Economics Glossaries

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Above full-employment equilibrium An equilibrium in which real GDP exceeds potential GDP.

Absolute advantage A person has an absolute advantage in production if by using the same quantities of inputs that person can produce more than another person; a country has an absolute advantage if its output per unit of inputs of all goods is larger than that of another country.

Adverse selection The tendency for the people to enter into agreements in which they can use their private information to their own advantage and to the disadvantage of the less-informed party.

Aggregate demand The relationship between the real GDP demanded and the price level.

Aggregate hours The total number of hours worked by all the people employed, both full time and part time, during a year.

Aggregate planned expenditure The sum of planned consumption expenditure, planned investment, planned government expenditures, and planned exports minus planned imports.

Allocative efficiency The situation that occurs when no resources are wasted—when no one can be made better off without someone else being made worse off. Allocative efficiency is also called Pareto efficiency.

Anti-combine law A law that regulates and prohibits certain kinds of market behaviour, such as monopoly and monopolistic practices.

Automatic fiscal policy A change in fiscal policy that is triggered by the state of the economy.

Autonomous expenditure The sum of those components of aggregate planned expenditure that are not influenced by real GDP.

Autonomous taxes Taxes that do not vary with real GDP.

Autonomous tax multiplier The amount by which a change in autonomous taxes is multiplied to determine the change in equilibrium expenditure that it generates.

Average cost pricing rule A rule that sets the price equal to average total cost.

Average fixed cost Total fixed cost per unit of output—total fixed cost divided by output.

Average product Average productivity of a factor of production—total product divided by the quantity of the factor employed.

Average revenue The revenue per unit of output sold—total revenue divided by the quantity of the good sold. Average revenue also equals price.

Average total cost Total cost per unit of output.

Average variable cost Total variable cost per unit of output.

Balanced budget A government budget in which outlays and revenue are equal.

Balanced budget multiplier The amount by which a simultaneous and equal change in government expenditures and autonomous taxes is multiplied to determine the change in equilibrium expenditure.

Balance of payments accounts A country’s record of international trading, borrowing, and lending.

Balance of trade The value of exports minus the value of imports.

Bank rate The interest rate that the Bank of Canada charges the chartered banks on the reserves that it lends them.

Barriers to entry Legal or natural impediments that protect a firm from competition from potential new entrants.

Barter The direct exchange of one good or service for another good or service.

Below full-employment equilibrium An equilibrium in which real GDP is less than potential GDP.

Big trade-off The trade-off between inequality and efficiency that is created by the redistribution of income.

Bilateral monopoly A situation in which there is a single buyer (a monopoly) and a single seller (a monopsony).

Black market An illegal trading arrangement in which buyers and sellers do business at a price that is higher than the legally imposed price ceiling.

Bond A legally enforceable debt obligation to pay specified sums of money at specified future dates.

Bond market The market in which the bonds issued by firms and governments are traded.

Budget deficit A government’s budget balance that is negative—outlays exceed revenues.

Budget line The limits to a household's consumption choices.

Budget surplus A government’s budget balance that is positive—revenues exceed outlays.

BureaucratA hired official who works in a government department at either the federal, provincial, or local level.

Business cycle The periodic but irregular up-and-down movement in economic activity, measured by fluctuations in real GDP around potential GDP.

Canadian interest rate differential The Canadian interest rate minus the foreign interest rate.

Capital The equipment, buildings, tools, and other manufactured goods that are used in the production of goods and services.

Capital account A record of foreign investment in a country minus the country’s foreign investment abroad.

Capital accumulation The growth of capital resources.

Capital gain The income received by selling a stock, bond, or asset for a higher price than the price paid for it.

Capital stock The stock of plant, equipment, buildings (including residential housing), and inventories.

Capture theory A theory of regulation that states that regulations are supplied to satisfy the demand of producers to maximize producer surplus—to maximize economic profit.

Cartel A group of firms that has entered into a collusive agreement to restrict output so as to increase prices and profits.

Central bank A public authority that supervises financial institutions and markets and that conducts monetary policy.

Ceteris paribus Other things being equal—all other relevant things remaining the same.

Change in demand A change in buyers’ plans that occurs when some influence on these plans other than the price of the good changes. A change in demand is illustrated by a shift of the demand curve.

Change in supply A change in sellers’ plans that occurs when some influence on these plans other than the price of the good changes. A change in supply is illustrated by a shift of the supply curve.

Change in the quantity demanded A change in buyers’ plans that occurs when the price of a good changes but all other influences on buyers’ plans remain the same. A change in the quantity demanded is illustrated by a movement along the demand curve.

Change in the quantity supplied A change in sellers’ plans that occurs when the price of a good changes but all other influences on sellers’ plans remain the same. A change in the quantity demanded is illustrated by a movement along the supply curve.

Chartered bank A private firm, chartered under the bank Act of 1922 to receive deposits and make loans.

Choke price The price at which the quantity demanded of a natural resource is zero.

Classical growth theory A theory of economic growth based on the view that population growth is determined by the level of income per person.

Coase theorem The proposition that if property rights exist and transactions costs are low, private transactions are efficient—equivalently, there are no externalities.

Collective bargaining A process of negotiation between representatives of employers and unions.

Collusive agreement An agreement between two (or more) producers to restrict output so as to increase prices and profits.

Comparative advantage A person or country has a comparative advantage in an activity if that person or country can perform that activity at a lower opportunity cost than anyone else or any other country.

Complement A good that is used in conjunction with another good.

Constant returns to scale Technological conditions under which a given percentage increase in all the firm's inputs results in the firm’s output increasing by the same percentage.

Consumer efficiency A situation which occurs when consumers cannot make themselves better of by reallocating their budget.

Consumer equilibrium A situation in which a consumer has allocated his or her income in the way that, given prices of goods and services, maximizes his or her total utility.

Consumer Price Index An index that measures the average level of prices of the goods and services that a typical urban Canadian family consumes.

Consumption demand The relationship between consumption expenditure and the real interest rate, other things remaining the same.

Consumption expenditure The amount spent on consumption goods and services.

Consumption function The relationship between consumption expenditure and disposable income, other things remaining the same.

Consumer surplus The value that the consumer places on the good minus the price paid for it.

Contestible market A market structure in which there is one firm (or a small number of firms) and because of freedom of entry and exit, the firm (or firms) faces competition from potential entrants and so it operates as if it were a perfectly competitive firm.

Contractionary fiscal policy A decrease in government expenditures or transfer payments or an increase in taxes.

Cooperative equilibrium The outcome of a collusive agreement between players when each player responds rationally to a credible threat from another player to inflict heavy damage if an agreement is broken.

Copyright A government-sanctioned exclusive right granted to the inventor of a good, service, or productive process to produce, use, and sell the invention for a given number of years.

Cost-push inflation Inflation that results from an initial increase in costs.

Countervailing duty A tariff that is imposed to enable domestic producers to compete with subsidized foreign producers.

Craft union A group of workers who have a similar range of skills but work for many different firms in many different industries and regions.

Credit union A cooperative organization that operates under the Co-operative Credit Association Act of 1922 and that receives deposits from and makes loans to its members.

Creditor nation A country that has invested more in the rest of the world than other countries have invested in it.

Cross elasticity of demand The responsiveness of the demand for a good to the price of a substitute or complement, other things remaining the same. Cross elasticity of demand is calculated as the percentage change in the quantity demanded of a good divided by the percentage change in the price of the substitute or complement.

Cross-section graph A graph that shows the values of an economic variable for different groups in a population at a point in time.

Crowding in The tendency for an expansionary fiscal policy to increase investment.

Crowding out The tendency for an expansionary fiscal policy to increase interest rates and decrease in investment.

Crown CorporationA firm that is publically owned and operated under government supervision.

Currency The notes and coins that we use in Canada today.

Currency appreciation The rise in the value of one currency in terms of another currency.

Currency depreciation The fall in the value of one currency in terms of another currency.

Currency drain An increase in currency held by household and firms.

Current account A record of receipts from exports of goods and services sold abroad, the payments for imports of goods and services from abroad, net interest paid abroad, and net transfers (such as foreign aid payments).

Cyclical deficit The budget deficit that is present only because the economy is not at full employment.

Cyclical unemployment The fluctuations in unemployment that coincide with the business cycle.

Deadweight loss A measure of allocative inefficiency, which is equal to the loss of total surplus (consumer surplus plus producer surplus) that results from producing less that the efficient level of output.

Debtor nation A country that during its entire history has borrowed more from the rest of the world than it has lent to it. Its stock of outstanding debt to the rest of the world exceeds the stock of its own claims on the rest of the world.

Decreasing returns to scale Technological conditions under which a given percentage increase in all the firm's inputs results in the firm’s output increasing by a smaller percentage.

Demand The relationship between the quantity demanded of a good and its price, with all other influences on buyers’ plans remaining the same. Demand is described by a demand schedule and illustrated by a demand curve.

Demand curve A curve that shows the relationship between the quantity demanded of a good and its price, all other influences on buyers’ plans remaining the same.

Demand for labour The number of labour hours hired by all firms in the economy.

Demand-pull inflation Inflation that results from an initial increase in aggregate demand.

Deposit money Deposits at banks and other financial institutions such as trust companies.

Deposit multiplier The amount by which an increase in bank reserves is multiplied to calculate the increase in bank deposits.

Depository institution A firm that takes deposits from households and firms and that makes loans to other households and firms.

Depreciation The amount of existing capital that wears out in a given period as a result of wear and tear and the passage of time.

Derived demand Demand for a item not for its own sake but for use in the production of goods and services.

Desired reserve ratio The ratio of reserves to deposits that banks wish to hold.

Diminishing marginal product of labour The marginal product of labour declines as the quantity of labour increases

Diminishing marginal rate of substitution The general tendency for the marginal rate of substitution of one good for another to diminish as the consumer moves along an indifference curve, increasing the consumption of good measure on the x-axis and decreasing the consumption of the good measured on the y-axis.

Diminishing marginal returns The tendency for the marginal product of a variable factor eventually to diminish as additional units of the variable factor are employed.

Diminishing marginal utility The decline in marginal utility that occurs as more and more of a good is consumed.

Direct relationship A relationship between two variables that move in the same direction.

Discounting The conversion of a future amount of money to its present value.

Discouraged workers People who during a recession temporarily leave the labour force and who during an expansion re-enter the labour force and become more active job seekers.

Discretionary fiscal policy A policy action that is initiated by an act of Parliament.

Discretionary policy A policy that responds to the state of the economy in a possibly unique way that uses all the information available, including perceived lessons from past "mistakes."

Diseconomies of scale Technological conditions under which the long-run average cost increases as output increases.

Disposable income Income earned by supplying the services of factors of production (wages, interest, rent, and profit) plus transfer payments from the government minus taxes.

Dominant strategy equilibrium The outcome of a game in which there is a single best strategy (a dominant strategy) for each player, regardless of the strategy of the other players.

Duopoly A market structure in which two producers of a good or service compete with each other.

Dumping The sale of a export by a foreign firm for a price that is below its cost of production.

Dynamic comparative advantage Comparative advantage that a person or country possesses as a result of having specialized in a particular activity and then, as a result of learning-by-doing, having become the producer of that activity with the lowest opportunity cost.

Economic depreciation The decrease in the market price of a piece of capital during a given period.

Economic efficiency A situation that occurs when the cost of producing a given output is as low as possible.

Economic growth The expansion of production possibilities that results from capital accumulation and technological change.

Economic information Data on prices, quantities, and qualities of goods and services and factors of production.

Economic model A description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand.

Economic profit A firm’s total revenue minus its opportunity costs.

Economic rent The income received by the owner of a factor in excess of the amount required to induce that owner to offer the factor for use.

Economic stability The absence of wide fluctuations in the economic growth rate, the level of employment, and average prices.

Economic theoryA generalization that that summarizes what we think we understand about the economic choices that people make and the performance of industries and entire economies.

Economics The study of how people use their limited resources to try to satisfy unlimited wants.

Economies of scale Technological conditions under which long-run average cost decreases as output increases.

Economies of scope A situation in which average total cost decreases as a result of increasing the number of different goods produced.

Efficiency wage The wage rate that maximizes profit.

Efficient market A market in which the actual price embodies all currently available relevant information.

Elastic demand Demand with a price elasticity greater than 1; other things remaining the same, the percentage change in the quantity demanded of the good exceeds the percentage change in its price.

Elasticity of supply The responsiveness of the quantity supplied of a good to a change in its price, other things remaining the same. Elasticity of supply is calculated as the percentage change in the quantity supplied of a good divided by the percentage change in its price.

Employment-to-population ratio The percentage of people of working age who have jobs.

Entrants People who enter the labour force.

Entrepreneurial ability A special type of human resource that organizes the other three factors of production—labour, land, and capital—and makes business decisions, innovates, and bears business risk.

Equation of exchange An equation that states that the quantity of money multiplied by the velocity of circulation equals GDP.

Equilibrium expenditure The level of aggregate expenditure that occurs when aggregate planned expenditure equals real GDP.

Equilibrium price The price at which the quantity demanded equals the quantity supplied.

Equilibrium quantity The quantity bought and sold at the equilibrium price.

Equity In economics, equity has two meanings: economic justice or fairness and the owner's stake in a business.

Excess reserves A bank’s actual reserves minus its desired reserves.

Exchange efficiency A situation in which a good or service is exchanged at a price that equals both the marginal social benefit and the marginal social cost of the good or service.

Exchange rate The price at which one currency exchanges for another.

Excise tax A tax on the sale of a good or service. The tax is paid when the good or service is bought.

Excludable goodA good is excludable if its benefits can be restricted to the person who has paid for the good.

Exhaustible natural resources Natural resources that can be used only once and that cannot be replaced once used.

Expansion A business cycle phase in which real GDP increases.

Expansionary fiscal policy An increase in government expenditures or transfer payments or a decrease in taxes.

Expected utility The average utility arising from all possible outcomes.

Exports The goods and services that we sell to people in other countries.

External benefits Benefits that accrue to members of society other than the buyer of a good.

External costs Costs that are borne by members of society other than the producer of the good.

External diseconomies Factors outside the control of a firm that raise the firm’s costs as the industry produces a larger output.

External economies Factors beyond the control of a firm that lower the firm’s costs as the industry produces a larger output.

Externality A cost or a benefit arising from an economic transaction that affects people other than those who decide the scale of the activity.

Factors of production The economy's productive resources—land, labour, capital, and entrepreneurial ability.

Farm marketing board A regulatory agency that intervenes in agricultural markets to stabilize the prices of many agricultural products.

Federal budget A annual statement of the revenues and outlays of the government of Canada together with the laws and regulations that approve or support those revenues and outlays.

Feedback-rule policy A rule that specifies how policy actions respond to changes in the state of the economy.

Financial innovation The development of new financial products—new ways of borrowing and lending.

Financial intermediary An institution that receives deposits and makes loans.

Firm An institution that hires factors of production and that organizes those factors to produce and sell goods and services.

Fiscal policy The government’s attempt to influence the economy by setting and changing taxes and government spending.

Fixed cost A cost that is independent of the output level.

Fixed-rule policy A rule that specifies an action to be pursued independently of the state of the economy.

Four-firm concentration ratio A measure of market power that is calculated as the sales of the four largest firms in an industry as a percentage of total industry sales.

Flow A quantity per unit of time.

Foreign exchange market The market in which the currency of one country is exchanged for the currency of another.

Foreign exchange rate The price at which one currency exchanges for another.

Free rider A person who consumes a good without paying for it.

Frictional unemployment Unemployment arising from normal labour turnover—new entrants are constantly coming into the labour market, and firms are constantly laying off workers and hiring new workers.

Full employment A situation in which the unemployment rate equals the natural rate of unemployment.

Full employment equilibrium An equilibrium in which real GDP equals potential GDP.

Game theory A method of analysing strategic behaviour.

GDP deflator A price index that measures the average level of the prices of all goods and services that are included in GDP.

General Agreement on Tariffs and Trade An international agreement designed to limit government intervention to restrict international trade.

Government debt The total amount of borrowing that the government has undertaken.

Government deposit shifting The transfer of government funds by the Bank of Canada from the government’s account at the Bank of Canada to its accounts at the chartered banks or from the government’s accounts at the chartered banks to its account at the Bank of Canada.

Government expenditures Goods and services bought by the government.

Government expenditures multiplier The amount by which a change in government expenditures on goods and services is multiplied to determine the change in equilibrium expenditure that it generates.

Government sector surplus or deficit An amount equal to net taxes minus government expenditures on goods and services.

Great Depression A decade (1929– 1939) of high unemployment and stagnant production throughout the world economy.

Gross domestic product (GDP) The value of aggregate production in the economy in a year.

Gross investment The amount spent on adding to the capital stock and on replacing depreciated capital.

Growth accounting A method of calculating how much real GDP growth has resulted from growth of labour and capital and how much is attributable to technological change.

Herfindahl-Hirschman Index A measure of market power, that is calculated as the sum of the square of the market share (as a percentage) of each of the largest 50 firms (or all firms if there are fewer than 50 firms) in the market.

Hotelling Principle The proposition that the market for a stock of a natural resource is in equilibrium when the price of the resource is expected to rise at a rate equal to the interest rate on similarly risky assets.

Human capital The skill and knowledge of people, which arises from their education and on-the-job training.

Implicit rental rate The rent that a firm pays to itself for the use of the assets that it owns.

Import function The relationship between imports and real GDP, other things remaining the same.

Imports The goods and services that we buy from people in other countries.

Incentive An inducement to take a particular action.

Income effect The change in consumption that results from a change in the consumer’s income, other things remaining the same.

Income elasticity of demand The responsiveness of demand to a change in income, other things remaining the same. Income elasticity of demand is calculated as the percentage change in the quantity demanded divided by the percentage change in income.

Increasing marginal returns The tendency for the marginal product of the variable factor to increase as additional units of the variable factor are employed.

Increasing returns to scale Technological conditions under which the percentage increase in a firm's output exceeds the percentage increase in its inputs.

Indifference curve A curve that shows combinations of goods among which the consumer is indifferent.

Induced expenditure The sum of the components of aggregate expenditure that varies with real GDP.

Induced taxes Taxes that vary as real GDP varies.

Industrial union A group of workers who have a variety of skills and job types but who work for the same firm or industry.

Inelastic demand A demand with a price elasticity between 0 and 1; other things remaining the same, the percentage change in the quantity demanded of a good is less than the percentage change in its price.

Infant-industry argument The argument that protection is necessary to enable an infant industry to grow into a mature industry that can compete in world markets.

Inferior good A good for which demand decreases when income increases.

Inflation A process in which the price level is rising and money is losing value.

Inflationary gap The amount by which real GDP exceed potential GDP.

Information cost The cost of acquiring information on prices, quantities, and qualities of goods and services and factors of production—the opportunity cost of economic information.

Injection A flow into the circular flow of income and expenditure. It is an expenditure that does not originate with households.

Insider-outsider theory A theory of job rationing that says that to be productive, new workers—outsiders—must receive on-the-job training from existing workers—insiders.

Intellectual property rights Property rights for discoveries that are owned by creators of knowledge.

Interest rate The amount received by a lender and paid by a borrower expressed as a percentage of the amount of the loan.

Interest rate parity A situation in which interest rates on assets denominated in different currencies are equal when converted to the same currency.

Intermediate goods and services Goods and services that firms buy from each other and use as inputs in the goods or services that they eventually produce and sell to final users.

International crowding out The tendency for an expansionary fiscal policy to decrease net exports.

Inverse relationship A relationship between two variables that move in opposite directions.

Investment The purchase of new plant, equipment, and buildings and additions to inventories.

Investment demand The relationship between the level of investment and real interest rate, all other influences on investment remaining the same.

Involuntary part-time rate The percentage of the people in the labour force who have part-time jobs and want full-time jobs.

Job leavers People who voluntarily quit their jobs.

Job losers People who are laid off, either permanently or temporarily, from their jobs.

Job rationing The practice of paying a wage that creates an excess supply of labour and a shortage of jobs.

Job search The activity of people looking for acceptable vacant jobs.

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