Economics 7-12

Externality

A spillover effect on third parties not directly involved in a market transaction.

Negative Exernality

A spillover that imposes a cost on others outside the transaction.

Positive Externality

A spillover that creates a benefit for others outside the transaction.

Market Failure

Occurs when the free market equilibrium is socially inefficient.

Market Private Cost (PMC)

The cost borne directly by the producers.

Marginal Social Cost (MSC)

The true cost to society.

Marginal Benefit (MB)

The value to the consumer

GDP

Gross Domestic Production is the market value of all final goods and services produced within a country’s boarders during a given time period.

Nominal GDP

GDP measured in today’s dollars, with no adjustment for inflation.

Real GDP

GDP adjusted for inflation

GDP Deflator

The tool used to convert nominal GDP into real GDP by measuring the average price level of all goods and services in the economy.

GDP Per Capita

The average output per person in the economy.

Purchasing Power Parity (PPP)

Recalculates GDP per capita using what a fixed basket of goods costs in each company, making comparisons fairer.

Lorenz Curve

A graphical picture of income distribution

Gini Coefficient

The Lorenz Curve into a single number

Government Budget

A legal document that sets out expected revenue, planned expenditure, the resulting surplus/deficit

Balanced Budget

Revenue = spending

Surplus

Revenue greater than spending

Deficit

Revenue less than spending

Financing Deficits

Issuing government bonds

Fiscal Policy

Government use of spending and taxation to influence the economy

Expansionary fiscal policy

Increases government spending and decreases taxes.

Contractionary fiscal policy

Spending decreases and taxes increase.

Crowding Out

Government borrowing raising interest rates, reducing private sector investment.

Inflation

A sustained increase in the general price level of goods and services.

Deflation

Prices falling across the economy.

Money Supply

The amount of money available in the economy at any given time

Monetary Policy

RBA actions to influence economic activity by changing interest rates, money supply and lending conditions.

Expansionary monetary policy

Lower cash rate. used to fight recessions or economic slowdown.

Contractionary monetary policy

Fight inflation, cool an overheating economy.

Quantitative Easing (QE)

RBA sets the cash rate to influence borrowing costs across the economy. The RBA creates new money electronically and uses it to buy government bonds from financial institutions.