnight
interest rate</b>
29
<b>bank rate</b>
30
<b>disinflation</
b>
<b>sacrifice
ratio</b>
30
Liquid assets that are easily convertible
into money without risk of significant
loss of value and can be used as shortterm stores of value but are not
themselves media of exchange.
The fraction of its deposits that a
commercial bank holds as reserves in the
form of cash or deposits with the central
bank.
The fraction of its deposits that a
commercial bank wants to hold as
reserves.
An interest-earning bank deposit, legally
subject to notice before withdrawal (in
practice, the notice requirement is not
normally enforced).
Currency plus demand deposits.
M1 plus savings deposits at the chartered
banks.
M2 plus deposits held at institutions
that are <i>not</i> chartered banks.
The idea that a change in the supply of
money has no effect on any real variables
but only affects the price level.
The total amount of money balances that
the public wishes to hold for all
purposes.
A situation in which the demand for money
equals the supply of money.
The channels by which a change in the
demand for or supply of money leads to a
shift of the aggregate demand curve.
The value now of one or more payments or
receipts made in the future; often
referred to as <i>discounted present
value</i>.
The tools used by the Bank of Canada to
conduct its policy.
The macroeconomic variables that the Bank
of Canada seeks to influence.
The purchase and sale of government
securities on the open market by the
central bank.
The interest rate that commercial banks
charge each other for very-short-term
loans.
The rate of interest at which the Bank of
Canada makes loans to commercial banks.
A reduction in the rate of inflation.
The cumulative loss in real GDP,
expressed as a percentage of potential
output, divided by the percentage-point
reduction in the rate of inflation.
30
<b>stagflation</b
>
30
<b>acceleration
hypothesis</b>
30
<b>demand
inflation</b>
30
<b>expectationsaugmented
Phillips
curve</b>
<b>inflation</b>
30
30
<b>rational
expectations</b>
30
<b>supply
inflation</b>
31
<b>cyclical
unemployment</b>
31
<b>frictional
unemployment</b>
31
<b>New Classical
economics</b>
31
<b>structural
unemployment</b>
32
<b>government
debt</b>
32
<b>budget deficit
function</b>
32
<b>cyclically
adjusted deficit
(CAD)</b>
<b>budget
deficit</b>
<b>budget
32
32
The increase in inflation and reduction
in output (or its growth rate) that is
caused by an upward shift of the
<i>AS</i> curve.
The hypothesis that when real GDP is held
above potential, the persistent
inflationary gap will cause inflation to
accelerate.
Inflation arising from excess aggregate
demand, that is, when actual GDP exceeds
potential GDP.
The relationship between unemployment and
the rate of increase of money wages that
arises when the demand and expectations
components of inflation are combined.
A rise in the average level of all
prices. Often expressed as the annual
percentage change in the Consumer Price
Index.
The theory that people understand how the
economy works and learn quickly from
their mistakes so that even though random
errors may be made, systematic and
persistent errors are not.
A rise in the price level originating
from increases in costs that are not
caused by excess demand in the domestic
markets for factors of production.
Unemployment in excess of frictional and
structural unemployment; it is due to a
shortfall of real GDP below potential
GDP.
Unemployment caused by the time that is
taken for labour to move from one job to
another.
An approach to explaining macroeconomic
fluctuations in which fluctuations in
economic activity are explained by shocks
to technology and tastes rather than to
markets that fail to clear.
Unemployment due to a mismatch between
characteristics required by available
jobs and characteristics possessed by the
unemployed labour force.
The outstanding stock of financial
liabilities for the government, equal to
the accumulation of past budget deficits.
A relationship that plots the
government's budget deficit as a function
of the level of real GDP.
An estimate of what the government budget
deficit would be if real GDP were at its
potential level.
Any shortfall of current revenue below
current expenditure.
Any excess of current revenue over
32
32
32
surplus</b>
<b>crowding
out</b>
<b>debt-service
payments</b>
<b>fiscal
policy</b>
32
<b>primary budget
deficit</b>
32
<b>Ricardian
Equivalence</b>
33
<b>comparative
advantage</b>
33
<b>learning by
doing</b>
33
<b>absolute
advantage</b>
33
<b>gains from
trade</b>
33
<b>open
economy</b>
<b>closed
economy</b>
<b>terms of
trade</b>
33
33
34
<b>protectionism<
/b>
34
<b>trade
policy</b>
34
<b>customs
union</b>
34
<b>common
market</b>
34
<b>dumping</b>
current expenditure.
The offsetting reduction in private
expenditure caused by the rise in
interest rates that follows an
expansionary fiscal policy.
Payments that represent the interest owed
on a current stock of debt.
The use of the government's tax and
spending policies in an effort to
influence the level of GDP.
The difference between the government's
overall budget deficit and its debtservice payments.
The proposition that the method of
financing government spending (taxes or
borrowing) has no effect on national
saving because private saving will just
offset any government dissaving.
The situation that exists when a country
can produce a good with less forgone
output of other goods than can another
country.
The reduction in unit costs that often
results as workers learn through
repeatedly performing the same tasks. It
causes a downward shift in the average
cost curve.
The situation that exists when one
country can produce some commodity at
lower absolute cost than another country.
The increased output due to the
specialization according to comparative
advantage that is made possible by trade.
An economy that engages in international
trade.
An economy that has no foreign trade.
The ratio of the average price of a
country's exports to the average price of
its imports, both averages usually being
measured by index numbers.
Any government policy that interferes
with free trade in order to give some
protection to domestic industries against
foreign competition.
A government’s policy involving
restrictions placed on international
trade.
A group of countries who agree to have
free trade among themselves and a common
set of barriers against imports from the
rest of the world.
A customs union with the added provision
that factors of production can move
freely among the members.
The practice of selling a commodity at a
34
<b>free trade
area (FTA)</b>
34
<b>import
quota</b>
34
<b>voluntary
export
restriction
(<i>VER </i>)</b>
<b>infant
industry
argument</b>
34
34
<b>tariff</b>
34
<b>nontariff
barriers
(NTBs)</b>
<b>trade
creation</b>
34
34
<b>trade
diversion</b>
35
<b>appreciation</
b>
35
<b>depreciation</
b>
35
<b>flexible
exchange rate</b>
35
<b>fixed exchange
rate</b>
35
<b>adjustable peg
system</b>
lower price in the export market than in
the domestic market for reasons unrelated
to differences in costs of servicing the
two markets.
An agreement among two or more countries
to abolish tariffs on all or most of the
trade among themselves while each remains
free to set its own tariffs against other
countries.
A limit set by the government on the
quantity of a foreign commodity that may
be shipped into that country in a given
time period.
An agreement by an exporting country to
limit the amount of a good exported to
another country.
The argument that new domestic industries
with potential for economies of scale or
learning by doing need to be protected
from competition from established, lowcost foreign producers so that they can
grow large enough to achieve costs as low
as those of foreign producers.
A tax applied on imports of goods or
services.
Restrictions other than tariffs designed
to reduce the flow of imported goods or
services.
A consequence of reduced trade barriers
among a set of countries whereby trade
within the group is increased and trade
with the rest of the world remains
roughly constant.
A consequence of reduced trade barriers
among a set of countries whereby trade
within the group replaces trade that used
to take place with countries outside the
group.
A fall in the exchange rate—it takes
fewer units of domestic currency to
purchase one unit of foreign currency.
A rise in the exchange rate—it takes more
units of domestic currency to purchase
one unit of foreign currency.
An exchange rate that is left free to be
determined by the forces of demand and
supply on the free market, with no
intervention by central banks.
An exchange rate that is maintained
within a small range around its publicly
stated par value by the intervention in
the foreign-exchange market by a
country's central bank.
A system in which exchange rates are
fixed in the short term but are
35
<b>managed
float</b>
35
<b>balance of
payments
accounts</b>
35
<b>current
account</b>
35
<b>official
financing
account</b>
<b>direct
investment</b>
35
35
<b>portfolio
investment</b>
35
<b>trade
account</b>
35
<b>capitalservice
account</b>
35
<b>capital
account</b>
35
<b>exchange
rate</b>
35
<b>purchasing
power parity
(PPP)</b>
36
<b>developed
countries</b>
36
<b>developing
countries</b>
occasionally changed in response to
changes in economic events.
A situation in which the central bank
intervenes in the foreign-exchange market
to smooth out some of the large, shortterm fluctuations in a country's exchange
rate, while still leaving the market to
determine the exchange rate in the longer
term.
A summary record of a country's
transactions with the rest of the world,
including the buying and selling of
goods, services, and assets.
The part of the balance of payments
accounts that records payments and
receipts arising from trade in goods and
services and from interest and dividends
that are earned by capital owned in one
country and invested in another.
In the balance of payments, this account
records the central bank's purchases and
sales of foreign-currency reserves.
Nonresident investment in the form of a
takeover or capital investment in a
domestic branch plant or subsidiary
corporation in which the investor has
voting control. Also called <i>foreign
direct investment.</i>
Foreign investment in bonds or a minority
holding of shares that does not involve
legal control.
In the balance of payments, this account
records exports and imports of goods and
services.
In the balance of payments, this account
records the payments and receipts that
represent income on assets (such as
interest and dividends).
The part of the balance of payments
accounts that records payments and
receipts arising from the import and
export of long-term and short-term
financial capital.
The number of units of domestic currency
required to purchase one unit of foreign
currency.
The theory that over the long term, the
exchange rate between two currencies
adjusts to reflect relative price levels
(relative purchasing power).
The higher-income countries of the world,
including the United States, Canada,
Western Europe, Japan, Australia, and
South Africa.
The lower-income countries of the world,
most of which are in Africa, Asia, and
36
36
<b>newly
industrialized
countries
(NICs)</b>
<b>infrastructure
</b>
Latin America.
Countries that have industrialized and
grown rapidly over the past 40 years.
The basic installations and facilities
(especially transportation and
communications systems) on which the
commerce of a community depends.