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Glossary of terms related to Economics.
Five other glossaries are available:

- the banking glossary; - the finance glossary; - the international economics glossary; - the macroeconomics glossary; and, the monetary policy glossary


  • Adverse selection [r]: a partial market failure that occurs when there are traders who take advantage of asymmetric information, raising uncertainty and leading to a reduction in the value of its products. [e]
  • Agency cost [r]: The cost to the owners (or company shareholders) of an organisation of actions by their agents (or the company management) that are contrary to the owners' interests - and the cost of attempting to prevent such actions. [e]
  • Applied statistics [r]: the practice of collecting and interpreting numerical observations for the purpose of generating information. [e]
  • Arbitrage [r]: transactions to take advantage of a price differences of a product in different markets by buying where it is cheap and selling where it is dear. The possibility of arbitrage often prevents the occurrence of price differences. [e]
  • Asset price bubble [r]: The condition of an asset market in which price is governed by speculators' expectations that it will increase. [e]
  • Asymmetric shock [r]: A shock that has different effects upon different parts of an economic system such as a country or a monetary union. [e]
  • Austrian School of economics [r]: A school of economists who reject the tenets of macroeconomics and oppose the practice of collective economic management; and whose methodology concentrates upon the decisions of individuals and the operation of the market mechanism. [e]


  • Balassa-Samuelson effect [r]: A tendency for productivity increases in the traded sector to lead to a rise in the relative price of nontradables. [e]
  • Basis point [r]: (bp) one hundredth of a percentage point . [e]
  • Beveridge curve [r]: A curve (convex when viewed from the origin) showing a relationship between vacancies and unemployment. [e]
  • Bubble (economics) [r]: A surge in prices that raises expectations of further increases, so generating further increases: a process that continues until confidence falters, the bubble "bursts" and prices rapidly revert to an objectively-based level. [e]
  • Budget balance [r]: the difference between a central government's revenue and its expenditure in a given financial year. Conventions differ concerning the items that are included, and various cyclical adjustments can be made to identify its discretionary element.. [e]
  • Budget deficit [r]: the excess of a government's expenditures over its receipts. See also cyclically-adjusted budget deficit [e]

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  • Circular flow of income [r]: A model of the economy in which income flows from firms to households in the form of wages and salaries, and from households to firms in the form of spending on goods and services, and in which other subsidiary flows can be specified. [e]
  • Classical unemployment [r]: Unemployment that results from setting the wage rate at a level at which the demand for labour falls short of its supply. [e]
  • Competition [r]: In economics, the attribute of a market that is characterised by the closeness of its approach to the ideal of perfect competition in which no supplier is able to influence the price of its products. [e]
  • Complex interactive system [r]: A system in which an event in one of its components can have significant repercussions in many other components; and which can exist in more states than can be enumerated - including "open systems" whose operation is affected by events that have been generated from outside (such as international trade in the case of an economic system). [e]
  • Concentration ratio [r]: A ratio that shows the extent to which a market is dominated by a small group of suppliers. An example is the 5-firm concentration ratio, which is the percentage of total sales of a product that is supplied by the five largest suppliers. An alternative measure is the Herfindahl Index [e]
  • Consequentialism [r]: The belief that the expected consequences of decisions should be the sole criterion of decision-making (in contrast to deontology). [e]
  • Consumer's surplus [r]: The excess of the amount that a consumer would be willing to pay for a product over its market price, changes in the value of which are usually estimated according to the rule of one-half. [e]
  • Consumption function [r]: The relation between consumption and income, and in particular the tendency (other things being equal) for consumption to rise less rapidly than income because of a growing tendency to save (sometimes referred to as a falling marginal propensity to consume) [e]
  • Contingent employment [r]: Employment that does not involve a long-term commitment such as the use of independent contractors, temporary staff and workers on call for activity peaks. [e]
  • Corporation [r]: In commerce, an organisation that is jointly owned by shareholders who participate in its profits but are not personally liable for its debts. More generally, a legal entity that is distinct from its owners and may employ people, buy and sell assets, and lend or borrow money. [e]
  • Covariance [r]: A statistical parameter that indicates whether two random variables show a related linear trend. [e]
  • Creative destruction [r]: The process by which technological innovation makes existing assets and skills redundant and releases resources for more productive employment (argued by Joseph Schumpeter to be an essential feature of economic growth). [e]
  • Cross elasticity of demand [r]: The percentage change in the quantity demanded of one good as a result of a unit percentage change in the price of another good. [e]
  • Cyclically-adjusted budget deficit [r]: The budget deficit, excluding the effects upon public expenditure and receipts from taxation of departures from the trend growth of output (see automatic stabilisers). [e]
  • Cyclical deficit [r]: That part of a budget deficit that is attributable to a temporary departure of national output from its trend, and which ceases when trend output growth resumes. [e]

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  • Deleveraging [r]: A reduction of the proportion of debt in a company's capital structure - also used to refer to a general reduction in household debt. [e]
  • Demand shock [r]: A sudden change in the demand for domestically-produced goods and services - such as could result from a tax increase or a fall in world trade. [e]
  • Destocking [r]: The reduction in suppliers' stocks that occurs in response to a fall in consumer demand at the beginning of a recession. [e]
  • Devaluation [r]: A policy-induced downward adjustment to a country's currency exchange rate. The term is normally applied to action to improve its international competitiveness, taken by a country that operates a nominally fixed exchange rate regime. [e]
  • Diminishing marginal utility [r]: The axiom, usually stated as a law, that there is a diminution in the satisfaction gained per unit of a good, each time an extra unit of that good is received. [e]
  • Discounting [r]: (i) The action of selling a bill of exchange before its due payment (or "maturity") date "at a discount": that is to say after paying the purchaser a fee for accepting it. (ii) The practice of calculating the current equivalent of a future cost or benefit by the application of a chosen discount rate. [e]
  • Discount window [r]: A facility provided by central banks that enables a bank to make secured short-term loans at its central bank's discount rate. [e]
  • Discouraged worker [r]: A person of working age who is available for work but is not seeking work because he believes that no suitable work is available. [e]
  • Double-dip recession [r]: A fall in economic growth following an aborted recovery from a recession, such as occurred in the 1937-39 phase of the Great Depression. [e]
  • Downturn (economic) [r]: The start of a period of negative economic growth. [e]

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  • Generational accounts [r]: accounts that are constructed by extrapolating current policies through the lifetimes of all people currently alive, and by calculating the net taxes they would pay under those policies. The results are sensitive to the method of extrapolation. [e]
  • Gini coefficient [r]: A number between 0 and 1 denoting the degree of inequality of income in a community, defined as the area between the Lorenz curve and the diagonal divided by the area under the diagonal. [e]
  • Gini index [r]: A Gini coefficient expressed as a percentage. [e]
  • Goods (economics) [r]: A term used in economics to include all tangible products to which people attach value. [e]
  • Golden Rule (finance) [r]: The requirement that borrowing should be used only for the purpose of investment. [e]
  • Great moderation [r]: the period between 1980 and 2007 during which the volatility of US output was less than half that of the preceding post-war period. [e]


  • Herding (economics) [r]: The practice of basing decisions upon the actions of others - by firms, investors and consumers. [e]
  • Herfindahl Index [r]: A measure of market concentration obtained by adding together the squares of the fractions of total sales of a product supplied by all of its suppliers. [e]
  • High-powered money [r]: currency held by the public plus bank vault cash plus bank deposits at Federal Reserve banks (see also broad money). [e]
  • Hysteresis (economics) [r]: The failure of an economic variable to return to its initial equilibrium after a temporary shock, for example when productive capacity that becomes unemployed during a recession is not returned to employment when the recession is over. [e]

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  • Impossibility theorem [r]: The proof that it is impossible to devise a rational democratic voting system that is guaranteed to produce a consistent set of preferences for a group from the preferences of the people in the group. [e]
  • Income effect [r]: The tendency of the demand for a product to change in response to a change in its price because the price change has the effect of changing the consumer's income. [e]
  • Incomplete contract [r]: A contract that does not fully specify what each party to it must do under every conceivable circumstance. [e]
  • Information asymmetry [r]: The situation in which relevant information is known to some parties to an agreement, but not to others. [e]
  • Infrastructure (economics) [r]: The institutions and networks that are a necessary adjunct to a country's normal economic activity, including its legal system, its financial system, its other markets; and its communication, transportation, and energy supply networks. [e]
  • Intermediate product [r]: A product that is both an output from one production process and an input to another. [e]
  • Internal rate of return [r]: the discount rate which, if applied to a sequence of cash flows, makes the net present value of those cash flows equal to zero. [e]
  • Internal devaluation [r]: Policy action taken to improve the international competitiveness of a country's products without a currency devaluation, for example by reducing labour costs. [e]

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  • Kaldor-Hicks criterion [r]: The criterion for the assessment of the economic efficiency of a proposal that requires that those who gain from it should be able to compensate those who lose from it. [e]
  • Kurtosis [r]: a mathematical expression defining the shape of a symmetrical probability distribution curve - sometimes referred to as "peakiness". It is sometimes adjusted to put the kurtosis of a normal distribution at zero (although some mathematicians then call it "excess kurtosis"). Positive kurtosis then means that more of the variance is due to infrequent extreme deviations, rather than to frequent modestly-sized deviations. [e]
  • Labour (economics) [r]: The application of human activity to the production of goods and services. [e]
  • Labour force [r]: That part of a country's population that is available for employment, including those in employment, the self-employed and the unemployed (otherwise termed the "working population"). [e]
  • Labour market [r]: A conceptual aggregation of all the markets in which the wages and conditions of employment are determined. [e]
  • Learning curve [r]: A mathematical relationship between the cost of performing an action and the number of times it has been performed. [e]
  • Lender of last resort [r]: An institution, that is prepared to lend money to any solvent bank that encounters a serious liquidity risk, or a threatened bank run. (The term has sometimes also been applied to financial assistance to avert insolvency that could occur for other reasons, or to financial assistance to governments). [e]
  • Leverage [r]: (i) The use of borrowing to increase the amount of money that is available for investment or consumption. (ii) A proportional measure of indebtedness, such as the ratio of a company's debt to its shareholders' equity (the same as British "gearing"), or the ratio of the indebtedness of a household to the net value of its assets (ie net of its debts). [e]
  • LIBOR [r]: (London Interbank Offer Rate) the rate of interest at which a group of banks (16 banks from seven countries, including the United States, Switzerland and Germany) are willing to lend to each other for periods ranging from a day to a year . [e]
  • Liquidity [r]: (i) The quantity of available assets in its possession that an organisation could rapidly exchange for cash (assets that cannot be exchanged for cash at a particular time are considered to be "illiquid" at that time); (ii) the funding that is unconditionally available to settle claims through monetary authorities (termed "official liquidity"). [e]
  • Liquidity crisis [r]: The situation faced by an otherwise solvent company that finds itself unable to raise the necessary cash quickly enough to meet its financial obligations. [e]
  • Lorenz curve [r]: A curve formed by plotting, on a cumulative basis, the amount of income received by members of a community against the number of individuals that receive that amount - so that inequality of income is indicated by departure from the 45 degree diagonal (sometimes applied to wealth). [e]

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  • Marginal cost [r]: The cost of producing one additional unit of a product. [e]
  • Marginal product [r]: The additional output of a product produced by the application of one additional unit of input. [e]
  • Marginal propensity to consume [r]: the proportion of a small increase in income that is spent rather than saved. [e]
  • Marginal propensity to save [r]: The proportion of a small increase in income that is saved rather than spent. [e]
  • Marginal rate of substitution [r]: The rate at which a person has to substitute the possession of one product for another in order to maintain a constant level of utility. [e]
  • Marginal tax rate [r]: The percentage increase in taxation that is due as a result of a small increase in income. [e]
  • Marginal utility [r]: The increase in the satisfaction experienced by a consumer caused by a unit increase in his possession of a product. [e]
  • Market [r]: A term used in commerce and economics to denote a conjunction of buyers and sellers. [e]
  • Market concentration [r]: The number and production share of firms in a market (or industry). [e]
  • Market interaction [r]: The tendency for a change in the price of a product (or of a factor of production) of one market to influence a corresponding price in another because of the possibility of substitution between their products (or between their factors of production). [e]
  • Market power [r]: The ability of a supplier to exercise a degree of choice concerning the pricing of a product by restricting its supply: a measure of departure from the ideal of perfect competition in which every supplier is a price-taker [e]
  • Market structure [r]: The distribution among its suppliers of the supply of a product to market, that determines the degree of concentration in that market. [e]
  • Means test [r]: The restriction of benefit payments to those whose income or savings are below prescribed limits. [e]
  • Monetary base [r]: currency in circulation plus bank vault cash plus deposits held by banks at the central bank (termed "high-powered money" in the US, and referred to as M0 in the UK). [e]
  • Monetisation (of public debt) [r]: A government's sale of its own securities to the country's central bank in order to obtain funds that are used to redeem its public debt - resulting in an expansion of the bank's monetary base, and consequently of the country's money supply. [e]
  • Money supply [r]: the economy's stock of those assets that can be quickly exchanged for goods and services. [e]
  • Moral hazard [r]: Motivation to take an otherwise unwarranted risk because the cost of an unfavourable outcome would be borne by someone other than the risk-taker. [e]

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  • Okun curve [r]: An empirical relationship between unemployment change and the output gap (originally thought to be linear at the rate of a 1 per cent increase in unemployment for every 3 per cent of output gap). [e]
  • Output gap [r]: the percentage difference between the current value of the output of an economy, and that economy's normal output trend. [e]


  • Pareto efficiency [r]: A Pareto-efficient situation is defined as one from which no change could benefit anyone without harming someone else, and the Pareto criterion for the assessment of a change requires that someone must gain from it and no-one most lose. [e]
  • Participation rate [r]: The percentage of the population of working age that participates in the labour force. [e]
  • Paternalism [r]: The conduct of a decision-maker who acts in accordance with his subjective judgment of the interests of those on whose behalf his decisions are made. [e]
  • Perfect competition [r]: The property of a hypothetical market in which no producer or consumer has the power to influence prices, each producer and each consumer acts independently, all products have identical qualities that are known to everybody, and there are no barriers to entry (see competition). [e]
  • Permanent income hypothesis [r]: The theory proposed by Milton Friedman that consumers attempt to adjust their consumption in response to variations in income in order to maintain an unvarying living standard - thus limiting their short-term response to a fiscal stimulus. [e]
  • Positive feedback [r]: A systemic reaction to an occurrence that has the effect of increasing the magnitude of that occurrence. [e]
  • Poverty trap [r]: The situation in which an increase in earnings would be significantly reduced by a loss of those state benefits that are subject to a means test. [e]
  • Price flexibility [r]: The property of a market in which prices act rapidly to bring supply into equality with demand (see supply and demand). [e]
  • Primary budget balance [r]: The budget balance excluding payments of interest on the national debt. [e]
  • Probability blindness [r]: The human brain's observed inability to make intuitive estimates of the probability of an event, even when presented with all of the relevant evidence [e]
  • Protection [r]: In international economics, a restriction upon trade by the imposition of quotas or tariffs. [e]
  • Public choice theory [r]: A theory of government decision-making that takes account of rent-seeking by decision-makers. [e]
  • Public expenditure [r]: Spending by the public sector [e]
  • Public sector [r]: Organisations and activities that are under the control of central, provincial and local government, including public services and public corporations[2]. [e]

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  • Sacrifice ratio [r]: The loss of output that results from policy action to reduce the inflation rate; defined as the loss of output per one percent fall in the inflation rate. [e]
  • Search friction [r]: The effect of obstacles to the matching the supply of a product with the demand for it that arise from the time and cost of the process of finding a match. [e]
  • Self-financing government investment [r]: A government investment that will achieve a positive net present value in monetary terms, as a result, either of its financial returns, or of the resulting future reductions in public expenditure or increases in revenues from taxation. [e]
  • Services (economics) [r]: A term used in economics to refer to intangible products to which people attach value, such as the provision of information, entertainment or security. [e]
  • Shock (economics) [r]: An event that causes a change of expectations, as a result of which there are changes of economic activity that displace the economy from its previous path. [e]
  • Skewness [r]: a measure of the "lobsideness" of a probability distribution. Positive skewness indicates that the tail of the distribution is more stretched on the side above the mean - indicating that there are more positive than negative deviations from the mean. [e]
  • Social choice theory [r]: The study of systems of collective decision-making. [e]
  • Sovereign default [r]: The failure of a government to comply with its interest payment or debt repayment obligations. [e]
  • Speculative motive [r]: The wish to hold money in order to take advantage of possible investment opportunities. [e]
  • Stability (economics) [r]: The tendency of a market, or other system, to return to its former state of equilibrium after being displaced from it by a demand shock or a supply shock. [e]
  • Standard deviation [r]: A statistical measure for the fluctuation of a random variable about its mean value (the square root of the variance). [e]
  • Standardised budget deficit [r]: the cyclically adjusted budget deficit, after further adjustments to exclude transitory influences. [e]
  • Sterilisation, monetary [r]: Action taken by a central bank to counteract changes to its monetary base - for example by buying or selling government securities. [e]
  • Structural deficit [r]: An estimate of the budget deficit that would occur in the absence of cyclical influences, the magnitude of which depends upon the expected future consequences of previous public sector investments. [e]
  • Structural unemployment [r]: Unemployment resulting from a change in industry structure as a result of which work is no longer available for members of the labour force with particular skills or in particular locations. [e]
  • Substitution effect [r]: The tendency of consumers to switch spending to or from a product in response to a change in its price relative to that of a substitute. [e]
  • Supply-side measures [r]: measures taken with the purpose of increasing a country's economic efficiency, e.g. by removing barriers to competition or counter market failures. [e]
  • Sustainable deficit [r]: A budget deficit that is self-financing in the long term. [e]
  • Systemic market failure [r]: A widespread reluctance to undertake transactions made on credit, or involving delayed delivery, because of fear that parties to such transactions may default. [e]

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  • Tax burden [r]: Tax paid as a percentage of income, calculated for the purpose of international comparisons as total tax revenue as a percentage of GDP, and otherwise as the total cost of taxation to an organisation or individual, including administrative costs, and may include allowances for the extent to which tax is passed on. [e]
  • Tax wedge [r]: the difference between the cost of labour to employers and the take-home pay of employees; made up of the sum of personal income tax and employee plus employer social security contributions together with any payroll tax less cash transfers, expressed as a percentage of labour costs (OECD definition). [e]
  • Time inconsistency [r]: A concept that includes (i) the failure to carry out a previous undertaking (such as an unsuccessful threat or promise that was intended to influence the decisions of others); and, (ii) a change, due solely to the passage of time relative to the time of valuation, to the discount rate that is used to value a delayed cost or benefit. [e]
  • Transactions motive [r]: The wish to hold money in order to pay for intended purchases. [e]
  • Transfer payments [r]: Payments such as pensions and income support, that are not payments for productive services. [e]
  • Unemployment [r]: (i) The condition of being unable to get gainful employment; (ii) the existence of a section of the labour force that is unable to get gainful employment. [e]
  • Unemployment rate [r]: The amount of unemployment expressed as a percentage of the labour force. [e]
  • Unemployment trap [r]: The situation in which the after-tax income from employment is less than the state benefits that are receivable when unemployed. [e]
  • Unit labour cost [r]: The cost per unit produced, of the labour input required for the production of a specified product. [e]
  • Use value [r]: A term used by classical and pre-classical economists that is equivalent to the current concept of utility, namely a measure of the satisfaction obtained from the use of a product. [e]
  • Utility [r]: A concept used in economic theory to denote the amount of satisfaction that an individual derives from a product. [e]
  • Vacancy (economics) [r]: A job for which an employer is seeking applicants [e]
  • Vacancy rate [r]: The total number of vacancies expressed as a percentage of the number of vacancies plus the number in employment. [e]
  • Variance [r]: A statistical measure of the variability of a random quantity (defined as the mean squared deviation from the mean value). [e]
  • Wage-fund theory [r]: The theory that the average wage is determined in the short term by the size of the labour force and the amount of capital that is available for its remuneration (which, in turn, is determined by the level of savings). [e]
  • Wealth effect [r]: The effect on spending decisions of changes in the perceived level of personal wealth. (Changes that are expected to be temporary are believed to have a smaller effect than those that are considered to be permanent.) [e]
  • Welfare (economics) [r]: A concept used in economics to denote the degree to which a group of individuals experience pleasure or satisfaction, each in his, or her, own estimation. [e]
  • Working population [r]: That part of a country's population that is available for employment, including those in employment, the self-employed and the unemployed (otherwise termed the "labour force"). [e]
  • Zarnowitz rule [r]: That the more rapid the downturn in economic activity in a recession, the faster will be the subsequent recovery in activity. [e]
  • Zero sum game [r]: A game in which every player's gains are entirely at the expense of other players. [e]

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