Glossary of Economic Terms

By Phillip G. Kayser · 2017-9-21

    In developing this glossary, I have found the essays of Beverly S. Krueger (BSK) and the George Edward Durell Foundation (GEDF) to contain marvelously concise definitions, and have used them where possible. E.L. Hebden Taylor (ELHT) is also cited. The following definitions are an attempt to find the simplest definitions while retaining accuracy.

    Austrian School of Economics

    One of several free market approaches to the science of economics. What is unique about the Austrian school is that it begins by deducing its economic laws from axioms (presuppositions) and then applying it to the market place. In contrast, the Chicago School of Economics is empirical (inductively studying the market to discover a system). Ludwig von Mises was one of the most important of the "Austrian" school of scholars.

    Bank

    A business that accepts deposits of money, makes loans, extends credit, issues money, transmits funds, etc.

    Bank Note

    A written promise to pay something.

    Barter

    "The direct trading of goods and services between people without the use of money." (BSK)

    Bond

    A written promise to repay money borrowed.

    Bretton Woods Agreement

    "An agreement reached by several governments in 1944 in Bretton Woods, New Hampshire, for the organization of the International Monetary Fund and the International Bank for Reconstruction and Development (World Bank)." (GEDF)

    Business Cycle

    The cycle of "boom and bust." Free market advocates say this comes from the government's manipulation of the supply of money and credit, not to the market itself. Karl Marx thought it was something inherent to capitalism.

    Cartel

    A group of organizations whose goal is to limit competition and/or to fix prices. According to the George Edward Durell Foundation, "Cartels are made possible only by government action; the Federal Reserve System is a banking cartel." (GEDF)

    Cash

    Coins and paper money.

    Cash holding

    The supply of cash kept on hand.

    Capital Resources

    "Goods made by people and used to produce other goods and services (also called intermediate goods)." (BSK)

    Central Bank

    A central bank is a government created banking institution with three powers: 1) the power to issue currency and to control the amount of currency, 2) the power to hold and manage reserves of commercial banks and 3) the power to serve as a fiscal agent for the central government. Most countries have central banks today and use them to manipulate the economy. The first central bank was the Bank of England, created in 1694, though it did not technically act as a central bank until it was granted a monopoly in 1833, and had those powers clearly formulated in 1844 (the "Peel's Act").

    Chicago School of Economics

    A school of economics based on the empirical method. Though using a different method, comes to similar conclusions on many issues as the Austrian School. Example: Milton Friedman. Also known as Monetarism.

    Choice

    "What someone must make when faced with two or more alternative uses for a resource, also called an economic choice."

    Circular flow

    "A model of an economy showing the interactions between households and business firms as they exchange goods and services and resources in markets." (BSK)

    Coin

    Verb: To stamp and shape coins from pieces of metal.

    Competition

    "Techniques used by businesses to gain more customers and to earn higher profits." (BSK)

    Consumers

    "People whose wants are satisfied by using goods and services." (BSK)

    Costs of Production

    "All resources used in producing goods and services, for which owners receive payment." (BSK)

    Credit

    An amount of money placed at a person's disposal by a bank.

    Creditor

    A person to whom a debt is owed.

    Debase (debasing)

    Reducing the value of precious metal in a coin by mixing it with a cheaper alloy.

    Debtor

    A person who owes a debt.

    Demand

    "A schedule of how much consumers are willing and able to buy at all possible prices during some time period." (BSK)

    Depression

    "The period of the business cycle when unemployment is highest and production is lowest" (GEDF)

    Devaluation

    "Reduction of the metallic content in the monetary unit or a decrease in the number of foreign monetary units exchangeable for one domestic unit." (GEDF)

    Discount

    "A reduction in the principal amount, face value, or list price." (GEDF)

    Discount Rate

    The rates at which the Federal Reserve Banks will lend money to other banks.

    Division of Labor

    "The process whereby workers perform only a single task or very few steps of a major production task, as when working on a assembly line." (BSK)

    Economic Systems

    "The way a society organizes the production, consumption, and distribution of goods and services." (BSK)

    Entreprenuership

    "The human resource that assumes the risk of organizing other productive resources to produce goods and services." (BSK)

    Exchange rate

    The ratio at which two currencies are exchanged.

    Equilibrium Price

    "The market clearing price at which the quantity demanded by buyers equals the quantity supplied by sellers." (BSK)

    Factors of Production

    "Resources used by businesses to produce goods and services." (BSK)

    Federal Reserve System

    The nationwide bank system in the United States of America set up by Congress in 1913. It is made up of 1) a board of governors, 2) the Federal Open Market committee, 3) twelve district banks and 4) the member banks.

    Fiat Money

    A coin or piece of paper whose only value consists in what the government declares it to be, and which declaration makes it legal tender.

    Floating exchange rates

    These are flexible exchange rates which are changeable at the whim of government or in response to market conditions.

    Fractional Reserves

    When a bank does not keep 100% of its deposits on hand to meet demand for cash withdrawal, its reserves are only a fraction of its deposits.

    Free goods

    Anything that is in sufficient quantity to satisfy all wants. Air is a free good in most places on earth. It is not a free good when tanked for those under the water or in space ships.

    Free Market

    "An economy in which private property is protected, competition is free and unrestricted by government, contracts are upheld by government, and force and fraud and threats to use them are either absent or punishable by law." (GEDF)

    Gold Bullion Standard

    "A monetary system in which gold coin functions as money and notes are redeemable in gold coin." (GEDF)

    Gold coin standard

    "A monetary system in which gold coin functions as money and notes are redeemable in gold coin." (GEDF)

    Gold standard

    "A monetary system in which gold functions as money. Some gold standards have been managed by the market; others have been managed by the government." (GEDF)

    Goods

    "Objects that can be held or touched that can satisfy people’s wants." (BSK) Examples: Automobiles, shoes, radios. Synonym: commodities.

    Government intervention

    "An act compelling or inducing people to act in the market in a way different from that in which they would have acted if the market were free." (GEDF)

    Gresham's Law

    “Simply and inaccurately stated, Bad money drives out good. Sir Thomas Gresham (1519-1579) noted that when people value money differently from what the government has decreed its value to be, the money they value less (bad money) will remain in circulation, while the money they value more (good money) will be hoarded. In an economy in which government does not impose an arbitrary value on money, good money will drive bad money out of circulation." (GEDF) Loss of American coinage in 1964 is an example of this.

    Human Resources

    "The quantity and quality of human effort directed toward producing goods and services (also called labor)." (BSK)

    Hyperinflation

    "A sudden and severe increase in the supply of money resulting in general price increases of one hundred percent per year or more." (GEDF)

    Incentives

    "Factors that motivate and influence the behavior of house-holds and businesses. Prices, profits, and losses act as incentives for participants to take action in a market economy." (BSK)

    Income Taxes

    "Taxes paid by households and business firms on the income they receive." (BSK)

    Indirect Exchange

    "Trading which involves the use of money or a medium of exchange. Opposite of barter." (GEDF)

    Inflation

    "An increase in the supply of money and credit caused by government action. Inflation usually results in a rise in the general price level for all goods and services, and, in popular usage, inflation has come to mean any rise in the general price level." (GEDF)

    Interdependence

    "Dependence on others for goods and services; occurs as a result of specialization." (BSK)

    Interest

    The cost of money (expressed as a %). "There are three components of interest rates: … interest proper results from the fact that present goods are worth more than future goods. Given a choice, people would prefer to have a good now rather than later. The second component, a risk premium, results from the fact that the lender incurs certain risks by lending money. The third component, an inflation premium, results from an anticipated decrease in the value of the money during the term of the loan." (GEDF)

    Investment in Capital Resources

    "Business purchases of a new plant and equipment." (BSK)

    Investment in Human Resources

    "Activities that increase the skills and knowledge of workers." (BSK)

    Laissez faire.

    Refers to a free market; without government intervention.

    Money which the government declares must be accepted by creditors for the payment of debts.

    Market Economy

    "An economic system where most goods and services are exchanged through private transactions by private households and businesses. Prices are determined by buyers and sellers making exchanges in private markets." (BSK)

    Markets

    "Any setting where buyers and sellers exchange goods, services, resources, and currencies." (BSK)

    Monetary policy

    The government's policy on money and banking.

    Monetize debt

    "The process by which the Federal Reserve purchases debt instruments (bonds, bills, and notes) of the U.S. government (or foreign governments) and creates new money by making computer entries in the accounts of the debt-issuing governments at Federal Reserve Banks." (GEDF)

    Money

    "A medium of exchange, a good that can be used to buy other goods and services." (BSK) Money performs three functions: 1) it is a store of value (able to keep keep its purchasing power over a long period of time), 2) it is a medium of exchange (a commodity that makes complext trading possible), 3) it is a unit of account (dollar, frank, ounce of gold, lbs of tobacco, etc.) (ELHT)

    Natural Resources

    "Gifts of nature" that are present without human intervention (also called land).

    Open Market operations

    The Federal Reserve's actions of buying and selling debt directly from the U.S. Treasury on the open market. This is done in order to influence the supply of money, and to cause prices to rise or fall, interest rates to increase or decrease, unemployment to worsen or improve or business activity to speed up or slow down.

    Opportunity Cost

    "The next best alternative that must be given up when a choice is made. Not all alternatives, just the next best choice." (BSK)

    Price

    "The value of a good or service stated in money terms." (BSK)

    Production/Producers

    "People who use resources to make goods and services, also called workers." (BSK)

    Productivity

    "The ratio of output (goods and services) produced per unit of input (productive resources) over a period of time." (BSK)

    Profit

    "The difference between the total revenue and total cost of a business; entrepreneurial income." (BSK)

    Property Taxes

    "Taxes paid by households and businesses on land and buildings." (BSK)

    Public Goods

    "Goods and services that are provided by the government. They often are too expensive or not practical to be obtained by individuals." (BSK)

    Purchasing power

    The ability to purchase goods in a competitive market.

    Real wages

    Wages adjusted to reflect inflation or wages expressed in its ability to purchase real goods.

    Recession

    A mild depression caused by a prior inflation.

    Reserves

    The amount of money a bank keeps on hand (or which is deposited with the Federal Reserve Bank) to be able to meet the demand for cash withdrawals.

    Reserve requirements

    The amount of reserves the government mandates banks to have on hand. The Federal Reserve varies this amount.

    Resources

    "All natural, human and human-made aids to the production of goods and services. Also called productive resources." (BSK)

    Sales Taxes

    Taxes paid on commodities and services purchased.

    Save

    The act of not consuming goods.

    Scarcity

    "The condition of not being able to have all the goods and services that we want." (BSK)

    Seigniorage

    The amount of profit made by the government in the minting of coins. (The difference between the face value of the coin and its actual metal value.)

    Services

    "Activities that can satisfy people’s wants." (BSK) Example: A bank teller performs services for the bank customers such as depositing money, cashing checks, paying bills, etc.

    Shortages

    "The situation resulting when the quantity demanded exceeds the quantity supplied of a good, service, or resource." (BSK)

    Socialism

    "Government ownership of the means of production. There are basically two forms of socialism: communism or socialism proper, in which the government is both legal owner and manager of the means of production, and fascism or Nazism, in which private persons or companies are the legal owners of the means of production, but they are controlled, regulated, and commanded by the government." (GEDF)

    Specialization

    "The situation in which people produce a narrower range of goods and services than they consume." (BSK)

    Specie

    Coins or bars of silver or gold.

    Supply

    "A schedule of how much producers are willing and able to produce and sell at all possible prices during some time period." (BSK)

    Surpluses

    "The situation resulting when the quantity supplied exceeds the quantity demanded of a good, service, or resource, usually because the price is for some reason above the equilibrium price in the market." (BSK)

    Taxes

    "Required payments of money made to governments by households and business firms." (BSK)

    Trade/Exchange

    "Trading goods and services with people for other goods and services or for money. When people exchange voluntarily, they expect to be better off as a result." (BSK)

    Trade-offs

    "Giving up one thing to get some of another." (BSK)

    Unemployment

    "The situation in which people are willing and able to work at current wages but do not have jobs." (BSK)

    Usury

    "Interest rates higher than the speaker thinks they ought to be." (GEDF)


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