Glossary of Key Terms

  A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

A  

absolute advantage   the comparison among producers of a good according to their productivity

aggregate-demand curve   a curve that shows the quantity of goods and services that households, firms, and the government want to buy at each price level

aggregate risk   risk that affects all economic actors at once

aggregate-supply curve   a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

appreciation   an increase in the value of a currency as measured by the amount of foreign currency it can buy

automatic stabilizers   changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession, without policymakers having to take any deliberate action    

B 

balanced trade   a situation in which exports equal imports

Bank of Canada   the central bank of Canada

bank rate   the interest rate charged by the Bank of Canada on loans to the commercial banks

bond   a certificate of indebtedness

budget deficit   a shortfall of tax revenue from government spending

budget surplus   an excess of tax revenue over government spending

business cycle   fluctuations in economic activity, such as employment and production  

 C

capital flight   a large and sudden reduction in the demand for assets located in a country

catch-up effect   the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

central bank   an institution designed to regulate the quantity of money in the economy

circular-flow diagram   a visual model of the economy that shows how dollars flow through markets among households and firms

classical dichotomy   the theoretical separation of nominal and real variables

closed economy   an economy that does not interact with other economies in the world

collective bargaining   the process by which unions and firms agree on the terms of employment

commodity money   money that takes the form of a commodity with intrinsic value

comparative advantage   the comparison among producers of a good according to their opportunity cost

competitive market   a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

complements   two goods for which an increase in the price of one leads to a decrease in the demand for the other

compounding   the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future

consumer price index (CPI)   a measure of the overall cost of the goods and services bought by a typical consumer

consumption   spending by households on goods and services, with the exception of purchases of new housing

core inflation   the measure of the underlying trend of inflation

cost   the value of everything a seller must give up to produce a good

crowding out   a decrease in investment that results from government borrowing

crowding-out effect on investment   the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

crowding-out effect on net exports   the offset in aggregate demand that results when expansionary fiscal policy in a small open economy with a flexible exchange rate raises the real exchange rate and thereby reduces net exports

currency   the paper bills and coins in the hands of the public

cyclical unemployment   the deviation of unemployment from its natural rate    

D

deadweight loss   the fall in total surplus that results from a market distortion, such as a tax

demand curve   a graph of the relationship between the price of a good and the quantity demanded

demand deposits   balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card

demand schedule   a table that shows the relationship between the price of a good and the quantity demanded

depreciation   a decrease in the value of a currency as measured by the amount of foreign currency it can buy

depression   a severe recession

diminishing returns   the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

discouraged searchers   individuals who would like to work but have given up looking for a job

diversification   the reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks

E

economics   the study of how society manages its scarce resources

efficiency   the property of society getting the most it can from its scarce resources

efficiency wages   above-equilibrium wages paid by firms in order to increase worker productivity

efficient markets hypothesis   the theory that asset prices reflect all publicly available information about the value of an asset

Employment Insurance   a government program that partially protects workers' incomes when they become unemployed

equilibrium   a situation in which the price has reached the level where quantity supplied equals quantity demanded

equilibrium price   the price that balances quantity supplied and quantity demanded

equilibrium quantity   the quantity supplied and the quantity demanded at the equilibrium price

equity   the property of distributing economic prosperity fairly among the members of society

exports   goods and services that are produced domestically and sold abroad

externality   the impact of one person's actions on the well-being of a bystander

F

fiat money   money without intrinsic value that is used as money because of government decree

finance   the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk

financial intermediaries   financial institutions through which savers can indirectly provide funds to borrowers

financial markets   financial institutions through which savers can directly provide funds to borrowers

financial system   the group of institutions in the economy that help to match one person's saving with another person's investment

Fisher effect   the one-for-one adjustment of the nominal interest rate to the inflation rate

foreign exchange market operations   the purchase or sale of foreign money by the Bank of Canada

fractional-reserve banking   a banking system in which banks hold only a fraction of deposits as reserves

frictional unemployment   unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

fundamental analysis   the study of a company's accounting statements and future prospects to determine its value

future value   the amount of money in the future that an amount of money today will yield, given prevailing interest rates    

G

GDP deflator   a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100

government purchases   spending on goods and services by local, provincial, and federal governments

gross domestic product (GDP)   the market value of all final goods and services produced within a country in a given period of time

H

human capital   the knowledge and skills that workers acquire through education, training, and experience

I 

idiosyncratic risk   risk that affects only a single economic actor

import quota   a limit on the quantity of a good that is produced abroad and sold domestically

imports   goods and services that are produced abroad and sold domestically

indexation   the automatic correction of a dollar amount for the effects of inflation by law or contract

inferior good   a good for which, other things equal, an increase in income leads to a decrease in demand

inflation   an increase in the overall level of prices in the economy

inflation rate   the percentage change in the price index from the preceding period

inflation tax   the revenue the government raises by creating money

informationally efficient   reflecting all available information in a rational way

interest rate parity   a theory of interest rate determination whereby the real interest rate on comparable financial assets should be the same in all economies with full access to world financial markets

investment   spending on capital equipment, inventories, and structures, including household purchases of new housing

J

job search   the process by which workers find appropriate jobs given their tastes and skills  

L 

labour force   the total number of workers, including both the employed and the unemployed

labour-force participation rate   the percentage of the adult population that is in the labour force

law of demand   the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises

law of supply   the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises

law of supply and demand   the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

liquidity   the ease with which an asset can be converted into the economy's medium of exchange

M

macroeconomics   the study of economy-wide phenomena, including inflation, unemployment, and economic growth

marginal changes   small incremental adjustments to a plan of action

market   a group of buyers and sellers of a particular good or service

market economy   an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

market failure   a situation in which a market left on its own fails to allocate resources efficiently

market for loanable funds   the market in which those who want to save supply funds and those who want to borrow to invest demand funds

market power   the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices

medium of exchange   an item that buyers give to sellers when they want to purchase goods or services

menu costs   the costs of changing prices

microeconomics   the study of how households and firms make decisions and how they interact in markets

model of aggregate demand and aggregate supply   the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

monetary neutrality   the proposition that changes in the money supply do not affect real variables

monetary policy   the setting of the money supply by policymakers in the central bank

money   the set of assets in an economy that people regularly use to buy goods and services from other people

money multiplier   the amount of money the banking system generates with each dollar of reserves

money supply   the quantity of money available in the economy

multiplier effect   the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

mutual fund   an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds

N

national saving (saving)   the total income in the economy that remains after paying for consumption and government purchases

natural-rate hypothesis   the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation

natural rate of unemployment   the rate of unemployment to which the economy tends to return in the long run

natural resources   the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits

net capital outflow   the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners

net exports   the value of a nation's exports minus the value of its imports; also called the trade balance

nominal exchange rate   the rate at which a person can trade the currency of one country for the currency of another

nominal GDP   the production of goods and services valued at current prices

nominal interest rate   the interest rate as usually reported without a correction for the effects of inflation

nominal variables   variables measured in monetary units

normal good   a good for which, other things equal, an increase in income leads to an increase in demand

normative statements   claims that attempt to prescribe how the world should be  

O 

Okun's law   the number of percentage points the unemployment rate increases when GDP falls by 1 percentage point

open economy   an economy that interacts freely with other economies around the world

open-market operations   the purchase or sale of Canadian government bonds by the Bank of Canada

opportunity cost   whatever must be given up to obtain some item

overnight rate   the interest rate on very short-term loans between commercial banks  

P

perfect capital mobility   full access to world financial markets

Phillips curve   a curve that shows the short-run tradeoff between inflation and unemployment

physical capital   the stock of equipment and structures that are used to produce goods and services

positive statements   claims that attempt to describe the world as it is

present value   the amount of money today that would be needed to produce, using prevailing interest rates, a given future amount of money

private saving   the income that households have left after paying for taxes and consumption

production possibilities frontier   a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

productivity   the amount of goods and services produced from each hour of a worker's time

public saving   the tax revenue that the government has left after paying for its spending

purchasing-power parity   a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries  

Q 

quantity demanded   the amount of a good that buyers are willing and able to purchase

quantity equation   the equation M 3 V 5 P 3 Y , which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services

quantity supplied   the amount of a good that sellers are willing and able to sell

quantity theory of money   a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

R 

random walk   the path of a variable whose changes are impossible to predict

rational expectations   the theory according to which people optimally use all the information they have, including information about government policies, when forecasting the future

real exchange rate   the rate at which a person can trade the goods and services of one country for the goods and services of another

real GDP   the production of goods and services valued at constant prices

real interest rate   the interest rate corrected for the effects of inflation

real variables   variables measured in physical units

recession   a period of declining real incomes and rising unemployment

reserve ratio   the fraction of deposits that banks hold as reserves

reserve requirements   regulations on the minimum amount of reserves that banks must hold against deposits

reserves   deposits that banks have received but have not loaned out

risk averse   exhibiting a dislike of uncertainty  

S 

sacrifice ratio   the number of percentage points of one year's output lost in the process of reducing inflation by 1 percentage point

scarcity   the limited nature of society's resources

shoeleather costs   the resources wasted when inflation encourages people to reduce their money holdings

shortage   a situation in which quantity demanded is greater than quantity supplied

small open economy   an economy that trades goods and services with other economies and, by itself, has a negligible effect on world prices and interest rates

stagflation   a period of falling output and rising prices

sterilization   the process of offsetting foreign exchange market operations with open-market operations, so that the effect on the money supply is cancelled out

stock   a claim to partial ownership in a firm

store of value   an item that people can use to transfer purchasing power from the present to the future

strike   the organized withdrawal of labour from a firm by a union

structural unemployment   unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one

substitutes   two goods for which an increase in the price of one leads to an increase in the demand for the other

supply curve   a graph of the relationship between the price of a good and the quantity supplied

supply schedule   a table that shows the relationship between the price of a good and the quantity supplied

supply shock   an event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve

surplus   a situation in which quantity supplied is greater than quantity demanded

T 

tariff   a tax on goods produced abroad and sold domestically

technological knowledge   society's understanding of the best ways to produce goods and services

theory of liquidity preference   Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance

trade balance   the value of a nation's exports minus the value of its imports; also called net exports

trade deficit   an excess of imports over exports

trade policy   a government policy that directly influences the quantity of goods and services that a country imports or exports

trade surplus   an excess of exports over imports

U 

unemployment rate   the percentage of the labour force that is unemployed

union   a worker association that bargains with employers over wages and working conditions

unit of account   the yardstick people use to post prices and record debts  

V 

velocity of money   the rate at which money changes hands

vicious circle   cycle that results when deficits reduce the supply of loanable funds, increase interest rates, discourage investment, and result in slower economic growth; slower growth leads to lower tax revenue and higher spending on income-support programs, and the result can be even higher budget deficits

virtuous circle   cycle that results when surpluses increase the supply of loanable funds, reduce interest rates, stimulate investment, and result in faster economic growth; faster growth leads to higher tax revenue and lower spending on income-support programs, and the result can be even higher budget surpluses

W

welfare economics   the study of how the allocation of resources affects economic well-being

world price   the price of a good that prevails in the world market for that good