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Compensating Differential
A difference in wages that compensates workers for unpleasant aspects of a job.
Derived Demand
The demand for a factor of production that depends on the demand for the good the factor produces.
Economic Discrimination
The practice of paying a person a lower wage or excluding them from an occupation based on an irrelevant characteristic such as race or gender.
Economic Rent (Pure Rent)
The price of a factor of production that is in fixed supply.
Factors of Production
Labor, capital, natural resources, and other inputs used to make goods and services.
Human Capital
The accumulated knowledge and skills that workers acquire from education and training or from their life experiences.
Labor Union
An organization of employees that has a legal right to bargain with employers about wages and working conditions.
Marginal Product of Labor
The additional output a firm produces as a result of hiring one more worker.
Monopsony
A situation in which a firm is the sole buyer of a factor of production, such as labor.
Personnel Economics
The application of economic analysis to human resources issues.
Statistical Discrimination
The practice of assigning the characteristics of a group to an individual who belongs to the group.
Value of the Marginal Product of Labor
The change in a firm's revenue as a result of hiring one more worker.
Arrow Impossibility Theorem
A mathematical theorem that states no system of voting can be devised that will consistently represent the underlying preferences of voters.
Average Tax Rate
Total tax paid divided by total income.
Excess Burden
A measure of the efficiency loss to the economy that results from a tax having reduced the quantity of a good produced.
Lorenz Curve
A curve that shows the distribution of income by arraying incomes from lowest to highest.
Marginal Tax Rate
The fraction of each additional dollar of income that must be paid in taxes.
Median Voter Theorem
The proposition that the outcome of a majority vote is likely to represent the preferences of the voter who is in the political middle.
Poverty Line
A level of annual income equal to three times the amount necessary to purchase the minimum quantity of food for adequate nutrition.
Poverty Rate
The percentage of the population that is in poverty according to the federal definition.
Progressive Tax
A tax for which people with lower incomes pay a lower percentage of their income in tax than do people with higher incomes.
Public Choice Model
A model that applies economic analysis to government decision making.
Regressive Tax
A tax for which people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes.
Rent Seeking
Attempts by individuals and firms to use government action to make themselves better off at the expense of others.
Tax Incidence
The actual division of the burden of a tax between buyers and sellers in a market.
Voting Paradox
The failure of majority voting to always result in consistent choices.
Business Cycle
Alternating periods of economic expansion and recession.
Consumption
Spending by households on goods and services, excluding new housing.
Economic Growth
The ability of the economy to increase the production of goods and services.
Expansion
The period of a business cycle during which total production and total employment are increasing.
Final Good or Service
A good or service purchased by a final user.
GDP Deflator
A measure of the price level calculated by dividing nominal GDP by real GDP and multiplying by 100.
Government Purchases
Spending on goods and services by local, state, and federal governments.
Gross Domestic Product (GDP)
The market value of all final goods and services produced in a country during a period of time.
Inflation Rate
The percentage increase in the price level from one year to the next.
Intermediate Good or Service
A good or service that is an input into another good or service.
Investment
Spending by firms on new factories, equipment, and by households on new houses.
Macroeconomics
The study of the economy as a whole, including topics such as inflation and unemployment.
Microeconomics
The study of how households and firms make choices and interact in markets.
Net Exports
Exports minus imports.
Nominal GDP
The value of final goods and services evaluated at current prices.
Price Level
A measure of the average prices of goods and services in the economy.
Real GDP
The value of final goods and services evaluated at base year prices.
Recession
The period of a business cycle during which total production and total employment are decreasing.
Transfer Payments
Payments by the government to households for which the government does not receive a new good or service in return.
Underground Economy
Buying and selling of goods and services that is concealed from the government to avoid taxes.
Value Added
The market value a firm adds to a product.
Consumer Price Index (CPI)
A measure of the average prices a typical urban family pays for goods and services.
Cyclical Unemployment
Unemployment caused by a business cycle recession.
Deflation
A decline in the price level.
Discouraged Workers
People available for work who have not looked for a job during the previous four weeks.
Efficiency Wage
An above-market wage that a firm pays to increase workers' productivity.
Employed
Someone who currently has a job or is temporarily away from their job.
Employment-Population Ratio
The percentage of the working-age population that is employed.
Frictional Unemployment
Short term unemployment that arises from the process of matching workers with jobs.
Labor Force
The sum of employed and unemployed workers in the economy.
Labor Force Participation
The percentage of the working-age population in the labor force.
Menu Costs
The costs to firms of changing prices.
Natural Rate of Unemployment
The normal rate of unemployment that consists of frictional and structural unemployment.
Nominal Interest Rate
The stated interest rate on a loan.
Producer Price Index (PPI)
An average of the prices received by producers of goods and services.
Real Interest Rate
The nominal interest rate minus the inflation rate.
Structural Unemployment
Unemployment that arises from a persistent mismatch between the skills of workers and the requirements of jobs.
Unemployed
Someone who is not currently at work but is available for work and has actively looked for work.
Unemployment Rate
The percentage of the labor force that is unemployed.
Capital
Physical assets and intellectual property used to produce goods and services.
Crowding Out
A decline in private expenditures as a result of an increase in government purchases.
Financial Intermediaries
Firms that borrow funds from savers and lend them to borrowers.
Financial Markets
Markets where financial securities such as stocks and bonds are bought and sold.
Financial System
The system of financial markets and intermediaries through which firms acquire funds from households.
Labor Productivity
The quantity of goods and services that can be produced by one worker or by one hour of work.
Long-Run Economic Growth
The process by which rising productivity increases the average standard of living.
Market for Loanable Funds
The interaction of borrowers and lenders that determines the market interest rate.
Potential GDP
The level of real GDP attained when all firms are producing at capacity.
Catch-Up
The prediction that the level of GDP per capita in poor countries will grow faster than in rich countries.
Economic Growth Model
A model that explains growth rates in real GDP per capita over the long run.
Foreign Direct Investment (FDI)
A firm's purchasing or building of a facility in a foreign country.
Foreign Portfolio Investment (FPI)
The purchase of stocks or bonds issued in another country.
Globalization
The process of countries becoming more open to foreign trade and investment.
Industrial Revolution
The application of mechanical power to production that began in England around 1750.
New Growth Theory
A model that emphasizes that technological change is influenced by economic incentives.
Patent
The exclusive legal right to produce a product for a period of 20 years.
Per-Worker Production Function
The relationship between real GDP per hour worked and capital per hour worked.
Property Rights
The rights individuals or firms have to the exclusive use of their property.
Rule of Law
The ability of a government to enforce the laws of the country.
Technological Change
A positive or negative change in the ability of a firm to produce output.
Aggregate Demand (AD) Curve
A curve that shows the relationship between the price level and the quantity of real GDP demanded.
Aggregate Expenditure
Total spending in the economy.
Aggregate Expenditure Model
A macroeconomic model that focuses on the short-run relationship between total spending and real GDP.
Autonomous Expenditure
Expenditure that does not depend on the level of GDP.
Cash Flow
The difference between cash revenues received by a firm and cash spending.
Consumption Function
The relationship between consumption spending and disposable income.
Inventories
Goods that have been produced but not yet sold.
Marginal Propensity to Consume (MPC)
The amount by which consumption spending changes when disposable income changes.
Marginal Propensity to Save (MPS)
The amount by which saving changes when disposable income changes.
Multiplier
The change in equilibrium real GDP divided by the change in autonomous expenditure.
Multiplier Effect
The process by which a change in autonomous expenditure leads to a larger change in real GDP.
Disposable Income
National income minus net taxes.
National Income
GDP equals disposable income plus net taxes.
MPC (Marginal Propensity to Consume)
Change in consumption over change in income.
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